MacroScope

Fewer firings do not mean more hirings

Jobless claims fell unexpectedly last week to 361,000. Analysts were particularly heartened by the improvement because the latest figures were finally “clean” of recent seasonal adjustment quirks related to auto factory shutdowns. That’s the good news.

Some lingering cause for hesitation: Eric Green at TD Securities reminds us that recent dips in claims have not necessarily translated into great bursts of new job creation.

Over past periods of this recovery claims at this level have been consistent with (monthly) job growth closer to 200,000. With claims back at these levels, one cannot presume that this will continue to hold given the level of uncertainty and slower growth momentum from which labor demand will lag.

The next employment report is not accelerating toward 200,000. A slowdown toward 120,000 is far more likely given the recent readings on PMI’s, Monster (online) advertising, and a sectoral breakdown which favors less job growth in leisure, business services, and information technology.

The economy created 163,000 jobs in July, much stronger than analysts had forecast. But the jobless rate climbed to 8.3 percent from 8.2 percent.

The productively disinflationary American worker

Strong productivity may be good for an economy’s long-term growth prospects. But it’s not always great for workers in the near-run, since it literally means firms are squeezing more out of each employee. In reality, rapid productivity growth can make it harder for workers to get new jobs or bargain for raises.

The benefits of operating efficiently are obvious enough: Productive firms will have more money left over to invest, which should lead to more job creation in the future. Except lately, that future seems never to come, giving rise to the somewhat oxymoronic notion of a jobless recovery.

Millan Mulraine at TD Securities explains:

In many ways, the 2009 and 2002 economic rebounds are very similar in that both can be characterized as largely ‘jobless recoveries’. However, the compensating boost from capital investment – which was a defining feature of the 2003 economic recovery and a key underpinning for economic and productivity growth during the 2003-2007 period – has been largely missing during this cycle. The missing boost from capital investment activity has reinforced the subpar economic performance over the past two years, and will portend poorly for longer-term economic growth potential if the trend continues.

Soft underbelly to firmer July jobs report

After a string of very weak figures in the second quarter, the July employment figures prompted a collective sigh of relief that the U.S. economy was at least not sinking into recession. That doesn’t mean the news was particularly comforting. U.S. employers created a net 163,000 new jobs last month, far above the Reuters poll consensus of 100,000. Still, the jobless rate rose to 8.3 percent.

Steve Blitz of ITG Investment Research explains why the underlying components of the payrolls survey offered little cause for enthusiasm:

The headline is good but the details do nothing to dissuade the notion that economic activity remains soft. There is, in effect, no sign in the details economic activity has accelerated from June’s pace when a downward revised 73,000 private sector jobs were added. Hours worked remain the same and overtime at manufacturing firms fell. The diffusion index (percentage of firms adding workers plus one-half of the percentage with unchanged payrolls) dropped in July to 56.4 from 56.8 in June, 61.3 in May, and 62.2 in July of last year. The civilian labor force dropped by 150,000 and the broad U-6 measure of unemployment rose to 15.0% — reversing all the gains made in 2012.

Weak manufacturing orders tend to precede U.S. recessions

U.S. manufacturing activity shrank for a second straight month in July as recent economic weakness spilled into the third quarter, according to the Institute for Supply Management’s closely watched index. But that wasn’t the worst of it: new orders, a gauge of future business activity, also shrank for a second month, albeit at a slightly slower pace.

Tom Porcelli at RBC explains why the status quo may not be good enough to keep the economy expanding:

The historical record back to 1955 suggests a rather ominous outcome when ISM new orders remain at 48 or less for two straight months. In fully 75% of those instances we were hurtling toward recession. The recent headfakes occurred in 1995 during the mid-cycle slowdown and in 2003 shortly after the recession ended and when the housing boom was in its infancy. Our call remains that we’ll (barely) skirt a recession but with evidence mounting that the economic headwinds are placing significant downward pressure on economic output, we find it striking that forecasters – as bearish as we’ve been told they are – still expect growth to average 2.2% in the second half of the year.

