Wednesday, December 29, 2010

Which Deficit is Most Important?

Popular Economics Weekly

All the talk of budget deficits really focuses on the wrong deficit. It is the output deficit of goods and services lost because of the Great Recession that is most important, not the state and federal budget deficit(s), since budget deficits will only be paid down with increased tax revenues that come from increased production.


The Center on Budget and Policy Priorities ( has been tracking the output deficit since the beginning of the downturn, and it shows that overall production (GDP) has now returned to its 2007 level, hence the end of the recovery cycle we have been discussing. But for significant deficit reduction GDP now has to continue to expand to its potential above $14 trillion.

With the latest congressional compromise, analysts are predicting a higher GDP growth rate in 2011—which if true might boost growth to that $14 trillion plus level. The legislation’s extensions of federal unemployment insurance and Obama-era tax cuts for low-income households (i.e., the 2009 improvements in the Child Tax Credit, Earned Income Tax Credit, and college tuition tax credit) — all policies insisted upon by the White House — are a big reason for the increased estimate.

Economist Mark Zandi of Moody Analytics gave the best analysis of the compromise. “The deal’s surprisingly broad scope meaningfully changes the near-term economic outlook. Real GDP growth in 2011 will be nearly 4 percent, approximately 1 percentage point greater than previously anticipated. Job growth will be more than twice as strong, with payrolls growing by 2.6 million. Unemployment will be more than a percentage point lower; instead of hovering near 10 percent through the year, it will end 2011 well below 9 percent.”

In fact, economic growth has been subpar since 2000, with just 5 million jobs created 2000-08 and another 1 million jobs added since January 2010, after the loss of 8 million jobs during the Great Recession.


Most of the budget shortfall has been due to the lost revenues of the Bush tax cuts during the last decade, with military spending adding another $1 trillion, whereas the output deficit comes mainly from lost jobs—8 million from this recession alone, as we said. So the best revenue enhancer would of course be more robust growth. In fact, if GDP growth exceeded 3.5 percent longer term as it has over the last 75 years (i.e., including the Depression), social security would never be in danger of running out of funds. The current projections are based on a long term forecast 2.6 percent GDP average growth rate, which has never happened.

The bottom line is that higher GDP growth increases personal incomes, which began their most recent decline at the beginning of the Great Recession and only started upwards again after it ended in July 2009. Real, after inflation, personal incomes are currently 95.5 percent of the last peak, so demand can’t pick up substantially until consumers’ financial health is restored.


In sum, the best bang for the buck is boosting incomes of the middle and lower classes who were most affected by the Great Recession. Unemployment insurance has been the most effective boost for the 15 million unemployed, followed by the current one year-2 percent income tax cut for all wage and salary earners. Since consumers will no longer be able to rely on massive borrowing from their homes, they will only be able to spend money the old fashioned way, by earning it.

Harlan Green © 2010

Monday, December 27, 2010

The 2011 Mortgage Mess

The Mortgage Corner

Will real estate finally show a sustained recovery in 2011? Much depends not only on a general economic recovery, but bringing back the mortgage markets. Right now, there’s a tug of war in Washington, over whether more aid should be given to borrowers with underwater mortgages under the various loan modification programs.

So the question is in part, just how many homeowners are ‘underwater’ these days, and when will housing values begin to rise again—is it 3 million or 8 million homes? The underwater statistic is somewhat misleading, as it is still cheaper for most homeowners to pay their mortgage with the record low interest rates rather than rent, even when the mortgage amount is more than current value. Rents have not fallen substantially, mainly because of the record number of homeowners who have become renters due to the loss of their homes.

Right now, a popular mortgage program is the ‘Refi Plus’ offered by both Fannie Mae and Freddie Mac, in which those with good credit and incomes can refinance at a market interest rate up to 105 percent of the loan to value of their home.

The latest FHFA (Federal Housing Finance Authority) price index, the regulator in charge of both Fannie and Freddie, shows some improvement. House prices for homes sold under government agency financing surprisingly rebounded in October. The FHFA purchase only house price index rebounded 0.7 percent in October, following a 1.2 percent decrease in September.


On a year-on-year basis, the FHFA HPI is down 3.4 percent, compared to down 3.8 percent in September. This index is based on resale prices for homes financed or bundled by Fannie/Freddie, VA/FHA, or the FmHA.

Sales of existing homes are slow but improving, up 5.6 percent in November to 4.68 million, an annual rate that's a little slower than expected. Details show gains across all regions along with a strong 6.7 percent rise in sales of single-family homes, the report's key component. Another plus is that prices didn't soften, up slightly to a median $170,600 to end a nearly six-month run of declines. Supply on the market fell for a third straight month yet at 9.5 months is still very heavy.


Another housing boost comes from third quarter GDP growth being revised up for the second month in a row, this time to 2.6 percent annualized from the prior estimate of 2.5 percent. And Q4 growth is looking to be even higher.


