3 Charts Explaining the Health of the U.S. Economy
Initial applications for unemployment benefits unexpectedly climbed to nine-week high of 344,000 in the week ended April 26 — a concerning sign for an economy expecting headline employment numbers to strengthen now that the last of the winter’s chilling effect has subsided.
The monthly National Employment Report prepared by the payroll processor ADP and Moody’s Analytics suggested as much; while it may not be the most complete measure of the health of the American labor market and it is less authoritative than the government’s official figure, the report does usually provide hints of overall job growth. And with U.S. employers adding 220,000 workers to payrolls in April, the most in five months, economists were handed a sign that the labor market has survived winter’s harsh grip and job creation is accelerating once again. “The job market is gaining strength,” noted Moody’s Analytics chief economist Mark Zandi after the report was released Wednesday.
The fact that first-quarter gross domestic product growth amounted to just 0.1 percent has also made the April jobs report much anticipated. However, “the weak pace of first quarter GDP growth does not reflect the pace of the labor market recovery,” argued PNC economists Stuart Hoffman and Gus Faucher in a Wednesday research note. “Business are responding to better [consumer] demand by boosting their hiring, and job gains will average around 200,000 per month over the rest of this year.” The firm expects the unemployment rate to drop from March’s 6.7 percent to 6.6 percent in April, even though the labor force is expected to grow “as more people look for work, encouraged by the improving job market.”
1. Jobless claims
While last week’s 14,000 claim increase in the number of Americans applying for jobless benefits was more than analysts expected, the jump was not immense; economists say any claims figure below 350,000 indicates moderate job creation. But nevertheless it was reminder that even though the labor market is indeed resilient, it is no where near full, pre-recession health. Ahead of Friday’s April Employment Situation Report from the Department of Labor, which is expected to show the strongest hiring numbers since last November, a string of economic reports have pointed to a jobs recovery that is once again gaining momentum, but still far from strong. Typically, before the Great Recession began in December 2007 an average number of 320,000 initial claims were filed each week due to the normal churn in the job market.
Still, that 14,000-claim increase represents the third consecutive rise in applications for unemployment benefits.
What was more concerning than the uptick in weekly initial applications for unemployment benefits was the corresponding increase in the monthly average. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings. Rising 3,000 from the previous week’s upwardly revised average 317,000, the four-week moving average for the week ended April 26 climbed to 320,000. Before the increases recorded in the past two weeks, the moving average stood at its lowest level since October 6, 2007 — when the four-week moving average hit 302,000 claims.
In addition, the number of people continuing to receive jobless benefits ticked up from 2,680,000 filed in the week ended April 12, which was the lowest level recorded since December 2007. Continuing claims — reported with a one-week lag — rose by 97,000 to 2,771,000 in the week ended April 19.
Even though, the four-week moving average rose last week, initial claims for unemployment benefits — which serve as a proxy for layoffs — still paint a picture of a strengthening and resilient labor market. If initial claims for unemployment benefits defined the whole labor market story than the narrative of the jobs recovery would be easy to summarize: Progress is steady, or, at least, the labor market situation is not worsening. Confirming the thesis of labor market resilience is the fact that the underlying trends in jobless claims have generally remained positive.
The general downward trend of jobless claims offer a sign that even though job creation remains sluggish, business remain confident enough to keep workers even if they are not inclined to increase payrolls significantly. A Thursday report from the global outplacement consultancy firm, Challenger, Gray & Christmas confirms the narrative jobless claims data has been creating. April’s layoff total did come in slightly higher than the prior month, with employers announcing 40,298 planned job cuts compared to March’s 34,399 planned job cuts, a nineteen-year low. But it is still safe to say that layoffs remain “very, very low,” as Moody’s Analytics senior economist Ryan Sweet told Bloomberg after last month’s report.
“Despite the April increase, the pace of downsizing remains relatively low. We just saw the lowest first-quarter total in 19 years and the year-to-date monthly average of 40,410 is the lowest since 1997,” the firm’s chief executive officer John A. Challenger said the data release. “However, while the economy still has a lot of room for growth, it is unlikely that monthly layoffs will experience a precipitous decline. Even during the economic boom of the late 1990s, employers still averaged about 550,000 announced layoffs annually.”