U.S. bond bulls ready to charge after payrolls report, survey says

(Corrects to show CRT is not a primary dealer)

Bond bulls are ready to charge after Friday’s July U.S. employment data, according to a survey by Ian Lyngen, senior government bond strategist at primary dealer CRT Capital Group.

Says Lyngen:

Despite the vacation season and the multitude of ‘out of office’ responses we got, participation in this month’s survey was above-average and consistent with a market that’s engaged for the big policy/data events of the summer. As for the results of the survey, in a word: BULLISH.

Lyngen argued the survey results were the most bullish since November 2010, a point that was followed by a selloff that brought 10-year yields from 2.55 percent to 3.75 percent over the following four months.

U.S. payrolls ‘wild card’: public school teachers, employees

The “big wildcard” in making July payroll projections is the size of the swing in public school teachers and other school workers.

Because of the size of teacher layoffs and the effect of the July 4th holiday on the data, the July seasonal adjustment factor can vary significantly from one year to the next, and the variation can be extreme, says Ward McCarthy, managing director and chief financial economist at Jefferies & Co in New York.

Many public school teachers, in addition to some other public school employees, are hired on a ten-month calendar that runs from September through June, large-scale layoffs occurring in July and large-scale hiring occurring in September.

U.S. manufacturing shrinks for second month

The closely watched Institute of Supply Management’s nationwide manufacturing index showed contraction in manufacturing for the second month in a row in July and Bradley Holcomb, chairman of the ISM’s business survey committee, sounded equally subdued in a morning teleconference.

An overall softening and flattening is going on. It’s a reflection of the overall state of the global economy.

New orders for manufactured goods also shrank for the second straight month, and backlogged orders fell for the fourth straight month. Prices weakened for the third month. Said Holcomb:

Hints of recession in sleepy Richmond Fed data

It’s a report that gets little attention normally (We at Reuters geek out on Fed data a lot, and even we don’t write a story about it). But an unusually sharp contraction in the Richmond Fed’s services sector index for July caught the eye of some economists. The measure took a nosedive, falling to -11 this month, the lowest in over two years, from +11 in June.

Tom Porcelli at RBC says the plunge in new orders was downright scary:

Richmond Fed manufacturing got absolutely walloped in July. In fact, the all-important new orders component sank to an abysmal -25 from -7 in June and -1 two months ago. This is by far the weakest print since the recession. In fact, at no point has this metric been this low when we have not been in a recession.

To be sure, the data capture only two cycles prior to this one, but this doesn’t take away from the fact that the recent print is suggesting things could be much worse than advertised. We continue to hear how this year is “2011 all over again”, yet the data suggest it is materially worse.

Three years after last increase, business group calls for U.S. minimum wage hike

Bucking the usual tune of private sector lobbyists, a group called Business for a Fair Minimum Wage is calling for a hike in the minimum wage, saying it would boost business and the economy.

Business for a Fair Minimum Wage is a project of Business for Shared Prosperity, which describes itself as a national network of “forward thinking” business owners and executives.

The last step of a three-step federal minimum wage increase went into effect on July 24, 2009. The $7.25 an hour current minimum wage comes to just $15,080 a year for full-time work, below the poverty line.

A summer lull?

It seems foolish to hope for a summer lull given recent history but in euro zone debt crisis terms at least, the next week looks quieter unless the markets turn savage again.

That’s not to say things are getting better – Spain’s 10-year borrowing costs are still above the seven percent level which it cannot survive indefinitely — it’s just that things aren’t getting much worse at the moment. Certainly with the Spanish bank bailout signed off as far as it can be, there’s nothing on the policy front to shake things up for a while although the debt-laden region of Valencia’s call for help with its debt hardly inspires confidence that Madrid can get things back on track.

What there is next week is a welter of evidence coming up on the health, or lack of it, of the world economy.
Flash PMIs for the euro zone, France and Germany are swiftly followed by Germany’s Ifo sentiment survey and second quarter GDP figures from Britain. The Q2 U.S. growth figure also comes out on Wednesday as well as the Chinese PMI on Tuesday. The euro zone’s slide into recession is likely to be confirmed and of course Britain is already there and unlikely to clamber out despite government and central bank protestations that the country’s travails are all to do with the euro area.