In 2010, the recovery transitioned from temporary support from government stimulus and an inventory rebuilding to more sustainable gains in underlying demand – household spending and business fixed investment. Most importantly, we saw the return of private-sector job growth. The pace of economic growth was sufficient to keep the unemployment rate roughly steady. We need to see much stronger economic growth to push the unemployment rate down more significantly. The pace of economic growth should pick up in 2011, but its unclear exactly how much. Moreover, it’s partly a chicken-and-egg kind of question. Better economic growth will boost job gains and stronger job gains will boost economic growth.

Weekly claims for unemployment insurance benefits fell sharply during the Christmas week, to the lowest level since July 2008. One needs to be careful in interpreting the claims figures during this time of year. The seasonal adjustment is difficult and it’s not unusual to see large week-to-week swings in the reported numbers. In addition, a reduced rate of seasonal hiring would lead to a reduced rate of seasonal job losses later on. Unadjusted claims typically peak around the start of the new year, reflecting seasonal job losses in construction, retail, and education. The claims figure won’t provide a clear view of what’s going on until the second half of February.

 

 

We tend to think of jobless claims as representing just one side of the labor picture, job destruction. However, an increase in new hiring would also reduce claims. Here’s why. There’s a lot of flux under the surface – millions of jobs are created and millions are destroyed each quarter. If hiring picks up, a newly laid off worker would be more likely to find new work and be less likely to file a claim for unemployment insurance benefits. A trend in jobless claims below 350,000 would be consistent with a “strong” job market. We still have some way to go.

Surveys of hiring intentions have improved, but still remain relatively low by historical standards. The job market is getting better, but not rapidly better. Large firms have generally seen improvement in corporate profits, but that hasn’t fed new hiring. In fact, much of the gain in corporate profits has come through continued cost containment, notably labor expenses. We normally look to smaller, newer firms to account for much of the new hiring in an economic expansion. Credit is still very tight for small firms, but has begun to turn the corner.

The main driver of consumer spending growth is income, and the biggest driver of income is jobs. While private-sector labor income sagged during the downturn, government transfer payments increased, helping to shore up disposable income. As part of the December tax cut agreement, unemployment insurance benefits were extended and payroll taxes were reduced through the end of 2011. This, in turn, sets a speed bump for consumer spending in early 2012. Hopefully, the pace of job growth will have picked up more strongly toward the end of 2011, offsetting the impact of higher payroll taxes.

The Employment Report is made up of two separate surveys. The household survey, a telephone survey of about 60,000 households, generates estimates of the unemployment rate. The establishment survey, which covers about 400,000 worksites, yields estimates of nonfarm payrolls, average weekly hours, and hourly earnings. The December Employment Report will include annual benchmark revision to the household survey data (annual revisions to the establishment survey data will be included in the January Employment Report, due February 4). The household survey revisions are unlikely to change the recent picture, although we could see slightly higher or low unemployment rates reported for the last few months. This release will also include some methodology revisions, notably efforts to get a better reading on unemployment duration, but these changes won’t affect the unemployment rate.

While the outlook for economic growth has improved, a number of headwinds remain in the near term. Lingering problems in the housing sector, tighter state and local government budgets, and the decrease in the federal fiscal stimulus will restrain overall economic growth. In addition, higher gasoline prices may dampen the pace of consumer spending growth. However, stronger job growth would help counter these pressures, providing fundamental support for the housing market and helping to lift state and local government tax receipts. A major uncertainty in the first half of 2011 will be the contest between positive feedback loops (a little more job growth leads to a little more spending, and so on) and the prevailing headwinds. There’s more hope, but still some risks.

(c) Raymond James

www.raymondjames.com