Last week, the economy continued to grind along slowly and did not show any signs of moving away from its current growth path of 1.5%, neither in an upward nor downward direction. In one sense, this is good news given the continuing unresolved European debt crisis and the fact that growth in China is slowing down noticeably.
The most important development last week was initial claims for unemployment compensation. This indicator measures the strength of the labor market and allows one to determine whether firms are increasing layoffs.
While the newly published number of 361,000 is much higher than it would be under normal circumstances (about 325,000), it has exhibited a downward trend in recent weeks. Specifically, one month ago it was 386,000, and one week ago it was 367,000. This suggests that the labor market has a more solid foundation than commonly perceived.
Initial claims for unemployment compensation decreased:
361,000; the previous week was 367,000
The change in consumer credit, published last week, reinforced the view that consumers are more pessimistic. The figure indicated that consumer credit contracted from the previous month. In June it measured $6.5 billion, which was a significant reduction from $16.5 billion in May.
The reduction is a mixed blessing. In particular, when credit is increasing consumers are spending more than they take in in income. That behavior cannot be sustained over the long run.
In contrast, increases in credit indicate that consumers have enough confidence in the economy to spend more. If they lack confidence they cut back on spending and save. This means additional credit outstanding will be smaller.
This is what happened last month which is reinforced by the fact that these savings rate in the economy went up from 4% in May to 4.4% in June. The economy needs consumers to spend more in order to grow.
Consumer Credit Outstanding decreased:
$6.5 billion for June; the previous month was $16.7 billion
On the downside, the indicator of the nation’s productivity was also published last week and showed that during the second quarter, productivity was 1.7%; a significant decline from the previous quarter of 5.6%.
Productivity is a measure of how much output each worker generates. High levels of productivity usually accompany rapid periods of economic growth. Nevertheless, it is not unusual for this measure to make large swings from one quarter to the next. Generally speaking, the level of productivity should correspondence to the long run level of real economic growth (i.e. real economic growth takes inflation into account). The economy has grown about 2.5% over the last quarter-century. While the most recent quarter of productivity growth was below the trend, the previous quarter’s level was significantly above it.
Second Quarter Productivity Decreased:
1.7%; the previous quarter was 5.6%
Labor Market Recap
The Labor Department’s jobs report for the month of July indicated the unemployment rate increased slightly from 8.2% to 8.3%. The increase was in line with expectations. The number of jobs created, 163,000 was more than doubled the number that was created in June (64,000). The increase exceeded analysts’ expectations. The private sector created 172,000 jobs, but government cutbacks reduce that number by 9000.
The increase in the unemployment rate was mainly attributable to 153,000 previously unemployed workers reentering the labor market in search of work. This is an encouraging sign.
Among ethnic and racial groups, white unemployment remained the same at 7.4%, unemployment among blacks decreased from 14.4% to 14.1%. Also, unemployment among Latinos decreased from 11% to 10.3%.
Last modified: August 13, 2012