Weak but not Collapsing Labor Markets, Manufacturing

MBA (8/4/2008 ) Velz, Orawin
The advance estimate of gross domestic product showed that economic growth accelerated to 1.9 percent in the second quarter from 0.9 percent in the first quarter (annualized rate). The boost to GDP largely came from net exports, which posted the largest contribution to growth since 1980.
In addition, the stimulus tax payments helped propel consumer spending growth to the strongest pace in three quarters. The report, which also included an annual revision to GDP, showed that the economy contracted slightly in the final quarter of last year, with real GDP declining 0.2 percent instead of growing 0.6 percent reported earlier.

While the economy managed to expand in the first half of the year, the pace was not strong enough to create jobs for those who were seeking them, causing the unemployment rate to rise. Nonfarm payroll employment fell for a seventh consecutive month in July, declining by 51,000. While May and June payrolls were revised up by 26,000 jobs, making the declines in employment in those months less severe than originally reported, those jobs were in the government sector. The unemployment rate, which is calculated from a separate survey, rose from 5.5 percent in June to 5.7 percent in July, the highest level since March 2004.

Overall, the report continued to show an ongoing, modest decline in payroll employment. Since the beginning of the year, 463,000 jobs have been lost—an average of about 66,000 jobs per month. Job losses moderated in the second quarter, averaging 55,000 per month, compared with an average of 82,000 per month in the first quarter.

Other reports last week indicated continued subpar growth in the third quarter as the impact of the stimulus checks fades and global growth is poised to slow. Manufacturing activity declined slightly in July, with the Institute for Supply Management (ISM) manufacturing index edging down from 50.2 to 50.0—a level that indicates that manufacturing activity neither contracts nor expands. Like the economy as a whole, manufacturing continued to receive support from trade, which helped offset the impact of declining domestic demand.

Finally, while crude oil prices declined sharply in July, consumers remained downbeat as their assessment of the labor markets continued to deteriorate, according to The Conference Board’s Consumer Confidence Survey. The consumer confidence index edged up in July following six consecutive monthly declines but the index continued to hover near the lowest reading in 16 years.

The pickup in the unemployment rate to a four-year high is supporting the view that the Federal Reserve will likely leave the federal funds rate unchanged at its meeting next Tuesday and perhaps for the coming months. The Fed's decision last week to extend into 2009 loans to investment banks and other liquidity measures also supports the view that the Fed may not raise interest rates until next year.

Long-term Treasury yields declined sharply on Thursday in response to the rise in weekly initial unemployment claims to the highest level in five years. Yield declined further on Friday on news of an increase in the unemployment rate to a four-year high. The yield on the 10-year Treasury note stayed around 3.95 percent by mid-Friday afternoon, 18 basis points lower than the rate on the previous Friday.