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 slowly healing labor market picked up a bit of steam in October. Payrolls grew by 151,000, with the private sector contributing 159,000 net jobs for the month. For
the first ten months of 2010 the private sector has created more than 1.1 million
jobs. The October report coupled with positive corporate earnings provides some hope that the recovery is starting to get some footing. In addition, action by the Federal Reserve to maintain interest rates low should provide incentives for corporations to put their capital to work in the economy rather than keep it in cash. The labor markets still need all the help they can get. Another 7 million jobs need to be added to return to the employment level seen at the beginning of the recession. Furthermore, tfor the unemployment rate to return to pre-recession levels, an additional 4.5 million jobs need to be created to account for new entrants to the labor force over the last 3 years.
The fiscal woes of local and state governments provide headwinds to the recovery as they cut budgets and personnel to balance their budgets. Over the last few moths this has resulted in significant layoffs at the local level. Over the last twelve months state and local government payrolls excluding education were reduced by 123,000.
The composition of private sector gains underscores the frailty of the recovery. Of the 46,000 jobs added were in professional and business services, 35,000 were for temporary workers. Healthcare is the only sector that has shown strength throughout the year, while manufacturing employment while not showing losses, has stalled since June.
Clearly the economy is in better shape than it
was last year; we seem to be recovering from the late Spring/Summer slowdown. While the very high productivity levels experienced
earlier in the year have come down, 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. Fiscal spending last year supported much of the economic
recovery in the second half of last year and in the first half of 2010;
the Congressional Budget Office (CBO) estimates that the stimulus bill
increased GDP between 1.7% and 4.5%, and without it there would have
been between 1.4 and 3.3 million additional unemployed people. To put
this numbers in perspective, GDP in Q2 grew by 1.6%, which means that
without the stimulus bill the economy would have contracted in Q2 and
unemployment could have reached 11.7% (vs. 9.5% today). 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. In October the economy did a bit better than break-even based on that gauge, but for the year we are still at a deficit.
The unemployment rate in October held steady at 9.6%. As paltry as the non-farm payroll figures have been, the
unemployment rate has not increased further because of the large decrease in the number of people seeking work. At the start of the recession, 66.0% of the civilian population were active participants in the labor force whether employed, sub-employed or looking for work. As of September of 2010, civilian labor participation has decreased to 64.5%; this implies that over 4 million people have left the labor force. The number of discouraged workers increased by 411,000 in October to reach 1.2 million.
Long-term unemployment is a serious issue as 6.2 million people
have been unemployed more than 27 weeks (6 months), representing 41.8% of all
unemployed. 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. The rate of under-employment dropped slightly in October; together with the unemployed, under-employed individuals represent 17.0% of the working US population.
For sake of comparison, the average unemployment rate since 1948 has been 5.6%,
and the average underemployment rate since 1994 (when data started being
collected) has been 4.2%. The current total unemployment and
underemployment rate is 7.2 percentage points higher.
The weekly unemployment claims report for the week
ending on 10/30/10 saw a reversal from the improving trend of the last few weeks; claims increased by 20,000 and are back to 457,000. Claims are stuck at very high levels and have not budged since late last year. For the unemployment rate to come down to a level closer to the
5% rate seen before the recession, weekly claims need to see a significant
reduction, certainly below 400,000.
Continuing claims are well off the close to 7 million
continuing claims number that we saw early in 2009. At 4.434 million,
they are still very high by historical standards, but on a trend lower and at levels not seen since late 2008. The high levels of continuing claims
and the fact that it is estimated that there are 6 applicants for every job
opening (it will be nice to see where this figure actually comes from, but it
is widely quoted), has led Congress to continue supporting extended unemployment benefits. The maximum number of weeks that a person can keep receiving
benefits is a staggering 99 weeks, and a growing number of people have reached the maximum and
are still without a job.
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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. In the second quarter of 2010 consumers became more conservative as the prospects for a quick recovery started to fade - income gains have been small, and with the unemployment rate still very high, individuals and families are spending less. The third quarter saw spending make a comeback, but at prudent levels. In September income decreased by 0.1%, and spending grew a modest 0.2%.
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 seen until recently, income is not expected to improve significantly (or looking from the companies' perspective, labor costs are not going to increase substantially). The weak economic outlook forecasts a slow recovery in personal income. Tepid growth in personal income should translate in tepid spending growth, as the other sources of consumer wealth, housing and financial assets are not expected to recover to pre-recession levels in the foreseeable future.
Savings
The mostly off-again affair between consumers and savings, looks to have been re-kindled. 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 8.2% in May of 2009 (based on the BEA revised statistics). It decreased significantly after that until April of this year in which, the savings rate recovered to a healthy 6.0%. The 5.3% seen in September, while still below the historical average of 7.4%, is much, much better than the paltry rates seen in the 2005-2008 period when the savings rate was less than zero for a few months.
Given the frailty of consumers' balance sheets, and the weak employment picture, it seems reasonable to expect that savings should continue at high levels 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.
Unfortunately, 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; however, given the general economic weakness, the Federal Reserve is enticing people to favor riskier investments (i.e. private sector equity) rather than savings. Consumer Sentiment
While consumer sentiment has certainly recovered from the panic months late last year and early this year, consumes are certainly not a happy bunch. After steadily increasing until June, sentiment took a turn for the worse in July, and recovered only mildly in August and September. At 67.7 in October, sentiment is still far from its best levels, and its long-term average of 85.1. Once again employment is the culprit of people's lackluster look at he future (and the upcoming election probably does not help either given the tenor of the campaigns). Most consumers do not expect their personal income and economic situation to improve much in the months to come, which should constrain spending. Until the employment outlook changes for the better, this is not expected to improve much.
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