All of these indicators point to slow but steady growth in 2011. NAR chief economist Lawrence Yun is hopeful for 2011. “Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable,” he said.

Yun added that home buyers are responding to improved affordability conditions. “The relationship recently between mortgage interest rates, home prices and family income has been the most favorable on record for buying a home since we started measuring in 1970,” he said. “Therefore, the market is recovering and we should trend up to a healthy, sustainable level in 2011.”

But any real estate recovery is still depending on whether interest rates stay below 5 percent. They have been rising of late, so that the 30-year conforming fixed rate is about 4.625 percent for a 1 pt. origination fee, up from 3.75 percent at its record low point. And so the Mortgage Bankers Association reported mortgage applications have trended down over the past 2 weeks, in line with the latest increases.


The four-week moving average of the purchase index is still at about the levels of 1997 - and about 17 percent below the levels of April this year before expiration of the homebuyer tax credits - suggesting weak existing home sales through January 2011, at least.

The bottom line is that housing values—and so sales—will only continue to improve substantially with improving employment. And this means improved wages and salaries that qualify more home buyers. There is no question that the economy will continue to improve in 2011. Let us hope that also improves the jobs market

Harlan Green © 2010

Monday, December 20, 2010

Is The Great Stimulus Debate Over?

Financial FAQs

The stimulus debate over what form government aid should take to the recovery is only over for the moment. The headlines tell us both the rich and poorer among us will receive various tax breaks under the Democratic-Republican Party compromise, while businesses will have their research and development (R&D) tax credits extended. This is bound to lead to more hiring, say most of the pundits.

What was the debate about? A hint was the House Democratic majority’s unsuccessful attempt to cut the inheritance tax exemption from $5m to $3.5 million. If the goal is over what gives the most bang for the buck, then it is important to know who will benefit. Economic growth is already back to its pre-recession level (See my Popular Economics Weekly column of this week.).

So the real debate yet to be settled is who will receive most of the benefits of the recovery. The Bush II recovery was fueled by tax cuts for the wealthiest, which brought us a wealth distribution that matched 1928 before the Great Depression. The theory being was that the investor class was in the best position to boost growth.

Alas, that didn’t happen, as just 5 million jobs were created from 2000-08 after the Bush II tax breaks, the lowest since WWII, vs. 22 million jobs created during the Clinton Administration (when tax rates were higher). Why? Incomes were much more eqalitarian then, creating much more demand from the income brackets that do most of the spending.

The solution really isn’t such a puzzle; more like common sense. The wealthiest tend to spend less of their incomes, whereas the middle and lower brackets spend almost all of their incomes. So simple math tells us the more income that flows to the lower income brackets, the more of it gets spent. And it is overall spending that fuels growth in our 70 percent consumer-driven economy.

What do the top income brackets do with their wealth, other than conspicuous consumption? They invest it, in part by lending it back to the rest of us. That happened from 2000-08. The record low interest rates engineered by Chairman Greenspan’s Fed created easy money that allowed the 90 percent income earners to borrow from the wealthiest 10 percent in record amounts. But, as Roosevelt’s Fed Chairman Marriner Eccles said during the Depression, the game ended once those players ran out of borrowed chips.

Though leaving the Bush tax cuts in place for those earning more than $250,000 per year benefits the highest income earners most, the other 90 percent also benefits somewhat with the temporary payroll tax reduction. Adding the 2 percent payroll tax cut lowers revenues to social security, however. The maximum tax drops to 12.2 percent from 14.2 percent, shared equally by employer and employee for salaried workers.

It is basically above the $500,000 annual income level that the Democratic and Republican Parties’ tax proposals differ. Preserving all the Bush II tax cuts boosts tax savings of the $500k to $1million incomes from $6,701 to $17,467 and for $1 million plus incomes from $6,309 to $103,835, a huge jump.


So the tax cut compromise doesn’t give as much bang for the buck as we would like. The strong retail sales report for November points to consumers feeling wealthier in certain areas, however. The latest (October) Federal Reserve consumer credit report showed consumer credit expanded $3.4 billion in October, following a $1.2 billion rise in September.  Outstanding credit has not risen for two consecutive months since mid-2008.  The latest rise was led by a $9.0 billion boost in non-revolving credit, following a $10.1 billion jump in September.  Both months reflect healthy motor vehicle sales.


Revolving credit, a category centered in credit cards, continues to contract, down $5.6 billion in October following September's $8.8 billion drop. The decrease in revolving credit means consumers are not pulling out the plastic for purchases—disappointing news for retailers.   It also likely is due to continued charge offs by banks of bad loans, conjectures Econoday. 

