U.S. data suggests no recession -- but little growth

In keeping with much of the other hard data we’ve seen recently, last week’s economic reports suggest that the economy continues to trudge along at a pace consistent not with a true recession, but with a “growth recession” -- an environment where growth is positive, but so mild as to have little impact on unemployment and living standards.

Friday’s eagerly awaited employment report showed that the U.S. added a net 103,000 non-farm jobs in September, including 137,000 private-sector positions. The latter number is somewhat inflated, however, as it includes 45,000 Verizon employees who had gone on strike in August and returned to work last month. Within the private sector, healthcare and education saw the greatest number of new jobs. Continuing a long trend, the public sector was not so lucky, shedding 35,000 jobs. A bright spot in the report was the revision of August data to reflect a net gain of 57,000 jobs rather than the zero initially reported.

All in all, the report was a bit better than markets had expected and reflects weak, but positive, economic growth. Unfortunately, employment gains of the magnitude we saw in September are not enough to keep up with population growth; about 150,000 people enter the U.S. workforce every month, so adding 103,000 new jobs isn’t going to bring down the unemployment rate, which was unchanged at 9.1%. 14 million Americans who want jobs remain out of work, and almost half of them have been searching for employment for six months or more. Including people who work part-time because they can’t find full-time employment, and those who have given up their job search (and so no longer count as part of the workforce), the unemployment rate is 16.5%. For the economy, this -- combined with a moribund housing market -- all adds up to a persistent lack of aggregate demand. Companies can’t hire more rapidly because their customers (in the U.S., at least) can’t afford to spend much more than they already are. And so the economy just putters along.

Of course, economic activity is not dead; it’s just sleeping off a bad hangover following the credit-fuelled binge of the pre-crash 2000s. Just as capital equipment eventually needs replacing, so do consumer goods, and much of what demand we do enjoy comes from sources such as these. There is more to it than that, however. Last week provided some insight on this front, as motor vehicle sales surprised with an 8% gain in September, bringing car sales above the replacement rate, to the highest level since April. Along similar lines, U.S. manufacturing activity improved, with the Institute of Supply Managers Manufacturing Index rising to 51.6 in September from 50.6 the previous month. That’s not exactly rip-roaring activity, given that 50 is the dividing line between growth and contraction, but at least it was a move in the right direction (unfortunately, the forward-looking new orders component came in at 49.6). A separate report on factory orders was lower on tough month-over-month comparisons and weak demand for primary metals, but capital goods orders were fairly robust. A third report showed that new orders in the services sector were higher in September, too.

I continue to expect very modest growth in the U.S. in the coming months, but I’d caution that my forecast leaves little room for major exogenous shocks, such as a worsening of the European debt crisis or serious policy missteps by U.S. officials.

Europeans continue to take incremental steps

European shares got some welcome relief last week as policymakers signaled a greater (though not that great) willingness to address the festering debt crisis. The European Central Bank (ECB) said it would reintroduce yearlong loans to banks, giving them access to unlimited funds through the beginning of 2013. It also said it would once again start purchasing covered bonds in order to encourage lending. What the central bank didn’t do, unfortunately was lower interest rates, despite relatively mild Europe-wide inflation and growth trends that suggest imminent recession (N.B.: unlike in the U.S., car sales in Spain and Italy just fell to their lowest levels in 15 years). The ECB is fanatical about fighting inflation -- its sole mandate -- to the point that it has demonstrated an unfortunate tendency to tighten policy at inopportune times, such as in 2008 and twice over the last year. Perhaps, with the exit of ECB Chairman Jean-Claude Trichet this month, the bank will have a change of heart at its next meeting, though there are few concrete signs to suggest that happening.

Last week also saw increasing chatter among leaders in favor of recapitalizing European banks. European Union (EU) Economic and Monetary Affairs Commissioner Olli Rehn was quoted as saying, “There is a sense of urgency among ministers and we need to move on.... Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty.” Similarly, German Chancellor Angela Merkel said policymakers “shouldn’t hesitate” to recapitalize financial institutions should doing so become necessary, as I believe is likely.

Still, all this talk of recapitalization may, in an odd way, be premature; as we went to print, Slovakia was still holding out on ratifying the EU’s July proposal to expand the European Financial Stability Facility (EFSF). In any case, events have made clear that it will probably be too small to be effective, even in its expanded form. As has been the case in recent weeks, “progress” on the debt crisis remains painfully slow, seemingly driven forward only by the prospect of imminent catastrophe. For this reason, we expect continued volatility until policymakers agree on a strong and credible response.

Source: Jerry Webman, Ph.D., CFA, Senior Investment Officer & Chief Economist, OppenheimerFunds, 10/10/2011