Tag Archives: recession

May’s job report shows the beginning of the end for the recovery

Summary: First, the good news: the May number was awful but probably noise. Then the bad news: job growth is slowing fast. It’s the among last economic metrics to roll over, suggesting that we’re sliding to a recession somewhere ahead of us. But the US is not a “Starbucks Economy”; real wage growth is normal. This is the second of two posts today; see Immigration to the US surges. It’s good news for Trump!

The good news about the bad news:
May’s job growth was ugly, but might just be noise
Note the other bum months amidst the otherwise steady growth
Graph of the monthly change in jobs since Jan 2013

Employment Change - May 2016

Employment is still growing, but slowing fast
Graph of the year-over-year percentage growth in jobs

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Trump & Clinton ignore America’s too-slow economic growth. We can change that!

Summary: Slow economic growth is among the most serious problems afflicting America. It’s incontrovertible, expected to continue — with broad and ill effects. Too bad neither of our major candidates are interested in talking seriously about it. We can change that, if we make the effort.

An exaggeration, but it’s a serious problem

Economic Growth is over

From the Fed’s survey of Professional Forecasters

The economy bounced as expected in 2010, with economists’ dreams of a “V” shaped recovery. Then the economy went off the rails, but they remained confident. Quarter after quarter, economists forecast great growth several years out — then slowly reduced them, only to find that actual GDP comes in even below their predictions. Forecasts of the Fed’s staff show the same pattern.

The only change is that now neither expects any improvement during the next few years. Of course, neither forecasts a recession in the next few years.

In 2013 Paul Krugman and Larry Summers predicted that the US had lapsed into secular stagnation. It was controversial then. After three years the problem has become apparent to anyone paying attention.

Consensus prediction of professional forecasters in Q1 of each year & Q2 2016
Read from left to right, top to bottom. Actual GDPs are in bold red & italics

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Mining and manufacturing are in recession. Will America follow?

Summary: The mining and manufacturing sectors of the US economy have rolled over. Perma-bear websites publish lurid descriptions of the horrific effect this will have on the US economy. What’s the truth? {2nd of 2 posts today.}

Recession

A warning. AP Photo/Mark Lennihan.

(1) The manufacturing collapse

Perma-bears often describe the manufacturing sector as in a downturn, sometimes as in a collapse, sometimes as in a recession. Here are the numbers describing the sector, indexed to the December 2007 peak before the recession. An explanation follows.

FRED: Manufacturing Sector Data

What does this tell us? Looking at these lines describing the manufacturing sector as of December, from top to bottom.

  • Inventories are high and stable.
  • Sales are down 8% from July 2014, and falling.
  • Its industrial production index is down 2% from July 2014, and stable.
  • Employment has grown slowly since March 2010 (+900 thousand); been flat as sales fell.
  • Not shown: average hours worked & overtime hours are flat since 2013.

It’s the new industrial revolution at work: tech and capex boost output without more workers. The level of activity in manufacturing (sales and IP) is back to the 2007 peak, but inventories are 15% above the 2007 peak — but employment is unchanged (increased productivity allowed output to increase without more workers).

What will happen if sales continue to fall? Production will drop even faster as companies reduce inventories. Employers will eventually cut hours worked and fire workers. We do not known when and how, but it manufacturing employment is too small to have a significant effect on the overall US economy. Even its output is only 12% of US GDP.

Bottom line: hold the hysteria.

(2)  Collapse of the mining sector (including oil & gas)

Output in red. Employment in green.

FRED: January 2016 Employment and Production of the Mining Sector

The US mining sector — which includes extraction of coal, oil, and natural gas — has hit hard times. Prices and volume are down. It’s a smaller sector than manufacturing (only 2% of GDP).

The mining story is the same as manufacturing’s — the new industrial revolution allows tech and capex to boost output without more workers since 2012. The decline has run in the opposite way as manufacturing, however: so far employment has fallen more than output (-16% vs. -11%). This is uncharted terrain; we can only guess what this will look like in a year or two.

The geographic concentration of mining means that a few states will suffer disproportionately: mining is one-third of Wyoming’s GDP, one-quarter of Alaska’s, one-sixth of West Virginia’s, one-eighth of Oklahoma’s, and one-tenth of Texas’ GDP (source: EIA).

So far the decline in mining output and employment has been in the non-petroleum industries. The below graph of oil & gas mining shows that since 2012 fracking boosted output with few new workers.

FRED: January 2016 Employment and Production of the Petroleum Sector

Now everything unravels. The price of natural gas (Henry Hub spot) peaked in February 2014; crude oil (WTI) peaked in June 2014, employment peaked in October 2014, it Industrial Production Index peaked in April 2015. A collapse will result eventually if prices do not rise — but we can only guess at its shape.

But the oil & gas extraction only employees 183 thousand people. The bankruptcies will affect investors. Some communities will suffer. But the national macroeconomic effects will be small.

Bottom line: no hysteria warranted.

Conclusion

The declines in manufacturing and mining have produced a clickbait extravaganza at some  popular perma-bear websites. However exciting, most of that exaggerates the national impacts.

Business investment and consumer spending are the powerful and volatile drivers of the US economy. When they turn down — and they have not yet done so — the overall economy will drop with them. There are indications that might happen in 2016. Keep your eyes on the center rings of the circus. Should the picture darken, do not delay taking steps to protect yourself.

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