Manufacturing Economy Is Looking Downright Scary: Caroline Baum
By Caroline Baum
New York, June 1 (Bloomberg) -- If there is a moral to today's employment report for May, it's not one about the state of the economy. It's about the unreliable nature of monthly indicators.
March's previously reported 53,000 job loss is now a 59,000 increase. The stunning 223,000 April decline is a less dramatic 182,000. And the 19,000 drop in May non-farm payroll jobs is relatively good news when compared with the daily barrage of lay- off announcements from corporations.
The net effect of the last three months of revisions was an addition of 184,000 to the army of employed.
``If GDP is not affected, it means a potential downward revision to productivity growth,'' says Henry Willmore, senior U.S. economist at Barclays Capital Group.
A survey of households -- compared with a survey of establishments from which non-farm payrolls are derived -- tells quite a different story. The household survey shows an average job loss of 224,000 for the last four months. Compare that with the establishment survey's average decline of 1,500.
Some economists think the household survey does a better job at turning points for the simple reason that the BLS uses a ``plug factor'' for the establishment survey. Every quarter the statisticians make an assumption about small business formation, since those establishments aren't part of the survey even though they account for most of the new jobs created in this country.
False Positive
Because of the inherent difficulty in anticipating turning points in the economy, the plug factor can overstate job formation when it's slowing and understate it when things are picking up.
The May report included the Bureau of Labor Statistics' annual benchmark revisions, which use unemployment insurance tax records for March 2000 to reconcile the establishment survey. The benchmarking hoisted the March 2000 level of employment by 468,000 (unadjusted).
None of this history is relevant to the present, which doesn't look too good. The unemployment rate declined 0.1 percentage point to 4.4, but that was a result of the labor force falling by twice as much as the number of employed, as measured by the household survey. When job prospects don't look good, folks give up looking for a job -- they effectively take themselves out of the labor force -- instead of pounding the pavement.
The manufacturing piece of the employment report was downright scary. Factories shed 124,000 workers last month even as they pared the workweek by 0.2 hour to 40.8 hours. This is hardly a sign of an imminent rebound in manufacturing, an industry that has shed 668,000 jobs in the last 12 months.
Dead Again
The losses in May were broad-based across durable and non- durable manufacturing industries. Even the auto industry, the economy's presumed turnaround story in the second quarter, lost jobs in the last three months.
The diffusion index of manufacturing showed only one-quarter of the establishments doing net hiring in the last three months. The one-month diffusion index at 29.4 was the lowest since the recession month of November 1990, according to Stone & McCarthy Research Associates in Princeton, New Jersey.
Increases in construction, finance, insurance and real estate, and services -- primarily health and education services -- offset some of the weakness in manufacturing, wholesale and retail trade last month. But they didn't do much for the tone.
The weakness in manufacturing was confirmed by the National Association of Purchasing Management's June survey. The NAPM Index fell 1.1 point to 42.1, negating the modest drift higher in February, March and April, when manufacturing was contracting but at a slower pace.
Fed Again
These two key reports released on the first day of the month, along with recently released data, ``justify but do not mandate another ease in June,'' says Neal Soss, chief economist at Credit Suisse First Boston.
If the Fed does cut rates again, it will be by 25, not 50, basis points, he says.
I'm not so sure. Fed chairman Greenspan is clearly nervous -- about the economy as well as his legacy. While easy money created the Nasdaq bubble and tight money burst it, easy money won't restore us to the status quo anytime soon.
If Greenspan really believed his rhetoric that this was just an inventory correction, he wouldn't be acting in hyper-kinetic fashion to cut rates, says Bob Barbera, chief economist at Hoenig & Co.
Words vs Deeds
``If you review Greenspan's speeches over the last 18 months, all talk of a bubble disappears from late 2000 through the spring of 2001,'' Barbera says. ``In his most recent speech, the bubble discussion returns. He seems more comfortable acknowledging the bubble and its real economy consequences because Nasdaq has stabilized. But his speed-of-light ease tells you it was his one concern all along, inventory discussions notwithstanding.''
The other thing Greenspan never, ever mentions is the central bank's role in creating the bubble. Because of the way central banks operate nowadays -- providing whatever reserves the banking system demands at an overnight rate they target -- they either say yes or no to increased credit demands. If demand for credit increases and the Fed doesn't increase the stock of money, the price of credit, or interest rate, would rise.
In other words, there can be no excess credit creation without the complicity of the central bank. I challenge you to find any reference to this basic fact in any of Greenspan's speeches. |
