Economic Notes: The Red Queen’s Race
7/07/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
"In our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing."
"A slow sort of country!" said the (Red) Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
~ Through the Looking Glass, Lewis Carroll
Employment fell in June according to the Bureau of Labor Statistics’ (BLS) survey of employers.
The first monthly decline in 2010 was expected (See: "Where's the Beef?") as 225,000 temporary Census jobs came to an end. Another 300,000 temporary Census positions are slated to be phased out in the next few months.
Net of the Census temps, public sector employment declined in the first half of the year as fiscally stressed state and local governments reduced payrolls.
Private sector jobs increased for the sixth consecutive month. Since the beginning of 2010, private employment is up 593,000 jobs (+0.6%), with more than half of the gain (+54.1%) in the temporary help sector.
The first-half’s increase in private jobs was almost equaled by a 538,000 decline in underemployment, with employers increasing part-time workers’ hours as consumer spending continued to rise. While the shift from part- to full-time employment did not increase the job count, it added to workers’ paychecks.
According to the BLS’s survey of households, which is conducted coincidentally with the employer survey, the unemployment rate slipped during the month. But that reflected weak demand, not robust hiring.
The duration of unemployment and the number of discouraged jobseekers (i.e., those who have ceased looking for work) both rose to record levels. Indeed, it appears that some of the discouraged who reentered the work force in the spring have again quit looking — discouragement is up 29.9% since the beginning of the year.
All told, during the slow growth expansion of the first half of 2010, the labor market — like Alice in the Red Queen’s Race — managed to run in place.
But as the Queen remarked, “If you want to get somewhere else, you must run at least twice as fast as that.” So how will the economy fare in the second half of the year? Will it be double time or a double dip?
Although the end of the 2007-09 recession has yet to be officially declared (See: "Hoof Prints"), the economy has expanded for three consecutive quarters. As was true after the two longest post-War recessions (prior to the most recent), the current rebound was already slowing at the end of the first quarter (Q-1) of 2010. (Note that while the three patterns are similar, the current recovery started slower and is fading faster than the earlier rebounds.)
While we will not have an estimate of how the expansion fared in Q-2 until the end of July, data through May provide some hints and most are positive.
Consumer spending on services – almost one-half of Gross Domestic Product – has risen steadily since last summer and spending appears to be accelerating. Concurrently,manufacturing new orders increased for 13 consecutive months (but then paused a bit (-1.4%) in May).
Further, surveys conducted monthly by the Institute for Supply Management suggest that both sectors will continue to expand in the coming months, although the respondents tempered their optimism a bit in May.
Two other components are less encouraging, however. First, the public sector will be a drag on growth as state and local fiscal constraints force spending cuts and the boost from last year’s Federal stimulus fades. Second, softness in real estate markets (housing and nonresidential) will leave construction spending in the doldrums well into 2011.
On net, while predictions of a “double dip” are not implausible, they are improbable.
Instead, the Chicago Fed National Activity Index (a composite of 85 indicators) suggests that the expansion will proceed at a subdued pace in the second half of the year. There may be some negative data points ahead, but the underlying trend will remain upward.
The expansion will fuel job growth but the number of unemployed will decline only slowly because the labor force will expand due to the return of the discouraged and the entrance of new jobseekers.
In the labor market and the Red Queen’s race: “it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.