The recovery's strength will fade further

The economic recovery remains intact, but it is far from vigorous. That was obvious from Friday's disappointing report of a relatively weak 103,000 seasonally-adjusted increase in December nonfarm payrolls, even though larger than a revised 71,000 November rise. This is hardly a significant reversal of the steep recession decline in employment. Indeed, this two-month rate of increase, an annual rate of 1.0 million, would not even match the normal long-term trend growth in the labor force, which will materialize if there were renewed confidence that there were enough jobs to attract them. That is evident from the growth of the population and the percent employed.

There was some initial enthusiasm over the decline in the unemployment rate to 9.4% in December, from 9.8% in November. But, the decline appeared far less impressive after it was realized that the improvement was appreciably due to an aberrant decline in the labor force, as some 260,000 discouraged unemployed workers gave up looking for work, while there was a suspect 297,000 increase in household survey employment, perhaps due to a questionable seasonal adjustment. There is likely to be a reversal of this unemployment rate decline over the months ahead as employment continues sluggish and the labor force reasserts some trend growth. Indeed, a rise in the unemployment rate to or above 10.0% remains a distinct possibility.

Other components of the December employment report continue to cast doubt over the strength of the economic recovery. The average workweek remained unchanged at a low 34.4 hours. This not only implies a less vigorous fourth-quarter real GDP rise than widely expected, but hints at a sluggish employment rise ahead since a rising workweek tends to foreshadow a rise in hiring. Also, average hourly earnings edged up a mere 0.1% in December after being unchanged in November. This points to a less than vibrant consumer sector over coming months, including weakening personal income. Moreover, though social security taxes are reduced, this boost to discretionary income will be more than offset by the rise in energy prices and food. Indeed, these price components are likely to boost consumer prices when they are released next Friday, perhaps by 0.4%. That will work to slow consumer discretionary spending on domestic products and help keep real GDP growing slowly.

The rise in inflation is by no means a positive indication of economic strength. Much of the rise in commodity prices stems from speculation, fueled by the increased liquidity sloshing through the global economy. Since a significant portion of the commodities affected are imported, it is not a boost to the US economy, but a cost that is difficult for business to pass on to the final purchaser. That will serve to squeeze US corporate profit margins, a disincentive to new hiring. Moreover, the consequent economic slowdown will tend to reverse the speculative commodity price rise and, with it, much of the recent rise in interest rates. This is, of course, far from the ebullient consensus forecast.

Other forces are also at work to keep the recovery disappointingly only inching along. The widespread requirement that State and local governments must cut their balooning budget deficits will probably produce significant employment layoffs and reductions in other spending. The new Congress may also make Federal spending reductions a priority. In addition, there is likely to be a new wave of residential real estate foreclosures that will further appreciably depress home prices. That will keep the real estate construction industry depressed. Shopping center vacancies are likely to rise further, leading to mortgage defaults and foreclsures in this sector. These various economic forces retarding the recovery will, at a minimum, curtail the positive impact of the stimulus programs.

There are also a number of other uncertainties and potential negatives ahead for the economy. The effort of bond holders to saddle banks with the losses on real estate backed securities is helping to intensify lending caution. And it could well lead to employment cuts in this sector. There is a risk of a decline in the grossly inflated real estate prices in the major cities in China. That could cause added problems for Chinese banks already saddled with sizable nonearning loan assets. The result could be more of a slowdown in Chinese economic growth than the authorities plan. The debt crisis in Europe is far from over. That will slow Europe's growth.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philibraverman@Gmail.com

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