Basically, consumers are still cautious about spending, maintaining a relatively high saving rate.  With so many of the tax benefits still going to the wealthiest, this means only a moderate pickup in overall consumer spending is sustainable. So it looks like the U.S. public will have to wait longer for a more egalitarian tax structure that both benefits most Americans, and pays our bills.

Harlan Green © 2010

Saturday, December 18, 2010

Good News--End of Recovery in Sight!

Popular Economics Weekly

What does it mean that pundits/economists are now saying the end of the recovery is in sight? Barron’s economist Gene Epstein maintains, “The Recovery from the Great Recession of 2008-09 is almost definitely over. Starting Jan. 2 the expansion will resume.”

The ‘recovery’ ends when Gross Domestic Product (GDP) reaches the peak before the recession began—in Q4 2007, says Epstein. Growth will have made up for the loss in output sustained during the Great Recession, in other words, and the economy can finally begin to expand into new territory.

A look at the unemployment numbers tells us why. A survey from the U.S. Bureau of Labor Statistics—called the Job Openings and Labor Turnover Survey (JOLTS)—gives us the most accurate picture of the labor market. In October, about 4.047 million people lost (or left) their jobs, and 4.196 million were hired (this is the labor turnover in the economy) adding 149 thousand total jobs. Four million has been the historical monthly job turnover, so huge is our economy. So the jobless numbers relate to how many jobs are gained or lost above or below that number.


Also, total job openings increased from 3.0 million in September to 3.4 million in October, though overall labor turnover was still low. (The dark blue line (hires) is now above the light blue bars (quits + layoffs) with the yellow graph line of job openings steadily rising. 

Economic growth reached its low point in Q2 2009, having fallen about 4.1 percent from its peak, the steepest loss since the Great Depression—hence this one being called the Great Recession. The latest (Q3) quarter probably expanded at 2.5 to 3 percent after all revisions, bringing growth back to its highpoint before the recession. Year-on-year, real GDP in Q3 is up 3.2 percent. Both Final Sales to domestic purchasers and Final Sales of domestic product (F.S.), a measure of overall demand, continued to increase.


Just as consumers take up almost 70 percent of GDP activity, retail sales are the most important component (50 percent) of consumer spending. And sales continue to rise for the fifth consecutive month. Overall retail sales on a year-ago basis in October was a huge 7.7 percent, slightly below 8.0 percent of the prior month.

Today's retail sales numbers should lead to upward revisions to forecasts for the Personal Consumption Expenditures component in fourth quarter GDP, says Econoday.  Overall, sales are quite healthy overall despite price issues. (Since retail sales do not adjust for inflation, it is difficult to determine if ‘real’, after inflation sales are staying ahead of inflation.


A more esoteric measure of sustainable demand is the inventory-to-sales ratio that tells us how fast shoppers are emptying the shelves. Business inventories rose 0.7 percent in October in a light build given a very strong 1.4 percent rise in business sales. The mismatch pulled the inventory-to-sales ratio down one notch to 1.27. The comparatively small build is a plus for the economic outlook, pointing to the need to build inventories faster which requires output and employees, says Econoday.


The strong retail sales report for November points to the possibility of a further draw in November retail inventories. Based on government data, retailers appear to be having trouble keeping goods on store shelves.

What should not be hard to understand is that private businesses begin to hire only when they see sustainable demand for their goods and services increase, as we said last week. And because we have returned to pre-recession growth levels, that demand seems to be sustainable.

Harlan Green © 2010

Monday, December 13, 2010

Who Are The Job Creators?

Popular Economics Weekly

The November unemployment report was bad news, after a string of good jobs reports, so it is important to understand what spurs job creation. The unemployment rate based on a small sampling of both the salaried and self employed rose to 9.8 percent. The broader payroll survey of businesses showed a net increase of 39,000 nonfarm payroll jobs—50,000 in private industry less 11,000 government jobs lost.


So based on the jobs’ numbers, the recovery is shaping up to be not V or U-shaped, but W-shaped. That is, the recovery that began in earnest when the various government stimulus programs kicked in—TARP (for banks), ARRA (for infrastructure and job creation), HAMP (for mortgage modification), and the Fed’s purchase of Treasury and Mortgage backed securities—reversed when the effects of the stimulus spending weakened.

Most of the TARP monies have been repaid, as well as the ARRA monies that have created or saved between 1.5 to 3.5 million jobs, according to the Congressional Budget Office, and the small number of mortgage modifications are barely making a dent in home foreclosures.

What should not be hard to understand is that private businesses begin to hire only when they see sustainable demand for their goods and services increase. That demand comes both from consumers and businesses, investors and producers, in both the private and government sectors. All use those goods and services, so when the private sector shrank in 2007 government stepped in, but it could not make up for all the private sector demand that was lost (something like a $6 trillion shortfall).

