In spite of Fed Chairman Bernanke’s recent optimism about avoidance of a double-dip recession, the Federal Open Market Committee announced they would continue to purchase Treasury Bonds, rather than allow the $2.05 trillion they now hold on their balance sheet to shrink as they are paid off. This allows more money to remain in circulation. Why? Probably to counter increasing consumer pessimism.
Their FOMC statement released after the meeting said as much. The statement acknowledged "that the pace of recovery in output and employment has slowed in recent months." This was less positive than in their June statement "that the economic recovery is proceeding and that the labor market is improving gradually."
Why the increased pessimism? The Conference Board’s confidence index has been stagnant since May 2009 over worries about the jobs picture and income prospects. The overall consumer confidence index slipped to 50.4 in July from an upwardly revised 54.3 in June. The latest decrease was led by a drop in expectations to 66.6 from 72.7 in June. This puts the index back to April 2009 levels.
Bernanke highlighted growing strength in the consumer sector, as we said last week. “In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.”
One reason the Fed has become alarmed is that forward momentum for the consumer sector stalled in June as personal income was unchanged, following a 0.3 percent boost the month before and retail sales slipped. What supports consumer spending fared even worse. The wages & salaries component slipped 0.1 percent after posting a healthy 0.4 percent advance in May.
Most of the weakness came from goods-producing industries' payrolls which decreased $8.9 billion of which $6.0 billion was in manufacturing. Services-producing industries' payrolls increased $3.7 billion. The decline in the number of temporary workers for Census 2010 subtracted $3.4 billion at an annual rate from federal civilian payrolls in June.
But the latest Institute for Supply Management Indexes actually look better. The ISM's July non-manufacturing composite index in particular improved to 54.3 from 53.8 month before. Business activity, akin to a production index, edged slightly lower to a still very strong 57.4 – well above breakeven of 50. But forward momentum may be gaining as the new orders index rose nearly 2-1/2 points to 56.7. Also, employment advanced more than one point to 50.9 for its best reading of the recovery.
Despite the negative headline number, there were some notable positives in the latest employment report – all pointing toward improvement in income. Average hourly earnings improved to up 0.2 percent, following no change in June. The average workweek for all workers rose to 34.2 hours from 34.1 hours in June. The firming in the workweek could be an early indicator of additional hiring down the road.
Probably the biggest positive in the report is a 0.6 percent jump in aggregate weekly earnings after dipping 0.3 percent in June. This points to a healthy gain in the wages & salaries component of personal income in coming weeks. And so these reports probably provide the best current argument - outside of private payroll job gains – that the economy is not headed for a double dip recession.
Harlan Green © 2010
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