U.S. Economic Highlights

Press Release / News

Nov. 2, 2009

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Last week’s Highlights: After four straight quarterly declines, GDP rose at a 3.5 percent annual rate in the third quarter. The good news doesn’t end there. New orders for durable goods remained on a rising trend through September. The ordering rate suggests supply conditions are on the mend and could remain so through the end of the year. But where's the demand to keep the supply chain humming?

The consumer confidence numbers released last week suggest household spending could remain weak. Another relatively poor labor report this week might reinforce relatively negative attitudes. The report on initial claims this past week would be consistent with another decline in jobs, and slow wage increases.

But consumption isn’t the only question. Public spending continues to be relatively robust, as more stimulus money goes out the door. And yet, state and local tax revenue were more than 8 percent lower in August than one year earlier, even with stimulus money tossed into the mix. The stimulus money is not a bottomless pit. And when that money is all spent, the squeeze on state and local finance will become even more acute.

In short, the financial system isn’t yet fully back on stream, consumer demand remains weak, and public demand could weaken further. And commercial real estate remains in a down cycle. Yes, this is a recovery, but with a lot more downside risk than upside risk.

Monday, November 2

10:00am Help-Wanted Advertising OnLine (The Conference Board)

The forward indicators of labor market activity have been pointing to continued but slowing downsizing ahead. Is there any change in these conditions heading into the final months of the year?

Tuesday, November 3

4:00am Euro-zone Producer Price Index (Eurostat)

Weak demand helped lead to an outright decline in retail inflation in July and August. There is little reason to think prices recovered in September. Rather, another decline of about 0.5 percent probably occurred. These sustained price cuts continue to put downward pressure on profit margins. While consumers may like the discounts, businesses will struggle to service debt, expand employment, or increase investment plans – as red ink piles up. It may take until the first half of 2010 or even longer for the price story to change substantially in the Euro zone.

Vehicle Sales

Car buying in the post "Cash for Clunkers" period is very weak. That’s likely to be the story in the October data, with not much change in November. Moreover, inventory remains very low and discounts are few and far between. Relatively modest sales may be the mark for the new 2010 models.

Thursday, November 5

8:30am Productivity and Costs (Bureau of Labor Statistics)

Productivity growth was very strong in the second quarter, as a result of very sharp cost-cutting. The 3.5 percent rise (annualized) in GDP suggests another rise in productivity in the third quarter, though probably not as strong as in the second.

Friday, November 6

8:30am Employment Situation (Bureau of Labor Statistics)

This report is probably more important than the GDP release. Job declines are slowing but so is average hourly wage. The result could be no gain in spending power. Consumers have been slow to step up spending and September was probably no exception with household buying posting another monthly decline. Moreover, with job losses continuing to mount, albeit at a slower pace, and wage restraint firmly in place, spending power growth is very likely to remain weak through year end. In turn, this is a recipe for a lousy holiday season. This set of circumstances creates a downside risk (along with the end of the inventory runoff). These developments could result in economic growth in the first half of 2010 of no more than 2 percent – much slower than the 3 percent pace of the second half of 2009.

Sustained job losses are softening the rising trend in wage costs. If prices edge a little higher too, a profit recovery could begin. Under these conditions the labor market might start improving a little faster as early as spring. Still, the big question remains how strong consumer demand will be under these circumstances.

Regionally, the labor market appears poised to turn around in the South Atlantic region, remain fairly strong in the West South Central and Mountain regions, but continue to struggle in much of the east and west coasts and in the Midwest. A sectoral view suggests some strength in the industrial core of the economy, but little of that momentum will trickle out to the much larger "core" service sector (which excludes health and education).

THE SITUATION ABROAD

The global economy continues to improve, as generally evidenced in the latest batch of Leading Economic Indicators. In fact, the improvement is sufficient in some cases for central banks to start raising interest rates (Australia and Norway).

Trade improvement is one feature of the recovering global economy. But the dollar is whipsawing trade. The lower dollar helps U.S. exports, but hurts exports elsewhere. Europeans complain that a chronically weak dollar could eventually result in slower wage and job growth.

The weak dollar, in a world of reduced tariff and trade barriers, could be viewed as a veiled protectionist move. As such, it could prompt counter actions. Other analysts speculate that the weak dollar reflects concern about continued financial market turmoil. Still others opine that brighter prospects abroad (Japan’s economy reignites?) are reflected in the dollar weakness. If, in fact, investors are more bullish on stocks in emerging markets, they are turning away from U.S. stocks, helping to send the dollar lower. Finally, the dollar weakness makes it less attractive to hold, more attractive to sell off, spiraling down the value until investors sense a bargain and start to buy.

Whatever the cause of dollar weakness, however fleeting or permanent, currency trading is likely to be a focus of attention at international gatherings through 2010. And that could both ease or entangle ongoing discussions about international cooperation in financial oversight.

FACT OF THE WEEK

1.3 million. That’s the number of high school dropouts per year, on average – with no sign that it is changing in 2009. The unemployment rate for high school dropouts was 13.7 percent in September, compared with an overall rate of 9.8 percent. But the participation rate is much lower for dropouts (47.3 percent) than for the total population (65.2 percent). In other words, two out of three adults are working or looking for work (9.8 percent for the latter group). But half of high school dropouts are not even looking for a job, no doubt believing they couldn't qualify for the jobs that are available.

It would seem obvious that metro areas with a large proportion of dropouts (think Detroit) are plagued by low wages (and low tax revenue even with high tax rates). In turn, the lack of revenue starves public service delivery, further depressing the local economic environment, even if the national economy was rebounding.

School funding depends heavily on the local tax base in most of the country. So the vicious cycle sets in: dropouts depress the income base. Tax revenues remain slow. Schools may tend to be underfunded and underperform. Some students respond by no longer going to school. And if the student population is overrepresented by relatively recent immigrants, the whole cycle may be intensified by a lack of language and communication skills.

QUESTION OF THE WEEK

What metro areas are the strongest economies? Which are the weakest? Which ones could be improving as the national recovery sets in?

As just described, some of the problems in metro areas are more structural than cyclical. Perhaps that is one reason why Detroit has the highest unemployment rate of any large metro area (17.3 percent in September). The next closest metro area is Riverside-San Bernadino in California. This area was hit heavy by the sub-prime mortgage mess and has a 14.2 percent rate currently.

Conversely, Denver has a 7.1 percent unemployment rate, up from 6 percent one year earlier. And if the whole Mountain region regains its footing as the strongest of the nation’s nine regions, Denver might quickly see its unemployment get back to the 6-percent range. The nation’s capital (metro area, not just the city) has a 6.2 percent rate now, compared with a 3.9 percent rate a year ago. Its economy is less dynamic than Denver’s, and therefore likely to improve more slowly, even as the national economy rebounds.

Metro areas like Seattle, Washington and Charlotte, North Carolina represent the kinds of local economies capable of quickly rebounding from the recession. Whether that happens there, of course, depends on a number of both cyclical and structural factors. Not least on the list is a turnaround in home building and home pricing. In turn, that depends on the labor market regaining solid footing. Moreover, the small business communities in these areas are likely to be crucial in renewed vigor in both the real estate and labor markets. The big question here isn’t whether these businesses can recover, but whether they can secure the necessary financing from a still troubled banking system.