Commentaries

Reasons to be cheerful

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Doing more with less is a corporate mantra that some say bodes ill for job growth. Data last week showed that productivity at non-farm business jumped at an extraordinary 9.5 percent annual rate in the third quarter.

Yet the sharp gains in efficiency are helping drive corporate profits and that could be just what’s needed to convince employers that it’s safe to begin hiring again.
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from John Kemp:

U.S. nonfarm payrolls signal turning point is near

John Kemp

Jun 5, 2009 13:00 UTC

Businesses outside the farm sector plus federal, state and local governments continued to eliminate positions on net last month (-345,000) but the rate of job losses was the smallest since the recession worsened in Sep 2008.  
 
The data is consistent with recent business surveys suggesting the pace of contraction is slowing, and the turning point in the economic cycle is drawing near. 
 
The relatively small decline in nonfarm payrolls should be reflected in a smaller decline in industrial output when the Federal Reserve reports its May 09 estimate later this month (not least because the Fed bases its estimate, in part, on the payroll data). 
 
In the past two months, the data flow has become consistently positive, in the sense that it points to a slower rate of decline and a nearing end to the contraction phase of the cycle, helping fuel the broad-based rally across equity and commodity markets.  Today's data will reinforce that optimism, and has already sent WTI futures (briefly) back above $70. 
 
(Un)-employment is a lagging indicator.  Job losses are likely to continue even once the economy starts to expand again and will act as a (moderate) drag on growth going forward (as well as contributing to further defaults on home mortgages and consumer lending over H2 2009 and throughout H1 2010). 
 
But the payrolls report does indicate the worst of the downturn is now over.

from John Kemp:

Manias and panics – here we go again

John Kemp

Jun 5, 2009 08:24 UTC

Like a party of drunken millenarians not sure whether to anticipate rapture or apocalypse but certain they are on the brink of something big, financial markets and commentators lurch from one extreme to another - absurd over-optimism to doom-laden pessimism.  Reality is almost always more prosaic.  Economic history is about "muddling through". 
 
The Black Death (1348-1351), to take perhaps the greatest catastrophe to befall Europe, carried away a third of the population, but two thirds survived, and somehow life went on.  The Great Depression cut U.S. manufacturing output in half between 1929 and 1933, but still left plenty of factories working -- albeit on severely reduced time.  Cars were still produced, crops harvested, and a few houses and factories built. 
 
Bread lines and work camps make better copy than thousands of people somehow struggling to cope and survive.  But they are only part of a more complex reality.  While John Steinbeck was the greatest reporter of the Depression, the bleakness of "The Grapes of Wrath" is only one part of rich heritage that includes characters coping in straitened circumstances in "Cannery Row".  
 
Financial history is about the highs and lows, exuberance and panic.  Social and economic history is about the middle ground, continuity as much as change. 
 
At the moment, markets are seized by the excitement of "green shoots" of recovery.  Not for the first time, participants are in danger of losing perspective. 
 
While the pace of decline has slowed in North America, Western Europe and Japan after the free-fall contraction of Q4 and Q1, manufacturing activity is still shrinking. Even if the economy hits the trough in the next 1-4 months, as expected, and a recovery begins, it is likely to be fitful and uneven. 
 
The attached chart on rail freight volumes in the United States (a good proxy for manufacturing and construction activity) provides some indication of the continuing difficulties.  
 
Freight volumes are still trending lower.  The year-on-year deficit has widened from -14% at beginning of Mar to -18% at the beginning of Apr, -21.6% at the beginning of May and -23.5% at the start of Jun. 
 
While a recovery is coming, it is not here yet, and the trajectory when it comes is anything but certain.