Last week ended on a low note as the employment report showed job growth of a paltry 54,000 versus expectations two weeks ago of 180,000 new jobs and 241,000 new jobs in the prior month.
Housing prices continued to erode, the national purchasing managers' reports for manufacturers showed a major decline, and auto sales laid an egg as high prices and short supply drove customers away. At least initial unemployment claims went down and the purchasing managers' survey of services looked better than expected. Both the June monthly and the pre-Memorial Day week of data showed that the consumer has still not given up the ghost.
Unfortunately, based on news already in the pipeline, even worse numbers lie ahead. A confluence of Japanese auto and supply chain issues, bad weather, record gasoline prices, and stagnant wages have produced a perfect storm of negative news that is exceptionally difficult to disentangle. The good news is the Japanese situation is on the mend and improving faster than earlier anticipated. And I have to believe that weather effects (too cold to buy summer clothes, too wet and rainy to begin home and garden projects) will run their course.
Even gasoline on a national basis is down from $3.98 a gallon at its high to $3.78 recently (still dangerously high compared with the $2.78 level of a year ago). The prognosis for real wage growth is less positive, resulting in the need for me to cut my 2011 economic forecast. And without some better news on the inflation front, even that estimate is suspect.
Officially Reducing My Real 2011 GDP Forecast to 2.75%
There is no doubt that the employment report was less than wonderful. Slower hiring was a concern (though the numbers may not be quite as bleak as they look), but I was much more concerned by the hourly wage numbers, which moved into negative territory on a year-over-year basis (three-month moving average) since early 2010.
Without increased earnings, it is going to be increasingly difficult for consumers to spend more. Yes, the upper income strata has done better than the hourly wage group. Yes, there are a lot of stock market gains being spent at the likes of Nordstrom (JWN), Saks (SKS), and Tiffany (TIF). Nevertheless, I think my 3.5% estimate for real GDP growth in 2011 is looking too aggressive. Therefore, I've reduced my economic growth forecast to a range of 2.5%-3.0% with a single-point estimate of 2.75%.
I think second-quarter GDP growth will have a hard time exceeding 2% (we already have 1.8% growth on the books for the first quarter) given the issues with the auto industry described below. However, as those plants are brought back online in the third quarter, quarterly growth in excess of 4% seems like a possibility.
Exogenous Factors Could Produce Shockingly Bad Statistics for Another Month or Two
Weather, changing seasonal effects, and major Japanese supply changes will continue to wreak havoc on economic statistics. All the variability will render a lot of statistics nearly useless, and there are no easy fixes for adjusting the data. For another month, maybe two, the biases will probably be on the downside (weakened auto sales could devastate May consumption statistics).
Then as Japanese plants come back online, weather improves, and seasonal adjustments become less onerous, we could see some stunning economic statistics later this summer. In the meantime, I have some fear that the short-run statistics look so bad that they will cause both businesses and consumers to panic, exacerbating the situation. So far it looks like businesses are doing most of the panicking even as consumer spending on non-auto- and non-gasoline-related products continues to show surprising strength. Business caution was certainly in evidence in this month's slower hiring report.
Employment Data Disappoints
Just two weeks ago I had been relatively confident that job growth would continue at a decent pace of 180,000 or so jobs. Instead, jobs grew by just 54,000 overall as retail, government, and leisure related slowness torpedoed my forecast. Percentage growth rates were down in all categories with the exception of finance, which showed an acceleration in growth. That said, only nondurable manufacturing, retail, and leisure showed slowing that could be described as meaningful.
Though there's some reason to doubt the magnitude of the decline in job growth, it's clear that labour markets were weaker in May than any of us hoped. Businesses clearly pulled back as rising gas prices affected consumer behaviour, commodity price increases pressured the bottom line, and the effects of the Japanese tsunami and the renewed European debt crisis weighed on the minds of CEOs. The reported job growth of 54,000 per month represents annual employment growth of just 0.5% annualised, far short of what is needed to reach my economic forecast or to make a dent in unemployment.
