Economics
Initial jobless claims
Latest available: Week ended July 12, 2008
Release date: July 17, 2008
Initial jobless claims for the week ending July 12 rose to 366,000 from 348,000 in the previous week. However, the rise was less than expected and contributed to the four-week moving average dropping to 376,500 from 381,000 last week. The jobless numbers are indicative of likely continued modest declines in payroll employment in July.
Jobs drop again; unemployment rate stays high at 5.5%
Latest available: June 2008
Release date: July 3, 2008
Payroll employment declined for the sixth consecutive month in June, dropping 62,000. This was generally in line with markets expectations for a drop of 60,000. More disappointing was that fact that declines in earlier months were revised to show even greater weakness, with May employment now down 62,000 (down 49,000 previously) and April off 67,000 (down 28,000previously). Also disappointing was the fact that the unemployment rate held steady at 5.5%. After jumping higher in May from 5% in April, expectations had been for a modest retracement back down to 5.4%.
Employment declines were relatively broadly based. Goods-producing industries saw employment drop by 69,000, led by employment in construction falling by 43,000 and in manufacturing by 33,000. Service-producing jobs remained in the positive column, although just barely, with employment up 7,000. However, this was largely achieved by large gains in two main components: government (up 29,000) and leisure and hospitality (up 24,000). Most other service areas declined, led by a whopping 51,000 drop in professional and business services.
The workweek for the overall economy held steady in June at 33.7 hours, although it dropped slightly for manufacturing to 40.8 hours from 40.9 hours in May. The combined effect of the employment and the workweek is captured in a separate measure, the index of aggregate weekly hours. For the second quarter as a whole, this index is down an annualized 0.7%. Assuming productivity growth of 1%-1 ½%, this implies GDP growth of around ¼% to ¾%. This conveys the idea that, although the economy is showing job losses, the declines to date have been relatively modest and not inconsistent with GDP growth continuing to eke out small gains.
More worrying was a separate report out this morning that showed jobless claims are continuing to trend higher, rising to 404,000 for the week ending June 28. If this trend continues in subsequent weeks, it would flag the risk of even more marked declines in payroll employment in July.
The key wage measure in the report, average hourly earnings, rose an expected 0.3% in the month. This resulted in the year-over-year rate holding steady at 3.5% in both June and for the second quarter. It is of note that, on a quarterly basis, this rate has generally been trending lower since a recent peak of 4.2% in the first quarter of 2007.
The continued declines in employment suggest a negative factor weighing on household spending in the near-term. Fortunately, the recently issued tax rebate cheques are providing an offset as evidenced by the stronger-than-expected consumer spending numbers in May. However, this support from fiscal policy will be relatively short-lived and is likely to fade by the end of the current quarter.
Our forecast assumes that by then labour markets will start to improve as the restraint from the credit tightening and high energy prices starts to ease. However, if these negative factors persist, concern will re-emerge about GDP growth remaining positive in the fourth quarter and going into 2009. This downside risk to growth is expected to result in the Fed opting to hold Fed funds unchanged at a still-stimulative 2% through the first half of next year despite increasing concerns within the Fed about inflation pressures building in the system.
Productivity and unit labour costs both advance
Latest available: First quarter 2008
Release date: May 7, 2008
Productivity growth in the first quarter came in at an annualized 2.2%, building on the 1.8% gain in the fourth quarter of 2007. Unit labour cost growth also came in at 2.2%, weaker than market expectations calling for a 2.6% increase.
Hourly compensation advanced 4.4%, slightly softer than the 4.6% gain seen in the fourth quarter. Hours worked fell 1.8%, while output in the non-farm business sector was up a slight 0.4%. Productivity in the manufacturing sector was up 4.1% and manufacturing hourly compensation advanced 6.7%.
On a quarter-over-quarter basis, measures of productivity and unit labour costs can be quite volatile. On a more stable year-over-year basis, productivity was up a decent 3.2%, which is above the 2.6% average pace seen since 2000. Unit labour costs were up a very slight 0.2% on a year-over-year basis. This is consistent with our forecast calling for core inflation to trend lower through the year. Going forward, continued sub-trend growth should slacken the labour market further, thus continuing to slow wage growth, which should contribute to a softening in unit labour costs.
Employment cost index advances
Latest available: First quarter 2008
Release date: April 30, 2008
The employment cost index advanced 0.7% in the first quarter, slightly below market expectations calling for a 0.8% gain. This brought the year-over-year rate to 3.3%, a touch slower than the 3.5% average growth rate observed during the past six years.
The wages and salaries component increased 0.8% in the quarter, matching the fourth-quarter pace. Growth in the benefit costs measure came in at 0.6%, a deceleration from the 0.8% pace in the prior quarter. This brought year-over-year growth in the benefits index to 3.5%, well below the 4.8% average growth rate in place since 2002.
Growth in the wages and salaries component, which includes commissions and bonuses, matched that of the fourth quarter. This contrasts with the first-quarter non-farm payroll wages data, which showed a slight acceleration in wage growth. A slowing economy coupled with continued troubles in financial and housing markets may potentially have weighed on commissions and bonuses, restraining growth in the wages and salaries component.
Going forward, with the unemployment rate likely to move up as the economy slows, wage growth should moderate. This will be helpful in allowing core inflation to trend lower from its currently elevated rate as we head through the year.
