Economy & Budget

Slower economic growth signals slower job growth ahead

Slower economic growth signals slower job growth ahead

This week is a big week for a number of reasons. For many and their children, it meant heading back to school. For others, following August vacations it meant getting back to work and with less than four months until the end of 2012 and redoubling efforts to hit year-end goals. Following last week’s Republican National Convention, this week we have the Democratic National Convention in which President Obama is looking to convince the American people to give him another four years. Like most people faced with the prospects of losing their job, we will likely hear President Obama talk about his accomplishments, but also offer excuses and blame for his shortcomings and failures.

Earlier this week, President Obama self-graded his first term with an “incomplete.” As anyone who has attended school or had a job knows, there are pre-determined periods of time for measuring performance, be it a marking period, semester or a term in office, and grades are assigned once those allotted times have been completed. In short, this means that President Obama is pandering for more time. The question is whether or not more time will make a difference.

Areas of key concern across the United States have been and will continue to be health of the economy and jobs. Despite all the government stimulus and easing by the Federal Reserve, the unemployment rate has been above 8 percent for 41 consecutive months and more than 2 million people have left the labor force over the last year, according to the Bureau of Labor Statistics.

Although second-quarter 2012 gross domestic product (GDP) was revised upward, the first half of 2012 grew a paltry 1.85 percent, well below the 2.7 percent rate in the second half of 2011. Acknowledging this, the Congressional Budget Office (CBO) recently revised its view on the pending fiscal cliff. The CBO now sees the $560 billion mix of spending cuts and tax hikes that make up the year-end fiscal cliff, “probably” causing a recession, because the economy would shrink by 0.5 percent in 2013.

As part of its revision, the CBO also raised the flag on uncertainty, noting the impact of the fiscal cliff is already being felt in hiring and business investment. This was confirmed by the August Wall Street Journal/Vistage Small Business CEO Survey. Per that survey, roughly half of nearly 800 owners of small businesses in the U.S. expect economic growth to remain sluggish in the year ahead. Furthermore, amid a backdrop of economic and political uncertainties, many do not plan to boost hiring or increase investment spending anytime soon. This was echoed in the Fed’s Beige Book report released last weekthat noted several Fed districts, including Boston, New York, Philadelphia, and Richmond, saw a softening in employment relative to expectations.

Surveys are helpful as they measure sentiment and expectations, but in this case the survey’s findings are backed by economic data received thus far in the current quarter. Weakening economic data means that prospects are dim for a meaningful increase in economic activity near term.

Over the last few months, data in the form of the Institute for Supply Management (ISM) Manufacturing Index revealed a contracting manufacturing economy colored by eroding orders. Falling orders reduces the outlook for manufacturing activity in the coming months, and weak orders since June are now starting to flow through in the August production data. As one would expect, the continued weakness in orders means slower business activity ahead, and that means the need for more workers will also slow if not contract. In other words, slower job growth ahead.

Friday’s employment report

With a little more than 60 days until the presidential election and many speculating on another round of easing from Federal Reserve Chairman Ben Bernanke, many will be dissecting Friday’s August Employment Report from the Bureau of Labor Statistics. Current expectations call for 125,000-140,000 nonfarm payroll jobs to have been added in August compared to 163,000 in July.

Ahead of that report we’ll get other views on August job creation from the like of payroll processing firm ADP and outplacement services firm Challenger Gray & Christmas. As tends to be the case, based on those two reports, analysts and economists will fine tune their August nonfarm payroll forecasts.

But ADP and Challenger Gray are not the only third-party views on August job creation. Another is Intuit’s Small Business Index, which showed slower job creation in August compared to July. More specifically, Intuit’s findings showed only 30,000 jobs were added in the month down from 45,000 in July. The August findings also revealed that wage growth remains stagnant. Those data points continue the trend reported in the BLS data over the last several months. Another view comes from Gallup, which saw an increase in its unemployment metrics to 8.3 percent in mid-August, up from 8.0 percent at the end of July.

Based on the data and surveys, odds are that Friday’s Employment Report at a minimum will show slower job creation than in July. The greater risk is that it misses expectations to the downside, just as it did in March, April, May and June.

In looking back over the last few years, the picture one sees is one of several economic false starts, a significant move in the national debt, high unemployment, a shrinking labor force, and consumers that are not only wary, but are cash strapped in the face of rising food and gas prices.

If I were to look at the current administration with my analyst hat that I use for each issue of PowerTrend Profits, I would expect the Board of Directors–that is the American people–to be looking for a management change.

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