Is the U.S. Expansion Durable? Data Says Yes, For Now

  • The U.S. economy added 163,000 new payroll jobs on net in July, exceeding consensus expectations. That was the good news in the July employment report. The bad news came from the separate household survey of employment, which determines the unemployment rate. The household survey showed a loss of 195,000 jobs for the month, along with a 150,000 worker decline in the civilian labor force, resulting in a one-tenth increase in the unemployment rate to 8.3 percent for the month. The payroll survey and the household survey are well correlated over the long term, but it is not unusual for the surveys to move in opposite directions in any given month, and the household survey is the more volatile of the two. Initial claims for unemployment insurance are no longer trending upward, as they did through the second quarter, bolstering the view that payroll job creation is improving from the April-June average of 73,000 jobs per month.
  • Two sectors of the U.S. economy are at critical junctures: housing and manufacturing. Residential construction has slowly  gained momentum over the last year. The National Association of Homebuilders housing market index has improved significantly since last September. However, both new and existing home sales declined in June, calling into question the durability of the housing recovery. The gains in housing are durable, but not impervious to calamity. Huge pent-up demand, high affordability and improving prices will keep a floor under housing as long as job creation remains positive. Case-Shiller data show broad improvement in house prices through May.
  • Manufacturing has been the engine of the U.S. economy since the Great Recession ended.  However, this June the ISM Manufacturing index dipped below 50 for the first time since July 2009. The below-50 performance was repeated this July with a reading of 49.80. Clearly, some momentum in U.S. manufacturing has been lost as auto sales plateaued at a 14 million unit pace through the first half of 2012. Directly, the U.S. auto industry accounts for about five percent of U.S. industrial production, and indirectly reaches into many other industries. Just as in the housing sector, there is huge pent-up demand for automobiles and affordability is very high, so the recovery in auto sales looks durable barring another calamity. A resurgent U.S. energy industry, cheap capital, a trend toward the reshoring of production and momentum in construction will support non-auto manufacturing.
  • What are the risk factors for this stalwart outlook? On the downside they remain Europe, Asia and the U.S. Fiscal Cliff. Europe is on the verge of re-enforcing yet another negative feedback mechanism with additional sovereign rating downgrades if they fail to convince the rating agencies that they are moving to a sustainable solution. This is a time for Superman (or Super Mario Draghi). There needs to be a massive intervention to break the downward spiral. China is opening up the policy toolbox, but will it be enough to avoid the European downdraft? The Fiscal Cliff looms. Expect a partial softening by early 2013. On the upside, the Fed policy doves are clamoring for action.

Click here for the complete August 2012 U.S. Economic Update: USEconomicUpdate0812.

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