Digging in for the last lap

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It’s not been a great year, economically speaking – nor necessarily a bad one. The ever-longer and more sluggish recovery continues in the U.S., yet it’s still a recovery, and that’s a good thing.

However, it’s an economic recovery buffeted by many negative winds – not the least of them the ever-more unsettled and dangerous tact the world seems to be taking.

The death of J. Christopher Stevens this morning – the U.S. ambassador to post-Kaddafi Libya – in a rocket attack launched by an angry mob protesting (of all things!) an online movie they felt “mocked” Islam is but the latest salvo of darkness.

The growing fear that Iran aims to develop nuclear weapons – and the ever-more public tensions displayed between the U.S. and Israel, nominally two staunch allies in the face of Tehran’s aggressive warmongering – also ranks high on the anxiety list as well.

Then there are the recent U.S. jobs numbers, with August payroll employment growth far weaker than expected at 96,000 – creating a drop in the unemployment rate from 8.3% to 8.1% that actually reflects lower labor-force participation, not rising employment, according to Nigel Gault, an analyst with consulting firm IHS Global Insight.

“The July's jobs report had hinted at acceleration in the labor market after a weak second quarter, [but] the August report dashed those hopes,” he said. “Job growth was anemic at 96,000, and June and July were revised down a combined 41,000. Even the drop in the unemployment rate to 8.1% from 8.3% was bad news because it happened for the ‘wrong’ reason—a declining labor force rather than rising employment. This disappointing report shows no pickup in the economy's sluggish pace of growth.”

In the payroll details, Gault said the U.S. manufacturing sector lost 15,000 jobs after adding 23,000 in July. The big swing was in motor vehicles and parts, where there were fewer summer shutdowns than normal in July. That meant there were fewer workers to bring back in August than normal—which translated into a seasonally adjusted jobs decline.

A similar seasonal quirk might have been operating in other durables industries, he said. “But if we look beyond these blips, we can see that manufacturing job growth has slowed, to an average of 5,000 per month over the past three months, compared with 21,000 per month in the previous three months,” Gault stressed. “That slowdown makes sense given the reports of declining manufacturing orders from the ISM survey and from durable goods reports."

Overall manufacturing production-worker hours fell 0.4%, a bad sign for manufacturing output growth in August, he noted.

Another concern: Temporary help jobs fell 5,000, and their gains in June and July were revised down. “That's a discouraging sign, because if employers are becoming even more cautious, temp hiring would be one of the first areas affected,” Gault added.

Total hours worked in the U.S. edged up 0.1%, on the employment gain, but July hours were revised to show a 0.2% decline rather than the 0.1% increase originally reported, he said.

“That means that total hours are now on track for a weak increase of only around 0.5% for the third quarter – little different from the 0.4% increase in the second quarter, which gives no reason to expect GDP [gross domestic product] growth to accelerate from the second quarter's 1.7% pace,” Gault pointed out.

As a result, uncertainties over the strength of global growth, the Eurozone crisis, the fiscal cliff, and the November elections are giving employers plenty of reasons for caution, he concluded.

“We expect subdued monthly job creation in the 100,000–150,000 region over the rest of the year, in an economy growing at only around 1.5%,” Gault said. “This picture will greatly trouble the Federal Reserve. Fed chairman Bernanke identified the labor market as a ‘grave concern’ in his recent Jackson Hole [WY] remarks."

Gault thus expects the Fed to extend its “low-rates” guidance through mid-2015, and to launch a “QE3 program” of quantitative easing – concentrated on purchases of mortgage-backed securities – worth $500 billion to $600 billion.

“We do not think these measures will be very effective in boosting growth, but for the Fed it is a question of trying to do what it can,” he added.

Such pessimism is also being expressed in the executive suites of corporate America too. For the second straight quarter, business executives grew sharply more pessimistic about the outlook for the U.S. economy, according to the AICPA Economic Outlook Survey, which polls chief executive officers, chief financial officers, controllers and other certified public accountants in U.S. companies.

In addition, senior-level CPA perception of prospects for their own companies fell to a 12-month low, resulting in a more bearish view on hiring, according to AICPA’s quarterly survey, which polled 1,365 qualified responses from CPAs who hold leadership positions.

“One change this quarter is the dimmer outlook over the coming year,” said Arleen Thomas, CPA, AICPA’s senior vice president for management accounting. “For the first two quarters in 2012, more than half said they were optimistic about their organization’s prospects. Now, only 44% say so.”

That deepening pessimism may have an impact on hiring, at least in the short term, Thomas noted as only 9% of the survey’s respondents said they have immediate plans to hire new personnel, down from 12% last quarter and the lowest rate of the past 12 months.

In addition, senior-level CPAs who said their company had excess employees increased to 11% – the highest level since the second quarter 2011 – suggesting that layoff or job attrition strategies are more likely to be adopted by some companies. (Oh swell … not!)

Other findings from AICPA’s most recent survey:

  • Modest growth is still expected, but expectations for revenue, profit and headcount growth all fell slightly for the second straight quarter.
  • Investment is still supposed to increase slightly in most categories, but the expected rate declined substantially in information technology, marketing and research & development. Despite that, IT still leads the pack for planned spending increases in aggregate, while R&D investment is expected to lag other categories.
  • All industries suffered a decline in their perceived prospects this quarter. Manufacturing and real estate remain the most optimistic sectors. Technology and construction suffered sharp drops in optimism.
  • Respondents consistently identified “Domestic Economic Conditions” and “Regulatory Requirements/Changes” as the No. 1 and No. 2 business hurdles over the past 12 months. This quarter, “Domestic Political Leadership” moved up to the No. 3 spot, continuing its rise from No. 6 at the end of 2011.

Well then: looks like the stormy economic weather is expected to continue. That just means it’s probably a good time to dig the holes a little deeper so we can get through the last few months of 2012 to see if 2013 will be the starting point of better trend lines. 

Discuss this Blog Entry 2

on Sep 12, 2012

I know that the recession has ended...all the politicians have said so. I know that we are in a recovery...all the politicians said so. I also know that things cost 15-50% more than they did a couple of years ago, housing is in the toilet, and the economy really stinks....Steve said so.

on Sep 12, 2012

Sean,
I think you and ssgintx are on to something.
Steve

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