The US economy shows signs of stalling

The April employment report, released May 4, made it abundantly clear that the US economic recovery continues extremely sluggish. Indeed, the recovery is so sluggish that it is at risk of stalling, especially given the pronounced headwinds with which it is confronted. The seasonally-adjusted increase in April nonfarm payrolls was up a mere 115,000, a slimmer rise than was widely anticipated and even weaker than the 154,000 upward revised March increase. More significantly, it was far from the 252,000 average monthly rise from December to February. While it was a seasonally-adjusted increase, not a decline, the realty may be even worse. The alternative employment survey, the Household survey, showed an even more distressing 169,000 seasonally-adjusted decline in April employment. It is only because of an even larger 342,000 plunge in the labor force that the unemployment rate appeared to improve, declining to 8.1% in April from 8.2% in March. This flight from the labor force is most likely a reponse to the inability on the part of the long-term unemployed and discouraged workers to find jobs. The labor force as a percentage of the population is now at its lowest level in three decades. The retirement of baby boomers is far from an adequate explanation for this disturbing development. Unfortunately, there is a widespread unwillingness on the part of potential employers to even consider the applications of the long-term unemployed. This a bias that a well crafted Federal incentive program might be effective in overcoming. The U-6 employment report, which is viewed by many as a better all-inclusive measure of the true employment picture, remained steady at a 14.5% rate of unemployment in April. This unemployment measure includes discouraged workers in the labor force(even though they did not actively seek work in the last four weeks) and counts as unemployed those who took part-time jobs under economic duress becase they could not find full-time employment. Other economic indicators also reinforce the perception that the US economy is faltering. The Conference Board Index of Consumer confidence edged down to 69.2 in April from a revised 69.5 in March. This, together with weak employment, may help explain the slowing in domestic auto sales to 199,379 in April from 232,479 the month before. Sales of imported cars and domestic and imported light trucks were also slower than in March. First quarter real GDP was up a mere 2.2%, even with the boost from unseasonably warm weather, versus a more impressive 3.0% rise in the fourth and final quarter of last year. Given the reduction in tax incentives for investment this year, it is not surprising that first quarter nonresidential fixed investment was down. And the weakness likely extended into the second quarter considering that investment ended the quarter on a weak note. Orders for durable goods fell 4.2% in March, the sharpest single month decline since January 2009. Even excluding the erratic transportation equipment component, orders were still down 1.1%. These latest economic reports are a bad sign for the US economy's prospects, especially given the recession already underway in Europe and the marked slowdown evident in China's growth. Indeed, there is a significant risk that both the recession in Europe and the slowdown in China will worsen creating major economic contagion risks for the US. There is an increasing unwillingness of the voters in Europe to accept the austerity demanded as a price for the continued bailout. Much of the promised bailout funds are still only promised, including those from Germany and France. And those funding promises may very well not be fulfilled if the austerity commitments are not adquately met or there is an inability of the new government in France under Hollande to see eye to eye with Merkel's Germany. The threat of a breakup of the European Economic Union still exists and could still begin with Greece's departure. The US economic outlook for next year is especially dismal considering that the currently mandated increase in Federal taxes and cut in spending scheduled for next year are the equivalent of between 3% to (by some estimates) as much as 4% of GDP. If not changed those tax increases and spending cuts could alone pitch the US economy back into recession. And there is likely to be no agreement in Congess to change the current legislation until after the early November Presidential elections. And perhaps not even after the elections. Investors will be incresingly contending with these market depressing concerns over coming months. Taken together, this outlook implies subdued inflation risks and even renewed concerns over deflation. That increases the probility of not only continued Fed ease to 2014, as Fed Chairman Bernanke projected, but a return to quantitative easing, with the Fed buying longer dated Treasury debt. That promises a further decline in Treasury debt yields, including long-term bond yields, as well as a parallel decline in the yields of other bonds, both corporates and municipals. Of course the decline in those yields will commensurately lift the market prices of all those debt instruments. While the outlook also raises questions about the sustainability of the equity market rise, past experience suggests not selling until the broad stock indices, especially the Value Line index, declines 4.0% or more in a single (Friday through Friday) calendar week. Philip Braverman, President Braverman Economic anf Financial Consulting One Hewitt Square, #249 East Northport, New York 11731 This and prior reports can be accessed by going to Internet Explorer and typing in:Philipbraverman.blogspot.com I can be reached at philipbraverman@gmail.com