Additional assets 39051


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Additional assets 39045


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Additional assets 39037

– November 8, 2013

Despite cutbacks in government payrolls due to sequestration and policy uncertainty surrounding the recent shutdown of the federal government and the risk of debt default, the private sector appears to be grinding ahead.

AIER’s primary leading indicators registered 100 percent
in our latest evaluation, with 10 out of 10 indicators with a discernible trend judged to be positive (two indicators were judged to be trending sideways). This is up from a reading of 92 percent last month. Our cyclical score of leading indicators, derived from a separate mathematical analysis, declined slightly to 88 in the latest month from 90 in the prior month. Despite the mixed performance month-to-month, taken together, the high levels for both the leaders and the cyclical score suggest continued moderate growth is the most probable path for the U.S. economy.

Supporting the leaders and cyclical score are perfect 100 readings for both the primary roughly coincident indicators and the primary lagging indicators. The coinciders posted their 21st straight month with a reading of 100, while the laggers recorded their 17th  month in a row with a perfect score. Strong performances by these indexes offer further evidence that economic growth, while a bit sluggish, is well established.

Index Component Highlights

Among the component leading indicators, initial claims for unemployment insurance continues to fall towards levels associated with sustained economic growth. The latest weekly reading for initial claims came in at 336,000, down from 345,000 in the prior week, and back within the 300,000-350,000 range that is consistent with healthy job growth.

Job data has been a bit volatile in recent weeks because of the government shutdown as well as the switch by the California state employment agency to a new computer system. Despite the recent volatility, the downward trend in initial claims since the beginning of 2013 suggests ongoing gradual improvement in the labor market. Another sign of the improving labor market may be seen in the length of the average workweek in manufacturing, which continues to push higher. Reaching 41.8 hours in September, it is now just 0.2 hours shy of its pre-recession high.

New orders for consumer goods rose again in the latest month, sustaining the slow, upward trend in place since mid-2010. While still well below its pre-recession levels, ongoing moderate gains in consumer activity is consistent with our overall expectation for continued expansion for the broader economy.

Stock prices, as measured by the S&P 500 index, have hit new all-time highs recently. Stock price gains have been driven by rising valuations—partially a result of aggressive monetary policy and low interest rates—as well as by rising corporate profits. Consensus earnings per share estimates for the S&P 500 suggest actual earnings are on pace to hit a record high for 2013.

Among AIER’s coinciders, the index of industrial production recorded a 0.4 percent increase in September, led by a jump in utility output.

The manufacturing sector rose a more modest 0.1 percent and is up 2.6 percent from a year ago. Though the 2.6 percent gain over the past 12 months is relatively tame by historical standards, manufacturing output has a well-established rising trend, posting gains in seven of the past 11 months, and is just 4.9 percent below its pre-recession peak. Likewise, manufacturing and trade sales has risen at a 3.7 percent annualized rate since the low in 2009 and is within 1.3 percent of its all-time peak.

Government Cutbacks Create Drag 

By many measures, the economic recovery that began in 2009 has been tepid, with real GDP growing at an annualized 2.2 percent over the past 16 quarters. Of particular concern to the Fed—with its dual mandate of promoting stable inflation and maximum employment—has been the weak job recovery. Politicians, whose re-elections rest with a happy electorate, and businesspeople, whose profit growth is contingent on gains in personal income and spending, join the Fed in desiring healthy gains in the labor market.

AIER’s analysis of the labor market shows that while job growth in the latest recovery has been somewhat weaker than past recoveries, the weakness has been concentrated in the government sector while private-sector jobs growth has been on par with recent past expansions.

Every business cycle is different, and differences in the pattern of job changes at the beginning and the end of economic expansions can confound comparisons. To minimize these differences, we compared the rate of job growth during the most recent expansion with similar periods in each of the previous three expansions.

Specifically, we compared average monthly job growth by sector for the three-year period in the middle of each of the prior three expansions to the three-year average monthly job gains through September 2013 (the current expansion).

Growth in total nonfarm jobs has averaged 177,000 per month over the past three years, well below the growth rate for the late 1980s and the 1990s expansion, though slightly ahead of the 2000s expansion.

However, excluding the government sector, private nonfarm payroll growth has averaged 187,000 per month over the past three years, ahead of both the 1980s and early 2000s expansions.

The government sector has gone from being a net jobs creator in each of the past three expansions to a net jobs loser in the current expansion. The results are shown on the table on page 3.

Where the Jobs Are

In the chart at right, the brown lines show the average monthly private-sector jobs gain for the three years ending September 2013. The green verticle bars show the range of average monthly job gains over the previous three expansions. The top of the bar is the strongest job growth of the previous three expansions while the bottom of the bar is the weakest growth.

Manufacturing, and mining and logging are creating jobs at a very strong pace relative to past expansions (brown lines are at the top of the green bar), while construction is adding jobs at a relatively slow pace (brown lines near the bottom of the green bar).

Job creation in service-producing industries, which account for the majority of jobs in the U.S., has been led by professional and business services, education and health care, leisure and hospitality, and retail trade (brown lines are the highest among the 12 industry groups).

Among these four, job creation in education and health care is relatively weak compared to prior expansions. In contrast, job creation in retail, leisure and hospitality, and professional and business services is proceeding at a relatively strong pace.

Transportation, wholesale trade, financial services, and other private services are all creating relatively small numbers of jobs compared to other industries.

Wholesale trade job creation has been robust during this expansion in contrast to previous recoveries, while transportation, financial services, and other private services are creating jobs at a relatively weak pace. 

Information services is the only private-sector industry that remains a net job loser over the past three years, eliminating about 300 jobs per month on average.

As policy makers

continue to focus on jobs, media attention on employment data will remain intense. “Weak” job growth and the “jobless recovery” will grab many headlines.

Our analysis shows that job growth has been somewhat lackluster during the current economic expansion, but much of the weakness is a result of government payroll declines. We expect the drag on the overall job market from the government sector to continue for some time. In contrast, private-sector payroll growth is within recent historical ranges, with some industries doing well and some trailing.

For the Fed, understanding the source of the weakness—in this case, the government—may influence its view of the economy overall. The Fed does not have significant influence over government job creation (or losses). However, it can and has been supporting stronger economic growth in the private sector through extraordinary monetary policy stimulus.

The Fed’s challenge will be to determine when the private sector will be robust enough to withstand both the drag from the government sector and the removal of the extraordinary stimulus. This would entail ending the stimulative bond-buying program, neutralizing massive excess reserves in the banking system, and unwinding the Fed’s enormous balance sheet. Moving too quickly could cause a new recession, while moving too slowly risks a surge in inflation.

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Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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