December employment figures -- ho-hum

It's time for the BLS monthly employment report review. Here's the straight dope from Uncle Sam himself:

Nonfarm employment increased by 167,000 in December, and the unemployment rate was unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in several service-providing industries, including professional and business services, health care, and food services. Average hourly earnings rose by 8 cents, or 0.5 percent, in December.

If we highlight the private sector data alone, we see a one-month increase of 150,000 jobs, slightly higher than November's 144,000 and the economy's best job producing month since August.

But let's get real for a moment. This job report is just another in a series which shows that 2006 was at best a ho-hum year for employment. For the year as a whole, monthly average (SA) growth was 133,000 jobs. Recall that best estimates suggest 150,000 new jobs per month are necessary simply to keep up with labor force growth -- which translates into about 125,000 private sector jobs per month (that nonesense of 110,000 as "equilibrium growth" coming out of some Fed governors' mouths is just that -- nonsense). That makes 2006 a pretty mediocre year. For comparison, the 2005 average was 152,000 and 2004 was 161,000. See a trend here?

For 2006Q4, actual (NSA) private sector job growth stood at 289,000, down from 386,000 in 2005Q4 and 453,000 in 2004Q4. See the same trend?

But how about those hourly earnings? Up 0.5% in December sounds pretty good, and real hourly wages are on a significant uptick these last three months. We don't have the inflation figures for December yet, and neither do we have the fourth quarter median earnings data at this point, but real wage growth does seem like it's happening again for the first time in three years.

See, the General isn't all gloom and doom now, is he?

The indefatigable consumer

Apparently it's all coming up roses on the consumer spending front, yet shouldn't the following continue to be causing somebody in high places some concern?

Americans earned and spent more as the holiday season began, reinforcing the role consumers will play in extending the economic expansion to a sixth year.

Spending rose 0.5 percent in November, the most in four months, and incomes increased 0.3 percent for a second month, the Commerce Department said today in Washington.

Yes, income was up, but spending was up more -- a lot more -- in November. Personal income rose $33.8bn while personal consumption expenditures ran up $50.5bn. No surprise then that the personal savings rate took another plunge, down to -1.0%, the reversal of a late summer-fall trend toward more savings (or actually less dissaving).

If the personal savings rate in November had simply remained where it was in October (at -0.7%), consumption would have been $27bn less than actual, which would have dragged down the growth in consumption from the actual 0.5% to 0.2%. I doubt the press would have been crowing then. If personal savings had magically reached simply zero in November, consumption "growth" would have been -0.5%.

Is this fuelled by rising debt? Equity withdrawals? Selling the family jewels?

Have we reached the summit?

The third quarter US current account figures are out today, and -- you guessed it -- we hit (another) all-time record deficit: $225.6bn.

This is a bit deceptive in that the CA deficit in real terms was actually higher in 2005Q4 (in constant 2000 dollars per the GDP deflator, the CA deficit was $195.6bn in 2005Q4 while $193.7bn in 2006Q3), but who wants to quibble over a couple billion? The damned thing is big and, unfortunately, for the last two quarters getting bigger.

Surprising to me was the fact that the AP actually included this important tidbit of information:

The Commerce Department reported Monday that the current account trade deficit increased 3.9 percent to a record $225.6 billion in the July-September quarter. That represented 6.8 percent of the total economy, up from 6.6 percent of the gross domestic product in the spring quarter.

A remarkably useful piece of information, which means it rarely appears in reporting on this issue. The CA deficit was again larger in relative terms in 2005Q4 (7.0% of GDP), but that record setter was due largely to two things which I want to highlight today, one ephemeral and one an apparent (and long forecast) new trend.

In 2005Q4 there was an enormous turnaround in net unilateral current transfers, from -$9.5bn the quarter before to a whopping -$26.2bn. Transfers of that size -- and particularly a shift of that size -- have proved fleeting, settling since then into the normal $19-21bn quarterly deficits of long standing.

The new trend which first appeared in 2005Q4, however, has only been reinforced in the quarters since, and especially so in the data from 2006Q3. In 2005Q4 the US balance on income -- that is, the income from financial assets made by Americans on their foreign holdings minus that made by foreigners on their American holdings -- turned consistently negative for the first time in post-war US history.

What do I mean by "consistently"? Well, the most convenient definition for my argument of course, which is three or more consecutive quarters. The US had a negative income balance for 1998Q3-4, 2001Q3 and 2002Q2, but we're now at four consecutive quarters in a row and the beast is growing.

So much for all that delicious dark matter we started hearing of, oh, just about a year ago. Strangely enough, just after the last quarter of positive balance on income. Hmm.

Thus what we have is an apparently long-term force now operating strongly against the return of the US current account toward (not "to") balance. In 2005Q4, the US required an extra $2.2bn in exports to compensate for its negative net income balance. By 2006Q3 that grew to $3.8bn. After nine years of gargantuan current account deficits, this was bound to catch up with the US and promises to eat more and more into exports' contribution to resolving the deficit. A falling dollar should help slow the leakage somewhat, but that will of course dissuade investors from plugging new money into the hole in the dike. And note in the chart above that when the dollar slid precipitously in 1985 and 1986, the US income suprlus nearly vanished as well.

From here on out it looks like the US is set to run the Red Queen's Race. Happy jogging!

So, is 132,000 a lot?

The Associated Press' take on the latest US employment numbers from the BLS:

Employers boosted payrolls by a respectable 132,000 in November, but the unemployment rate edged up to 4.5 percent as jobseekers streamed into the labor market by the thousands with the onrushing holidays.

The tally of new jobs added to the economy last month marked an improvement from the 79,000 new positions generated in October and was the most since September, the Labor Department reported Friday. It was mostly a cheerful economic message at a time of year when shopping peaks.

