More Troubling Economic News
Another round of economic statistics suggests that we're unlikely to see any real improvement between now and Election Day.
The economic news has not been good of late. It started when we got a revision to the First Quarter GDP to a level well below forecast levels, and well below where it needs to be to create sustained job growth. Around the same time those numbers came out, we also learned that planned layoffs had increased by 53% in the month of May alone. Overseas, there were signs that Europe’s economy is contracting. In China, there are signs that the years of strong growth may be coming to an end. At the start of the Second Quarter, we learned that April’s Factory Orders took an unexpected drop, signalling more slowing down to come in May and June. Then we got an incredibly weak May jobs report that showed only 69,000 net jobs (of which some 83,000 were from the private sector). Now, as we head toward the end of the month and, soon thereafter, the release of the jobs report for the month of June, there are signs on the horizon that seem to indicate that the economic slowdown we saw at the end of the 2nd Quarter is continuing this month, which poses real risks for the economy itself and for the political fortunes of President Obama.
The big news of the morning is the Labor Departments initial jobless claims report, which went down slightly from last week but has now hit the hit the highest weekly average since December after several months in which it seemed to be moving in the opposite direction:
The number of Americans filing new claims for unemployment benefits was little changed last week, according to government data on Thursday that suggested the labor market was struggling to regain momentum.
Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 387,000, the Labor Department said. The prior week’s figure was revised up to 389,000 from the previously reported 386,000.
Economists polled by Reuters had forecast claims falling to 380,000 last week. The four-week moving average for new claims, considered a better measure of labor market trends, increased 3,500 to 386,250 — the highest level since early December.
What this suggests is that the seeming progress had been made in the job market in the early part of 2012 has essentially been reversed completely, and we’re back in the same position we were in at the end of last year. It also doesn’t bode well for job growth over the short or medium term, and suggests that we’re likely to see another disappointing jobs report coming up next month. Indeed, yesterday, the Federal Reserve Board joined nearly every Wall Street analyst in downgrading its economic forecasts for the coming year:
WASHINGTON — The Federal Reserve on Wednesday sharply lowered its economic growth forecasts through 2014 and projected that unemployment could remain above 8% through next year.
The central bank released the new forecasts ahead of Chairman Ben S. Bernanke’s quarterly news conference. Earlier, the Federal Open Market Committee voted to extend a program designed to lower long-term interest rates as it tries to respond to slowing growth in the U.S. and around world.
The program, called Operation Twist, was set to end on June 30 but now will continue through the end of the year as the Fed warned of a slowdown in the growth of jobs and household spending.
Growth in total economic output this year will be between 1.9% and 2.4%, much lower than the range of 2.4% to 2.9% the Fed projected in April. Growth will pick up in 2013, but the Fed’s central tendency forecast is for 2.2% to 2.8% annual growth in gross domestic product, below the 2.7% to 3.1% forecast the central bank made in April.
Not until 2014 would annual growth top 3%, the Fed said. Annualized growth was 1.9% in the first quarter of this year.
The unemployment rate will be 8% to 8.2% in 2012, the Fed projected, little changed from May’s rate of 8.2%. The Fed had forecast in April that unemployment this year would be 7.8% to 8%. Unemployment is forecast to be between 7.5% and 8% in 2013, higher than the 7.3% to 7.7% range forecast in April.
James Pethokoukis, meanwhile, points to another Labor Department report that leads to some troubling possibilities for the economy:
The government’s April Job Opening and Labor Turnover report was, in the words of JPMorgan economists, “soft, lending some credence to the view that the April-May slowing seen in the payroll report was real and not a statistical fluke.”
– The number of job openings in April fell 325,000 to 3.416 million. That’s the lowest level since November of last year.
- But here is the real red flag. Private job openings fell 282,000 — the most since early 2009 — to 3.080 million. Early 2009, if you recall, saw the economy just hemorrhaging jobs.
– One bright spot in this report in March was the rising in people quitting their jobs, showing some confidence in the economy. But that “completely reversed itself in April.”
– Now layoffs, thank goodness, continue to be low, evidence that the problem here is a lack of hiring rather than lots of firing. Hires fell 159,000 last month to 3.882 million, the lowest since last July and well below even the weakest month of the prior expansion.
Bottom line: ”The weakness in this report, particularly in the job openings figure, serves as a reminder that the labor market remains far from healthy.”
Some might be tempted to respond to that last quote with a sarcasm-laden “Thank You, Captain Obvious” but the numbers suggest that we are in danger of not just slow job growth but actually losing jobs if the economy doesn’t pick up some time soon. In that same regard, Steven Hayward points to an article in The Wall Street Journal that sees hints of an economic downturn in reports released by America’s largest next-day shipping company:
Air-freight competitorUTi Worldwide, which recently reported results, sounded a note of caution about business in coming months. And April data on volumes from FedEx, the latest available, suggest a 9% drop in international cargo through its main hub in Memphis.
All this hints that fourth-quarter results for the period ended in May, due Tuesday, could be accompanied by cautious guidance for the next fiscal year. Analysts’ consensus estimate calls for earnings of $1.89 a share for the fourth quarter, versus $1.75 a year earlier. The estimate has slipped by about five cents a share since March.
A glance at sales and income from previous downturns shows how sensitive FedEx is to economic growth. Not only is FedEx the kind of company that catches a cold when the world economy merely sneezes. It also is the type that gets the sniffles when data still give the economy a clean bill of health. That bellwether status is what makes FedEx’s earnings report so interesting, even to nonshareholders.
FedEx is nothing if not flexible, though. Earlier this month, it decided to accelerate the retirement of 24 older aircraft, resulting in a one-time charge. They were less efficient than several new Boeing Co. planes the company has on order. But reducing the number of planes it has in reserve, even as fuel prices are falling, also suggests FedEx doesn’t anticipate needing the extra capacity.
