MacroScope

Why the mediocre U.S. July jobs report was worse than it looked

U.S. economists were generally disappointed with the net gain of 162,000 jobs last month, well below forecasts around 180,000 and market talk of a possible reading above 200,000. The jobless rate did fall to 7.4 percent from 7.6 percent, but labor force participation also resumed its recent descent.

Thomas Lam, chief G3 economist at OSK-DMG/RHB, says the underlying details of the report make employment conditions actually look worse than at first glance. Here’s why:

The most striking aspect of the Jul employment report is that details of the release appear generally weaker than the uninspiring headlines figures.  The nonfarm payrolls print of 162k in Jul, while modestly softer than expectations, was accompanied by narrower gains in private payrolls (the weakest 1-month and 3-month diffusion data since Aug & Sep 2012), and net downward revisions of 26k in prior months (-19k in May and -7k in Jun, confined within private employment).  Moreover, the employment and workweek details from the Jul release imply that real GDP growth in early Q3 2013 might be tracking weaker than the advance Q2 2013 print of 1.7%.

Our proprietary leading indicator of payrolls, the Forward-Looking Indicator of Payrolls (or FLIP), which foreshadowed a weaker trend in private payroll growth recently, continues to signal downside risks to private employment growth in the pipeline.  Similarly, our calculations also suggest that private job growth within the more cyclically-sensitive sectors slowed markedly in Jul to only 9k from roughly 60k in the prior two months (with the 3-month run-rate trending lower).  Essentially, the foregoing decomposition suggests that private employment growth has probably been driven by counter-cyclical and less-cyclical industries over the last two months.

Separately, however, some took solace in the larger than expected decline in the headline unemployment rate – from the household survey – to 7.4% in Jul.  But the lower quality improvement in unemployment should raise some questions.  Our calculations suggest that around 60% of the 0.2%-point drop in unemployment was due to lower labor force participation (a stable participation rate would have led to a 7.5% unemployment rate in Jul), and the remainder resulting from higher employment.  But the gains in household employment in Jul probably emanated from the more fickle part-time category, which was almost twice as much as full-time hiring.  And early hints from available labor market indicators, based on our estimates, imply that the unemployment rate could potentially tick back up in the near-term.

Amnesty for undocumented immigrants would not burden U.S. economy – Levy Economics Institute

The recently passed Senate bill – S. 744, or the Border Security, Economic Opportunity, and Immigration Modernization Act – that would take significant steps toward comprehensive reform, is being held up in the Republican-controlled House of Representatives, with a “path to citizenship” for undocumented immigrants the apparent sticking point.

A recent report from the Congressional Budget Office estimated the following:

All told, relative to the committee-approved bill, the Senate-passed legislation would boost direct spending by about $36 billion, reduce revenues by about $3 billion, and increase discretionary costs related to S. 744 by less than $1 billion over the 2014-2023 period.

Nathan Sheets and Robert Sockin at Citigroup are even more sweeping in their endorsement of immigration’s economic upside:

China’s new economy needs fresh, reliable indicator on consumers

China’s transition into a domestic demand driven economy has kicked off with the government announcing long-awaited reforms, but it is missing a key element — an indicator to measure the success of the plan.

Long considered the ‘factory of the world’, China has a vast population that works in factories that produce everything from consumer and electronic goods to clothes, technology equipment and trinkets of everyday value.

Accordingly, its achievements are measured by economic indicators like exports, industrial production, gross domestic product and trade surplus, among others.

Obama’s second chance to reshape the Fed

Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.

The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.

Elizabeth Duke, the last George W. Bush appointee, is already on her way out. So is Sarah Bloom Raskin, who after a relatively short stint at the board is moving to the Treasury, to be Jack Lew’s Deputy Secretary. Then there’s the awkward suspicion that, if Obama passes up Fed Vice Chair Janet Yellen, by far the favorite for the top spot, she will also step down after a long career in the Federal Reserve system, including many years as head of the San Francisco Fed.

U.S. job openings rise, but nobody’s hiring?