Once broken down by sector, planned job cuts tell a very different story. Retail — an industry that has struggled since the recession ended — announced an industry-leading 6,993 job cuts in April. This year to date, retailers have announced 25,224 job cuts, a figure only slightly lower than the 31,297 retail job cuts reported in the first four months of 2013. After the retail industry, the financial sector cut 4,124 jobs which is also a relatively high figure. “We are seeing some stabilization in the banking industry,” said Challenger. “We may continue to see cutbacks in the mortgage departments, as banks shed the extra workers hired to handle the flood of foreclosures, but those areas are getting back to normal staffing levels.”
The aerospace and defense sector laid off 4,075 workers, the health care sector dropped 3,242 employees, and the food industry cut 2,865 jobs. Meanwhile, the technology sector has seen an unexpected increase in layoffs, with planned job cuts jumping 214 percent and 94 percent at telecommunications firms and computer firms, respectively. The 11,827 job cuts announced by telecommunications companies so far in 2014 is only about 1,000 fewer than the 12,952 cuts announced by these employers in all of 2013. But, “rising job cuts in the tech sector is not necessarily a harbinger of a weakening economy. Change occurs so rapidly in this sector that employers have become very adept at shift their workforce levels to the latest trends. In many cases, these firms are simultaneously hiring in one area while cutting staff in another,” noted the firm.
3. Personal income and outlays
This report from the Department of Commerce does not expressly shine a light on the health of the labor market. But there is no denying the link between employment, income, and spending. The relationship between business confidence, job creation, and consumer spending is a close one. U.S. businesses do not want to increase labor costs unless they are consumers will spend money on the goods and services they produce. But consumers who are not confident about their job prospects are not likely to spend beyond everyday necessities. Plus, stagnant wages and higher payroll taxes have affected spending for lower-income earners. Over the past year, average hourly earnings rose a less-than-stellar 2.1 percent, which is a very small increase by historical standards. More specifically, real average wages rose just 0.5 percent in March, compared with a year earlier, while consumer prices jumped 1.5 percent, erasing that entire wage gain. But still that wage gain was the biggest recorded since August.
Important to note is the fact that incomes are supported by government subsidies for health care payments; adjusting for inflation and taxes, the increase in disposable income amounted to just 0.3 percent, in-line with February’s rise.
With wage growth stagnating while unemployment remains stubbornly high, households have been forced to dip into their savings in order to maintain spending.
Given that employment and income environment, economists have been particularly concerned about the American consumers’ ability to spend. Strong consumer spending is essential for the recovery of the American economy. Because government and business spending have largely remained remained weak in recent quarters, the economy has been heavily dependent on consumer spending — which accounts for approximately 70 percent of gross domestic product in the United States — to fuel growth. That key measure did slow slightly in the first quarter, growing at a 3 percent pace, as compared to the previous quarter’s 3.3 percent expansion, which was the greatest increase recorded in three years. In fact, personal consumption expenditures were the single biggest boost to economic output in the first three months of the year.
However, while consumer spending was relatively strong in the first three months of the year, it is interesting to note what Americans purchased in order to gain a better understanding of the health of consumers. From January to March, spending on goods slowed to a 0.4 percent pace, while spending on key services — like health care and energy — accelerated to a 4.4 percent pace. As this spending breakdown suggests, consumers are directing most of their spending dollars to immediate necessities, a pattern that has characterized much of the recovery. Still, that increase in consumer spending was good news for an economy dealing with decreasing government spending, a softening housing recovery, and months of worse-than-usual winter weather.
The Commerce Department’s March personal income and outlays report showed more specifically than Wednesday’s GDP data where consumer spending trends are headed. Personal spending inched up 0.9 percent in the final month of the first quarter, the greatest increase recorded since August 2009. That improvement suggested that March may be a springboard for faster growth in April through June period.
“March’s solid rise in real spending is due to two factors,” Capital Economics’ Paul Dales explained in a Thursday research note. First, the “unwinding of the weather distortion generated” a 1.4 percent month-over-month jump in spending on goods, he explained. Plus, a surge in health care spending, driven by the previously uninsured who are beginning to use new policies provided by the Affordable Care Act, led to a 0.4 percent increase in spending on services. In total, spending on services rose 0.7, with utilities contributing significantly as well.
Continuing a pattern, Americans’ spending outpaced income growth in March, meaning their savings rate has fallen. The percentage of disposable income households stow away dropped from 4.2 percent in February to 3.8 percent in March, the smallest since January 2013.
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