Berson's Weekly Commentary
Economic Commentary
July 11, 2005
Steady as she goes.
Our forecast for annualized real GDP growth has been 3.5-4.0 percent over the second half of 2005 for some time, and the June employment report supports this trend-like view. But how can this be, as the increase in payroll employment was 146,000 (on top of only 104,000 in May) compared with an estimated rise of 175-200,000 needed for trend growth? Despite the somewhat slower job growth over the past couple of months, there are a number of reasons to expect the job market to support trend economic growth.
First, job growth over all of 2005 has averaged 181,000 per month -- squarely in the middle of the needed range for trend growth. There will always be monthly deviations from trend, so the modest slowdown in job growth over the past couple of months is no more worrisome as a sign of slower economic activity than the jump in employment of 300,000 in February was worrisome as a sign of an overheated economy with inflation pressures.
Second, the estimate for payroll gains in both April and May were revised upward in the June employment report (by an average of 22,000 per month). Given downward trends in initial unemployment claims and recent upward revisions to income growth, it is more likely that future employment revisions will be to the up side rather than down -- perhaps suggesting that June's 146,000 figure will be revised higher.
Third, employment in the smaller household survey continues to increase more quickly than payroll employment -- up by an average of 247,000 per month through the first half of the year. Moreover, payroll gains are little different thus far this year than they were in 2004 (181,000 versus 183,000), while household increases have accelerated (247,000 versus 146,000). Most analysts (correctly) view the payroll survey as generally the more accurate of the two because of its larger sample size, but they also tend to view the household survey as being a more timely signal for changes in the job market -- as the payroll survey under-represents small firms and individual contributors, which usually move sooner in response to changing economic conditions than large firms do. As a result, the stronger gains in the household employment figures thus far in 2005 may reflect an overall increase in the demand for labor that the larger payroll survey has yet to pick up.
These points suggest that if the overall economy is growing at around trend rates, payroll employment should continue to average close to the 181,000 it has averaged thus far in 2005 (or, conversely, if job growth remains close to its recent average, the economy should grow at trend rates). (Note that this assumes that nonfarm productivity has settled into its estimated long-run growth rate of 2.5-3.0 percent -- which is what it has done for the past two quarters, after nearly three years of above-trend growth). With little change in bond market yields in the wake of the June employment report, it appears that financial markets agree with this assessment of the job market: it's neither too hot nor too cold, but rather growing at a pace that should allow trend economic growth to continue.
This will be a very busy week for economic indicators, even if none of the releases is viewed by financial markets as being as important as last week's employment report.
On Wednesday, import prices are expected to rise by 1.1 percent in June -- driven mostly by higher oil prices, and offsetting a similar decline in the prior month.
Also on Wednesday, the trade deficit should be little changed in May at around $57.2 billion -- with lower oil prices countering stronger domestic economic activity (which acts to pull imports in).
On Thursday, the consumer price index (CPI) for June is projected to increase by 0.3 percent -- in part because of higher energy prices, but also with the core rate up by 0.2 percent.
Also on Thursday, retail sales for June are expected to climb by 0.8 percent -- with sales excluding autos rising by 0.4 percent. Unit auto sales in June were the strongest in nearly two years.
Additionally on Thursday, initial unemployment claims are expected to be little changed at around 320,000 for the week ending July 9th -- keeping new claims at a relatively low level and indicating a modest strengthening in labor markets.
On Friday, the producer price index (PPI) for June is projected to rise by 0.5 percent -- with most of the rise coming from higher oil prices, as the core rate should be up by only 0.2 percent.
Also on Friday, business inventories are expected to increase by 0.4 percent -- continuing to add to economic strength.
Additionally on Friday, industrial production and capacity utilization should rise by 0.4 percent and to 79.6 percent, respectively -- showing that manufacturing continues to expand.
Finally, on Friday, the University of Michigan's consumer sentiment index for the first half of June is expected to edge down to 95.0 -- mostly in response to higher oil prices.
David W. Berson
Fannie Mae Economics
fanniemae.com |