So, is 132,000 new seasonally-adjusted jobs a lot?

This is a variant of one of my favorite questions I pose to my political economy students. For example, the World Bank claimed that static efficiency gains from completion of full liberalization through the Doha Round would deliver $287bn. Sounds like a lot -- but is it? (Here's your answer to that one.)

Let's compare November 2006 to the ghosts of Novembers past, and use the non-adjusted numbers. I like focusing on private sector jobs, too, rather than the whole enchilada, so these numbers are just for total private employment.

In November 2006 the US economy added 160,000 real private-sector jobs -- quite a lot fewer than in November 2005 (349,000) but a bit more than November 2004 (103,000). Over the past three months (September-November 2006), the US economy has destroyed 62,000 actual private sector jobs. Over the same period in 2005 the tally was +73,000; in 2004, +230,000.

So is the US economy doing a "respectable" job on jobs? In comparison to even the recent rather lackluster past, I think we have to respond with a resounding "no". Is it a "cheerful economic message"? Certainly to capital, which rejoices whenever labor is taking it on the chin. To the rest of us, perhaps we can hope for a Christmas Carol-like change of heart from old Mr. Scrooge. But I wouldn't just now take out a big loan to buy Tiny Tim a new pair of crutches.

Why now?

From Friday's Financial Times:

The dollar has fallen against currencies where base rates are both significantly higher and lower than in the US, indicating that current yield differentials are not playing a significant role. But a strong Ifo survey of German business sentiment, against a backdrop of poor US data, may have reinvigorated the view that rates on each side of the pond are heading in different directions. This survey was released on Thanksgiving, into light trading volumes, perhaps exacerbating the sell-off. By the time turkey-gorged US traders returned to work, the trend was established.

Of course, this comment ignores the fact that the dollar has been plunging since Columbus Day, not only since Thanksgiving. Against the euro, the USD fell 2.4 (euro)cents from 10/10 to 11/22 and another 2.3 (euro)cents from 11/22 to 12/1; against the pound, down 1.7p from 10/10 to 11/22 and another 1.7p since 11/22.

Certainly the pace of the Big Skid has picked up recently, but it's only accelerating a more long-standing trend.

As I was saying . . .

Good ol' Mr. Washington isn't dropping his jaw over the new Britney Spears photos.


While this most recent decline in the USD has been under way since November of last year, the real dramatic slide began just after Columbus Day. Up to yesterday, the broad dollar is -2.4% and the major currencies dollar is -3.3% over just these seven weeks. And as usual, dollar decline is vented upon the European currencies first and foremost: the USD is -5.4% against the euro and -5.8% against the pound since 10/10.

It will be interesting to see the October 2006 TIC data when it comes out on December 15. For the 12 months up through September 2006 the US was importing in net terms around $75bn per month of both long-term and short-term portfolio investment. That figure is a bit deceptive, however. In recent months, foreign net short-term portfolio investment has completely dried up. Perhaps long-term purchases have begun drying up, too, over the last two months. We'll have to wait another two weeks for a peek at the data.

In the grand scheme of things, this is not a bad outcome for the US. It would be better if dollar decline could vent against the Asian currencies more, but overall decline is a good thing in the big picture. One just needs to hope that these tremendous global imbalances unwind relatively slowly rather than precipitously. I'm the last person in the world who wants to see Volcker Shift II.

Is the GDP report really all that good?

The wire services and the stock market are both taking the revised 2006Q3 US GDP report as an overall good sign that the US economy is on track for the fabled "soft landing". Mark Zandi sums up the general sentiment well:

"It was a tough quarter, but not as tough as previously estimated," said Mark Zandi, chief economist at Moody's Economy.com. "But there's reason to be optimistic that the expansion will remain intact. With businesses so flush with profits, they will continue to invest and hire and the economy will continue to move forward," he predicted.

A close look at the revised numbers does indeed show that nonresidential investment surged ahead in the third quarter at an annualized 9.6% rate. Of course, this only just balanced out the rather stunning -19.4% annual change in residential investment. Overall, gross private domestic investment rose in the third quarter a microscopic 0.04% annualized, and over the last two quarter a meagre 0.5% annualized.

With overall investment at a standstill thanks to the housing market collapse, the economy has unfortunately become ever more dependent on consumer spending, which motivates the title of this posting. From 1983 to 1999, personal consumption expenditures as a percentage of GDP reguarly hit a ceiling of 68%. The big shift came during the bursting tech bubble in 2000 and the investment-led recession of 2001. Once the dust settled in 2002, the US economy found itself profoundly reliant on consumer spending as never before. Ever since 2001Q4, consumer spending has been at least 70% of US GDP as the below graph shows.

The result? A tremendously falling savings rate both in households and government, and a concomitant reliance on external savers to fund US investment (and consumption), producing current account deficits of 6.6% of GDP and tremendous pressure on the US dollar, which has fallen (on the major currencies index) some 3% in just 7 weeks.

From its peak in 2005Q2, the US economy's reliance on consumer spending began to relax. The percentage of GDP composed of personal consumption expenditures fell or remained steady each quarter after that -- until now. 2006Q3 saw this figure rise yet again, to 70.84%. The personal savings rate for 2006Q3 rang in at -1.3%, only slightly better [sic] than last quarter's -1.4%.

Quite frankly, the US economy needs to be shifting into saving, not yet more consumption. If it doesn't, the chances of a dollar crash becoming increasingly likely. In 2004 Paul Volcker claimed there was a 75% chance of a "dollar crisis" within five years. In the wake of this quickly declining dollar, it's about time we did something to avoid that most unpleasant of scenarios.