Based on tonight's employment numbers from the USA, there will be those who will interprete the numbers as meaning: 1) recovery is faltering; 2) risk of a double dip is growing; and 3) further declines in sentiment will soon become evident.
But before everyone gets too carried away with the figures, an assessment of the numbers is required.
In terms of what was announced tonight, US payroll added 6,000 positions for July, well below the consensus forecasts of 60,000 - 95,000 net gain.
Tonight, the markets have already re-acted to the news by marking down the DOW by 60+ in early trade. Clearly, Wall Street is reacting to the possibility that recovery is faltering, or at least stalling, mid-summer.
The reality behind the figures provides, however, for much more interesting reading: 1) private sector payrolls are growing (up 22,000 in July, but down on June's revised 45,000 growth rate); 2) Government sector payrolls are contracting (down 16,000 in July, following a revised 25,000 gain in June); and 3) net payrolls were up in July (by 6,000), follwoing a revised increase of 66,000 in June (previously reported as 36,000 growth).
That was the first time in 2002 that payrolls for a preceding month were not revised downwards in the immediately following month (ie: an up trend in employment growth is now emerging).
Based on the 2-month scenario, payrolls improved by 72,000 during June /July, aided by a net 5,000 increase in Government payrolls, and a net 67,000 increase in private payrolls.
Within the private sector, however, manufacturing continues to suffer in employment terms, albeit at a declining rate (down 7,000 in July, following -13,000 in June, and -29,000 in May).
Construction activity fell at an accelerated rate during July (down 30,000, following +14,000 in June, and 0 in May) primarily on account of seasonal influences. A similarly paced rebound is likely in August.
Services and retailing were the surprise stories for July.
Services employment continues to grow, up 50,000 in July, following a revised 62,000 increase in June, and an earlier 68,000 increase in May. Whilst some readers may consider the trend in decline here, the reality is that services employment continues to demonstrate robust growth in the USA. Currently, the rate of growth in overall services employment is running at its highest rate so far 2002.
As a result of this, services' wages continue to grow, thereby feeding into services inflation which is currently running at 3.7% and accounts for ~60% of core CPI. Taken to its next logical step, the growth in services employment may well translate into higher wages growth and higher inflation (as measured by the CPI) within the next 4 -6 months.
After several months of decline, retail trade employment rose in July (up 12,000, as against -16,000 in June, and -18,000 in May).
With retail spending continuing to hold-up (as confirmed today in separately released retail sales' figures), consumer sentiment remains resilient.
One immediate example of this can be seen in the July vehicle sales' figures which, according to USA's Merrill Lynch:
"were so strong that consumer spending should easily grow at a 3.5% rate or better in Q3 and we believe that Q3 GDP will also grow at a 3.5% rate. Barring some exogenous shock to the economy, we believe there is very low risk of a double-dip recession".
Conversely, with the continuing (albeit, slowing) decline in factory payrolls, coupled with a reduction in factory hours worked, it would appear that industrial production declined in July (est @-0.3% by Merrill Lynch).
Coupled with the decline in hours worked during July, it would appear that productivity growth continued with its recent trend of accounting for most (if not all) of the economic growth that is currently occurring.
Going forward, corporate restructuring is likely to keep further employment growth in check throughout the remainder of 2002. As a result, unemployment is likelt to tick back over to the low 6+ region. However, with the US economy in need of creating 125,000 jobs per month in order to create a neutral employment impact, it is clear that: 1) the US economy will continue to generate jobs going forward; 2) jobs growth should still be strong enough to keep consumer confidence and spending in its uptrend; and 3) productivity growth should continue to remain strong (ML is predicting a 5%+ lift in productivity gains in Q3).
Summarising this into a statement of economic intent: 1) the current US economic recovery is well underway and will continue; 2) towards the end of 2002, the rate of economic growth will accelerate; 3) it is entirely feasible that the US economy will be growing in the range of 2.7% (Lehmans) to 3.5% (ML) by year-end; 4) the recovering economy will be fueled by 2 primary sources: (a) the consumer, and (b) services growth; 5) productivity gains will continue throughout the remainder of 2002; 6) the continuing productivity improvement should lead to further sharp gains in earnings going forward; 7) an increasing number of US companies will be reporting improved sales and profitability conditions by late Q3, or going into Q4; 8) despite short-term drift, the DOW, and related stock market indices in the US will be trading at a higher, sustainable level by year's end (supported in the main by a strongly recovering economy, and healthy forward projecting P/E ratios, as opposed to trailing P/E ratios); 9) as previously argued, inflation (particularly in the services' area) will be the main risk going forward (not deflation); and 10) in support of all this, the Fed is likely to keep a neutral rates' setting until at least November.
Many of us may not consider it to be so, but the future is positive based on what is emerging from the US economic recovery (particularly in the services, and the technology areas, 6m out).
