Deller's two cents: I don't know about you but I am getting seasick from this roller-coaster of an economy....back on the up-swing this week! Paul Krugman said there are three kinds of economists: squiggly line economists (academics who use the latest mathematical trick to impress their colleagues), up and down economists (the talking heads on the business channels) and thinking economists (what does all this "stuff" mean?). This week-to-week roller-coaster is what up and down economists worry about; the price of gold went up 2% today, what does that mean? These types of economists tend to get a lot of whiplash or seasickness from the roller-coaster. The squiggly line economists seldom come out of the ivory tower (thank god) and only talk to themselves. What we want to strive to be are thinking economists: what does all this stuff mean and can we do anything about it. They tend to look a little longer term (remember it takes any particular indicator moving in the same direction at least three periods in a row to indicate a trend) and get below the surface.
Economic Week in Review: Bright spots pierce the gloom
September 03, 2010
The economic news turned somewhat brighter Friday morning, as the Labor Department's unemployment report was better than economists' gloomy expectations. Among the week's other bright spots were better-than-expected expansion in manufacturing, improved consumer confidence, and modest growth in consumer income and spending. But activity in the service sector, a big component of the economy, declined, along with productivity. For the week ended September 3, the S&P 500 Index rose 3.7% to 1,104 (for a year-to-date total return-including price change plus dividends-of about 0.4%). The yield of the 10-year U.S. Treasury note rose 5 basis points to 2.71% (for a year-to-date drop of 114 basis points).
Private-sector sheds fewer jobs than expected
The unemployment rate edged up to 9.6% in August, from 9.5% in July, as more people reentered the workforce looking for jobs. Nonfarm payrolls declined for the third straight month. The economy lost 54,000 jobs, the same as in July (a revision from an initial estimate of 131,000). Economists had expected a worse picture-losses of about double that number. The decline reflected contraction in the government sector, largely because temporary workers hired for the 2010 census were being released. These job losses were substantially offset by increased hiring in the private sector, which added 67,000 jobs in August, mostly in education and healthcare, and added more jobs in July than previously estimated. "The jobs number is very encouraging," said Roger Aliaga-Díaz, Vanguard economist. "However, we still need sustained gains above 120,000 jobs a month for the existing unemployed,discouraged workers reentering the labor force, and new entrants to be absorbed into new jobs."
ISM's gauges point in different directions
Business-conditions surveys by the Institute for Supply Management (ISM) found that manufacturing activity in August was greater than expected while service-sector activity was weaker. The ISM Index, which rose modestly to 56.3 in August from 55.5 in July instead of declining, was viewed as a welcome surprise given concerns that the economy's already-weak momentum is slowing. The manufacturing gauge had been declining in recent months, although still indicating expansion.
The ISM Non-Manufacturing Index, a barometer of the economy's much-larger service sector, declined to 51.5 in August, from 54.3 the prior month. A shallower slide had been expected.
Fed economists spar over the next step
At the August 10 meeting of the Federal Open Market Committee, according to minutes released this week, Fed officials concluded that the economy was growing slower than they had expected although a "moderate strengthening" was in the wind for 2011. Given the economic conditions, the officials strongly debated the best way to manage its balance sheet, which is bulging with about $2 trillion in debt, mostly mortgage-backed securities-which consist of pools of residential mortgages-and Treasury securities. The purchase of these securities is one of the unconventional tactics the Fed has used in its efforts to bolster the economy. The debate, which has been characterized in some press reports as contentious, concluded with the committee deciding to use the proceeds from maturing securities and prepayments of mortgages by homeowners (a favorite tactic when interest rates are low, as now) to purchase long-term Treasury bonds, a step intended to prevent any tightening of monetary policy while the economy is in a fragile state.
Consumers stage a comeback in July
Consumers' income and spending rose in July-compared with a no-growth June-although at a subdued pace. Personal income increased 0.2%, led by wage and salary growth, after declining in June. Spending on durable goods rose strongly, boosted by a jump in spending on automobiles. Overall personal spending, which includes durable and non-durable goods as well as services, rose 0.4%. The consumer savings rate dipped slightly, to 5.9%. The savings rate has been unusually high as recession-battered consumers seek to repair their personal balance sheets. By comparison, the savings rate was about 2% before the recession began in December 2007.
Consumer confidence surprises with a rebound
The Conference Board's index of consumer confidence jumped 2.5 points in August, to 53.5, as consumers' short-term outlook for business and labor-market conditions brightened somewhat. A slight decline had been expected in the consumer-sentiment gauge, which had fallen more than 11 points in the prior two months. Despite the gain, confidence remains low-the index was around 90 when the recession began in December 2007-and the job picture continues to weigh heavily on consumer attitudes.
Construction outlays fall
Total construction spending declined by a higher-than-expected 1.0% in July, compared with June, to $805 billion, a level that was almost 11% lower than a year earlier. Overall spending has declined for three months in a row. The largest decline came from private residential construction, which fell 2.6%, as a federal tax credit for home buyers expired in April and as consumers remained wary given job concerns. Public construction also declined, especially for roads and educational and transportation structures. Private nonresidential construction increased on the strength of infrastructure spending by power and communications companies.
Factory orders rise
New orders for manufactured goods rose 0.1% in July, following two months of decline. Helping boost results were transportation orders, especially for Boeing planes, which helped offset declines in orders for machinery and computer products. Non-durable orders were flat, an improvement over the previous three straight months of decline.
Productivity falls more than originally estimated
Productivity, a key measure of U.S. companies' efficiency, declined in the second quarter by 1.8%, in line with expectations and about double initial estimates. The drop was in sharp contrast to the 3.9% increase in the first quarter. The second-quarter decline primarily reflects a slowdown in the rate of growth in national output as growth in gross domestic product was revised downward during the period. The output slowdown was a contributing factor to the rise in unit labor costs-a closely watched measure of inflation-that was revised upward substantially, to 1.1%, compared to the initially reported 0.2%.
The economic week ahead
The Federal Reserve's gauge of regional business conditions, known as the Beige Book, is set for release on Wednesday. Other reports scheduled for release are consumer credit on Tuesday and international trade on Thursday.
--
Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve=