Though the information is limited, freight trends suggest a clear slowdown in Europe and a nascent one in Asia may even be accompanied by braking in the domestic market. Analysts at Credit Suisse note that April freight volumes in the U.S. fell by 11% from March; typically the month sees an about 4% decline
The Journal is also reporting that steelmakers are reporting that falling demand is leading to the worst forecast for the steel industry in four years, another suggesting that economic activity as a whole is slowing down. To be fair, much of the decline seems to be coming from Europe and Asia and it’s possible that the U.S. economy will be spared the worst of what’s happening right now. It’s unlikely, though, that we’d be able to avoid it completely, and it’s highly unlikely that our economy would be able to boom while the rest of the world is grinding to a halt once again. What this all suggests then is that we’re likely to see several more months of slow economic growth, and anemic progress on jobs, all the way right up to the election. Obviously, this isn’t the situation that President Obama’s campaign would prefer.
If I were President Obama, slurping down my morning Cherrios, while reading this column, I think I would just go back to bed, pulling the covers up over my head.
I know there is June gloom weather, here in CA. However, these are not encouraging trends or numbers, which makes for financial doom as well.
Also, I noted you included a James Pethokoukis observation, as well as one from Steven Hayward, which may bring some stem-winding comments about these ‘hacks’ not having any credibility. The liberal/conservative credentials of writers seems to be key here as to even looking at the data they present, let alone giving it any discussion merit.
The numbers mean real economic growth has come to a complete halt and there’s a growing chance of recession by the end of Q1 2013. The Fed’s original forecast of accelerating growth and employment next year was always poppycock, generated by people who don’t understand money or our monetary system.
Where’s al-ameda, Herb, JP, Hey Im not Normal etc?
It’s all Bush’s fault.
We’re still in “muddle through” mode, hoping to be tallest midget. Europe is dodgy, China is apparently slowing too.
IIRC, the household debt picture has hardly changed since the ’08 panic. People are in debt, they can’t find jobs… so demand is low. So there aren’t many jobs. This is, of course, simplified: globalization and automation are factors too, but those were factors pre-08 too.
The golden goose – the middle class – is basically tapped out and just can’t keep buying sh*t. It looks to me, in hindsight, that basically all the economic growth this century was an illusion (fueled by debt). That debt is still there, and so long as it is how can consumer demand bounce back? How do you get rid of that debt if you can’t find a job? Or if the job you can find pays a pittance?
Ben, I know you think the MMTers are right. What’s the policy solution that follows from MMT (or is there more than one)?
That’s pretty much how I see it. Sorry folks, you can’t get a new Lexus every two years, and go to Tuscany, and get a new Wolf range, and have 10 cashmere sweaters.
When I think about the lifestyle my family had in the 60’s in a wealthy suburb, and contrast it to how people were living during the real estate boom, it is pretty stunning. My dad drove a Ford and we did tent camping at the Lair of the Bear every summer. We did go out to eat a lot, and my parents went to Tahiti when that was still quite exotic, but we lived very modestly compared to 21st century expectations.
@Rob in CT:
1) Orthodox MMTers recommend a Jobs Guarantee: anyone who wants to work is made an offer by the Federal Government, paying about $9.00 an hour. Personally I reject this particular type of spending because it isn’t politically realistic in the U.S., although I support immediately replacing unemployment benefits with such a program.
2) My recommendation is to create a program under the administration of the Federal Reserve called the Full Employment and Growth Program, where each household in the U.S. will receive roughly $500 per month in perpetuity. This would eliminate the malinvestment provoked from inefficient government spending on large projects and increase individual freedom by creating financial security for the American people. The Fed could throttle payments up if it wants to stimulate or back it it wants to reduce inflation.
3) The answer to our economic problems is for government to increase the financial wealth of the private sector (concentrated on the middle class) sufficiently to generate full employment. Mosler’s Rule is that any downturn can be addressed by a sufficiently large tax cut or spending program, the key is to tailor the size of deficits to the private sector’s needs at any given time.
The real debate is how best to spend. Just throwing money out with no thought given to efficiency or effectiveness can cause as many problems as it solves.
Who’s fault was it – all of us. We had an economy dependent on leverage and cheap oil that was not sustainable. It was a house of cards that was eventually fall and eventually = now. No one and no policy can return us to the “good old days” – they are gone for good.
@anjin-san:
Interesting to read about your childhood.
Mine was somewhat similar, except more blue collar. We camped in an old trailer, and cleaned up the campgrounds we stayed in. That was my dad’s contribution to the earth — to clean up other people’s trash.
My Mom didn’t like to spend money on eating out. So, we never did. It was home-cooking 24/7, which was probably a lot healthier. However, when my boyfriends took me out for a burger and milkshake I considered it a big occasion!
Everything we owned was second-hand. I started working at 11 so I could have some money to spend on things important to me, and paid for most of my way through college.
I’ve never had a lexus or a cashmere sweater. However, I now have a X3 BMW, which I love to drive. I own rather than lease, so I will be having this car a long time.
Why is cheap oil not sustainable again?
@Ben Wolf:
1. Heh, yeah, not at all politically possible. Pipe dream.
2. Negative income tax, basically. IIRC, some conservatives have flirted with this idea in the past, as an alternative to other forms of safety net spending. Today, though, I put it up there with #1 as extremely unlikely to be politically possible.
Both 1 and 2 are basically about taking private debt and putting it on the government’s books – rather directly, as opposed to more indirect methods (e.g., The Stimulus).
Which is what I expected to hear, but I wanted to be sure. Thanks for taking the time.
Indeed the good old days are long gone Economy