It’s a good news, bad news story: The U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover (JOLTS) survey in June showed an increase in job openings, but a decline in new hires. The ratio of unemployed Americans to each open job fell in June to its lowest level in over four years.

The number of job separations (government code for layoffs) also fell, mainly due to fewer layoffs. The June numbers suggest some retracing of the gains of the previous month or two, but does not erase them, says Stone & McCarthy Research Associates economic analyst Terry Sheehan.

Job openings rose by 29,000 in June, but the number of new hires fell by 289,000. Simultaneously, the number of job separations also fell 300,000, mainly on declines in layoffs which fell 215,000.

U.S. GDP revisions, inflation slippage tighten Fed’s policy bind

Richard Leong contributed to this post

John Kenneth Galbraith apparently joked that economic forecasting was invented to make astrology look respectable. You were warned here first that it would be especially so in the case of the first snapshot (advanced reading) of U.S. second quarter gross domestic product from the U.S. Bureau of Economic Analysis.

Benchmark revisions to U.S. gross domestic product made for a bit of a mayhem for forecasters, who were way off the mark in predicting just 1 percent annualized growth when in fact the rate came it at 1.7 percent. Morgan Stanley had predicted a gain of just 0.2 percent.

Hours after the GDP release, Federal Reserve officials sent a more dovish signal than markets had expected, offering no hint that a reduction in the size of its bond-buying stimulus might be imminent. In particular, they flagged the risk to the recovery from higher mortgage rates as well as the potential for low inflation to pose deflationary risks.

India seeks to entice yield-seeking investors in a tapering world

 

India’s concerted effort to shore up the battered rupee over the past two weeks has had one goal in mind: raising currency-adjusted yields to a level where even investors wary of a withdrawal of cheap money from the U.S. would still buy emerging market assets. The central bank has raised overnight money market rates by more than 300 basis points – a spate of tightening not seen since early 2008 – and sharply inverted the swap and the bond yield curve in less than two weeks.

From an offshore perspective, FX implied yields have jumped from a chunky 6 percent last month to well over 8 percent this week. But the risk-reward has not come cheap. For all the pain caused in the world of domestic interest rates, the Indian rupee has barely edged higher. Part of the reason is the Reserve Bank of India’s sledgehammer steps last week have been offset by other actions taken by the central bank and conflicting talk from government officials assuring lenders – the biggest players in the domestic bond markets – that these measures are temporary.

While New Delhi and Mumbai seem to be at last reading from the same page on communications policy this week, there seem to be two scenarios evolving. The first and more optimistic option is that bond investors give the thumbs up to the RBI’s steps and start shoveling money again into the markets after taking nearly $8 billion out of bonds since June.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Fed on guard over low U.S. savings rate

As Federal Reserve Chairman Ben Bernanke delivered what may have been his last testimony on monetary policy before Congress, most of the world’s attention was focused on what hints he might give about the timing of an eventual reduction in the pace of asset purchases.

Tucked in the actual semi-annual monetary policy report Bernanke delivered to lawmakers on Capitol Hill was a little-noticed reference to growing worries about the potential for an extended period of low savings, associated in part with long-stagnant wages, to thwart long-run economic progress.

Total U.S. net national saving – that is, the saving of U.S. households, businesses, and governments, net of depreciation charges – remains extremely low by historical standards.

U.S. housing outlook still promising despite rise in rates: Citigroup economist

U.S. housing sector fundamentals remain favorable despite the recent rise in interest rates and the sharp drop in housing starts in June, says Citigroup economist Peter D’Antonio.

Housing starts fell 9.9 percent to a ten-month low of 836,000 units in June.

But the decline was almost all in the volatile multi-family sector, D’Antonio notes. Single-family starts remained in a range just below 600,000, while multi-family fell 26 percent to 245,000.

Multi-family starts have been an important growth sector in housing in the past year, but month-to-month changes in multi-family starts – noted for their volatility – are meaningless. Multi-family housing starts rose 21 percent in March, fell 32 percent in April, rose 28 percent in May, then fell 26 percent in June.