How is the Consumer Doing?
The recession ended in the third quarter (e.g. the US economy started growing again); however, the consumer remains the weak link of any recovery scenario. A healthy consumer is the dynamo that moves the US economy, a sick one gets us all into a recession, or depression if we don't get the patient the right medication. We will try to get to the answer here by looking at unemployment, personal income, spending and savings statistics. So far the patient is stabilizing, but is far from healthy...
Unemployment
The labor markets, while healing, are still very week. For the first six months of 2010 the private sector has created 593,000 jobs, 83,000 of which were added in June. While job creation is welcomed, it is still well below the level necessary to keep up with the new entrants to the workforce (~800,000 for the first six months of the year under regular conditions), and still paltry if the economy is to replenish the 8 million jobs lost in the recession.
Including the government sector employment has increased by 882,000 from January to June; however most government jobs created have been for census workers. With the census now mostly over, those workers are going back to the unemployment pool. For instance, while in May the Federal government hired 411,000 census workers, it laid off 225,000 in June.
The tepid increase in private sector employment in June was seen across most sectors in the economy. Manufacturing and retail again saw increases in payrolls and temporary employment continued its upward path that started last September. Clearly, the economy is recovering for its sharp downturn. While economic indicators have improved substantially from 2009, May and June showed a renewed weakness that put the incipient recovery in danger. While productivity has staid very high, earnings and gains in the average workweek have lagged. One of the big uncertainties remaining is whether the private sector will be able to expand without any additional government spending, most of which is set to end by late 2010 and last year supported much of the economic recovery in the second half. Recovery expectations have been downgraded; however, the consensus is
still that the economy will continue recovering, but at a very slow
pace.
Something to keep in mind: for the unemployment rate to start going down, the economy needs to create more than 130,000 jobs per month (shown in red in the "Total Unemployment" graph). In other words, just to keep even, monthly job creation needs to exceed that amount. As indicated above that means that for the first six months of the year, the economy could not keep pace with the rate of new workers entering the workforce - a factor that was not evident in the last labor department release because more people gave up looking for a job than those that started looking for one for the first time.
The unemployment rate in June decreased to 9.5% from 9.7%. While normally a cause for celebration, the reduction was not due to a stronger labor market, but rather to the fact that over 800,000 people left the labor force in June. Most of them we suspect deciding that the prospects of finding work were too slim to bother. Long-term unemployment is a serious issue as 6.8 million people have been unemployed more than 27 weeks (6 months), representing 45.9% of all unemployed. Given the weakness in the labor markets seen in May and June, economists have downgraded their expectations, and see the labor markets recovering very slowly over the next few years. Federal Reserve minutes showed that the Fed believes that it could take five years for the labor markets to return to the levels seen prior to the recession.
The unemployment rate under-represents the level of distress in the economy. A more realistic look at the unemployment picture includes the underemployment rate - those individuals that currently work either part-time, or have stopped looking for work because they can not find full-time employment. June saw 16.5% of the working US population either unemployed or underemployed; still a very high, but lower than in previous months due to the smaller labor force.
For sake of comparison, the average unemployment rate since 1948 has been 5.4%, and the average underemployment rate since 1994 (when data started being collected) has been 4.1%. The current total unemployment and underemployment rate is 7.0 percentage points higher.
The weekly unemployment claims report for the week ending on 7/10/10 saw a sizable decrease in the number of weekly claims which went down to 429,000 - just a tad lower than the 430,000-480,000 range in which claims had been stuck for most of the last 6+ months. A welcome sign, but still too early to tell whether we will start to trend lower from here, or we'll be back to the range. Until weekly claims move below the 400,000 level the labor markets will have a tough time showing large increases in the number of jobs.
Continuing claims are well off the close to 7 million continuing claims number that we saw early in 2009. At 4.68 million, they are still very high by historical standards, and while on a trend lower, they have remained stubbornly high. The high levels of continuing claims and the fact that it is estimated that there are 6 applicants for every job opening, is leading Congress to extend unemployment benefits again. The maximum number of weeks that a person can keep receiving benefits will be extended beyond the staggering 99 weeks available in some states.
Personal Income & Spending
Personal income and spending took big hits in 2008 and early 2009; by late 2009 the economy had stabilized, and with it the public's appetite for going to the mall. The first three months of 2010 have seen spending increasing, but personal income has not kept pace.
Other than in May 2009, when the government's stimulus provisions increased personal income sharply, gains in income have been very tepid over the last year. Given the weak labor market and the very high labor productivity figures of the last few months, income is not expected to improve significantly (or looking from the companies' perspective, labor costs are not going to increase substantially). That being said, as the economy continues expanding and labor markets recover, personal income should recover as well.
Personal expenditures look to be making a comeback. While goods are not yet flying off the shelves quite yet, Americans are back at spending a larger percentage of their income. Over the last 6 months growth in expenditures has been running ahead of growth in income. While still tepid, it has provided support to the economy.
Savings
Consumers' re-discovery of savings, appears to have been rather short-lived. After the near-death experience of the financial markets in September 2008, and confronted with the loss of equity in their homes and investments, consumers started saving again. The personal savings rate saw a sharp increase, turning as high as 6.4% in May. It has been coming down ever since as growth of expenditures runs ahead of income growth. In March it was down to 2.7% - while higher than the paltry rates seen in the 2005-2008 period, it is well below the 7.4% historical average. Furthermore, given the frailty of consumers' balance sheets, it seems reasonable to expect that savings should increase and move closer to the historical average. The rebuilding of consumers' balance sheets is expected to set a new trend where spending is more moderate and savings continue increasing, to re-balance the excesses of prior years. However, the evidence is starting to point to consumers getting back to their spending habits of the last decade in spite of their concerns regarding their personal finances.
The very low yields seen in traditional savings instruments such as savings accounts, certificates of deposit and government bonds, are certainly not enticing new savers to keep their money there (though much of it is sitting in "cash-like" accounts). The US government's fiscal position almost begs Americans to increase their savings rate. Unfortunately, a return to "normality" by the world economy appears still some ways off given the recent turmoil in Europe; until that happens investors will continue favoring the safety of US government debt and interest rates will continue to be low providing little incentive to savers. Consumer Sentiment
While consumer sentiment has certainly recovered from the panic months late last year and early this year, they are not getting carried away by it. Consumer sentiment has reached a certain stability. People are feeling better about the prospects of the economy, but rather lousy about their personal finances At 72.2, sentiment is still far from its best levels, and its long-term average of 86.7; nevertheless, there is a sense of confidence in the economy that the worst is over. Unfortunately, most consumers do not expect their personal income and economic situation to improve much in the months to come, which should constrain spending, but as we have seen consumers would rather spend than save.
Sign-up to receive our weekly update