INSIGHT: US economy at tipping point on a wave of dismal data

05 July 2012 17:22  [Source: ICIS news]

By Joe Kamalick

Wave of dismal data could tip US economyWASHINGTON (ICIS)--On the eve of what could be a crucial US employment report and a possible tipping point for the still wobbly national economy, a wave of dismal economic data bodes ill for the recovery.

On Friday, 6 July, the US Labor Department will issue its employment and jobless report for June, perhaps the most critical economic data set in a year.

The June employment report is important because it follows the May jobless figures that showed US unemployment inched up to 8.2% that month from the April reading of 8.1%.

Although not a major advance in the nation’s unemployment, May’s was the first increase in the jobless rate since June 2011 – an unwelcome development that ordinarily would not be expected three years into a post-recession recovery.

If Friday’s jobs report shows yet another incremental gain in the ranks of the unemployed, it could tip the US economy toward a new decline.

There has been a spate of negative economic news that, while not necessarily foretelling another increase in unemployment, would make news of job gains surprising.

Since the May uptick in unemployment, a survey of US small business owners indicated they were increasingly discouraged about near-term prospects for the nation’s economy.

The National Federation of Independent Business (NFIB), which represents some 350,000 US small business owners and operators, said that its index of small business optimism fell marginally in May to an historically low level.

NFIB also said that the percentage of small business owners who expect better economic conditions over the next six months had decreased. In addition, “more owners still expect the economy to deteriorate further than those who anticipate improvement”, said NFIB chief economist William Dunkelberg.

As a consequence, said NFIB, those owners are holding back on capital investments, equipment purchases and new hiring.

The well-being of US small businesses – defined as those with fewer than 500 employees – is crucial for overall economic health because those legions of small-volume employers generate most of the nation’s new jobs.

As if to echo that discouraging word among small business owners, the Commerce Department reported that US retail sales, a key measure of consumer spending, fell in May for the second month in a row.

While the two-month decline in retail sales was not large, down by only 0.2% in both April and May, the downturn followed a strong first quarter and was seen as a harbinger of things to come.

As National Retail Federation (NRF) president Matthew Shay said, the retail industry “is the first to feel any backlash from consumers’ concerns about the economy”.

In parallel with the April-May decline in retail sales, a key measure of consumer confidence also saw downturns in the same two months.

The Conference Board said that its consumer confidence index (CCI) for May fell to 64.9 from the 68.7 measure recorded in April, and followed a similar decline in April from March.

Lynn Franco, the board’s director of economic indicators, said the two-month dip in the CCI shows that “consumers were less positive about current business and labour market conditions, and they were more pessimistic about the short-term outlook”.

Consumer spending is the driving force of the US economy, accounting for as much as 70% of all production and commercial activity.

More troubling news came from the Manufacturers Alliance for Productivity and Innovation (MAPI), which late last month lowered its forecast for US economic growth to 2.1% for the second half of this year and the first half of 2013.

That reduced GDP forecast was only marginal, down from MAPI’s earlier prediction of 2.2% expansion over the next 12 months, but once again it represented a directional shift that is not typical in a recovery.

“Those growth rates are categorised as a relatively modest pace and well below would be considered normal for an expansion following a severe recession,” said MAPI chief economist Daniel Meckstroth.

The US economy grew at an annualised pace of only 1.9% in the first quarter, a full percentage point lower than the near-normal GDP growth rate of 3% in the fourth quarter of 2011.

Annual GDP growth of only 2% over the next 12 months or more will not generate enough jobs to accommodate new workers entering the labour force, much less make work available for the some 13m unemployed Americans plus another 10m who are either underemployed or have given up looking for a job.

Economists say that for the US economy to generate sufficient jobs growth to put those 23m workers back on payrolls would require annualised GDP growth of 3.5% or higher for six to eight quarters. That pace of growth does not look likely any time soon, according to MAPI.

But the report that gave real pause to economists and sent Wall Street markets tumbling came from the Institute for Supply Management (ISM) earlier this week with news that the broad US manufacturing sector went into contraction in June – the first such decline in the three years since the recession ended in June 2009.

The ISM said its closely watched purchasing managers index (PMI) fell by a sharp 3.8 percentage points in June from May to settle at 49.7%.

Month-to-month shifts in the PMI usually are in the 1-1.5 percentage points range.

The PMI is a composite of supplier responses to the ISM’s monthly survey of 10 different business performance measures in 18 major manufacturing sectors.

A PMI reading above 50% indicates the US manufacturing sector is expanding, while an index measure below 50% means production is contracting.

The PMI had been above 51% for 34 of the 36 months since the end of the recession in June 2009, including a recent peak of 59.9% in January 2011.

Since then, the index has been moderating, falling to 51.4% in July last year, edging back up to 54.1% in January this year before easing to the low-50s recently and in June dipping into negative growth for the first time since the recession ended.

Bradley Holcomb, ISM’s manager for the PMI survey, noted that the subsidiary index for new orders for manufactured goods fell by 12.3 percentage points in June, dropping to 47.8%.

That marks the first downturn in the new orders index since April 2009, when the US manufacturing sector was just beginning to lead the overall economy out of the 2008-2009 recession.

Holcomb said comments from survey participants expressed “concern that demand may be softening due to uncertainties in the economies in Europe and China”.

Perhaps more telling was the result of a new chemical industry economic analysis.

In the inaugural issue of its monthly chemical activity barometer (CAB), the American Chemistry Council (ACC) said that the already wobbly US economy could generate even less growth in the second half.

CAB, the council’s new leading economic indicator, fell by 1.3% in June from a retroactive measure of the barometer for May.

Developed by the ACC’s economics department, the CAB combines data from a range of chemicals and sectors including production of chlorine and other alkalies, pigments, plastic resins and other basic industrial chemicals.

The barometer also factors in chemical company stock data, hours worked in chemicals manufacturing, and publicly available chemicals pricing and inventories. Broader data sets, such as housing starts and new orders for general manufactured goods, also are included, according to ACC chief economist Kevin Swift.

“The chemical industry has been found to consistently lead the US economy’s business cycle given its early position in the supply chain,” the council said, “and this barometer can be used to determine turning points and likely trends in the wider economy.”

On the eve of June’s US employment report, those trends do not look promising.

To cap the run of bad news bulletins, the International Monetary Fund (IMF) said on Tuesday this week that the US economy has slowed, and that IMF analysts do not expect normal US GDP growth of 3%-3.5% until 2015 or 2016.

If Friday’s Labor Department report shows a second month of increased unemployment, those with jobs are likely to become more uneasy about their own employment.

That could translate into more household deleveraging, a greater emphasis on saving and further reductions in consumer spending – as already reflected in the Commerce Department’s report on US personal incomes for May.

Another gain in unemployment and a consequent decline in consumer spending would be likely to lead manufacturers to cut output, reduce operating hours and perhaps shed some workers, precipitating a chain reaction toward a new decline.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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