The private sector meanwhile has been sitting on their money. Corporations with a year of record profits have more than $1.8 trillion in cash salted away, banks have $1 trillion in excess reserves they are not using, and even consumers have been paying down debts faster and saving more than they have spent.

So the recovery which began January 2008 abruptly stalled when that aid declined. In part this was because state and local governments then began to shed jobs as their revenues shrank. It is only in 2010 that private business is beginning to hire again to the tune of 86,000 per month since January 2010. Both the manufacturing and service sectors have been expanding and are now hiring again.

The reason hiring has been slow, is that companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls—investing in more technology to replace workers—which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent, as we said last week.


The Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity, shows businesses are continuing to add employees. The 57.5 index level for employment is very strong.

The ISM's non-manufacturing index rose seven tenths to 55.0, the highest reading in six months and reflecting strong monthly gains for new orders and employment. The latter gain, taking the component to 52.7 for its strongest reading of the recovery, is notable given the softness in the employment report. This report's employment index, until this month, had been very flat indicating that non-manufacturers had been reluctant to hire. Unadjusted gains for retail and corporate management led the month's employment gain.


So there is a broad misconception that only jobs created by the private sector—though desirable—are the only engine of sustainable economic growth. Government always has been, and will continue to be a partner in this growth. Especially in a modern and overcrowded world where the water we drink, the air we breathe, the resources we consume, as well as our neighborhoods have to be preserved and protected.

And both governments and the private sector have to borrow to be able to function effectively. So those who decry government spending are really ignoring the obvious—that we will always have business cycles with recurring recessions that don’t ‘cure’ themselves.

We have to remember, though, all this depends on a continuing demand for goods and services, which in turn needs readily available credit. Banks are only now beginning to lend again to small businesses, as various small business sentiment surveys indicate. Such optimism must continue to grow for the hiring to continue.

Harlan Green © 2010

Sunday, December 12, 2010

Is Pending Sales Index Rise Good News?

The Mortgage Corner

The Pending Home Sales Index, a forward-looking indicator, rose 10.4 percent to 89.3 based on contracts signed in October from 80.9 in September. It was the highest jump since early 2003 when the surge in housing began. The index remains 20.5 percent below a surge to a cyclical peak of 112.4 in October 2009, which was the highest level since May 2006 when it hit 112.6.


This, and the continued rise in mortgage purchase applications signals an upsurge in housing demand. But is it sustainable? Is there enough pentup demand for housing—whether via increased household formation, or continued low interest rates—to sustain the surge? The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010, and is now back to its mid-1998 level, when housing was at the beginning of its last surge.


NAR chief economist Lawrence Yun said excellent housing affordability conditions are drawing home buyers. “It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” he said.

“More importantly, a return to more normal loan underwriting standards and removal of unnecessary underwriting fees for very low risk borrowers is needed and could quickly help in the housing and economic recovery,” Yun said. Recent loan performance data from Fannie Mae and Freddie Mac clearly demonstrates very low default rates on recently originated mortgages, much lower that the vintages of 2002 and 2003 before the housing boom.

That is the real issue. Probably because almost 90 percent of all mortgages are either guaranteed or insured by the federal GSEs, Fannie Mae, Freddie Mac, or FHA/VA, their guidelines have become increasingly restrictive, with heightened credit score and lower allowable debt ratios restricting many eligible borrowers.

But housing pricing haven’t yet stabilized, with the S&P Case-Shiller same-home price index still at the bottom. he S&P/Case-Shiller 10-city home price index (seasonally adjusted) fell for the third month in a row and fell very steeply, down 0.7 percent in September and down 0.3 percent the prior month. At only plus 1.5 percent, the adjusted on-year rate extended its run of weakness. Weakness is no longer concentrated in the West or Florida with declines sweeping across regions.


Also, with badly depreciated housing prices, the current appraisal system hurts housing values on legitimate, arms-length purchases by not taking into account compensating factors, such as whether a neighborhoods value has been damaged by a recent foreclosure, or short sale.

But the PHSI fell only in the Western region, while in the Northeast it jumped 19.6 percent, in the Midwest the index surged 27.3 percent, and in the South rose 7.1 percent. So we are in an uneven recovery, with those regions that have resumed growth leading the way, while those states with huge foreclosure backlogs—like California, Nevada, Arizona, and Florida—holding back growth in their regions.

Harlan Green © 2010

Monday, December 6, 2010

Redistributing Great Wealth (is) The Path to Recovery

Popular Economics Weekly

We are in the deepest economic malaise since the Great Depression. And there is a good reason for it. We also have the greatest maldistribution of wealth since 1928. Researchers are finding that the two—the greatest inequality and greatest downturns—are intimately connected. So restoration of what is in effect our Middle Class, where at one time the majority of wealth resided, would restore both the jobs and financial health to an economy sorely out of balance.

This will not be easy. Witness the vociferous opposition to any restoration of equality—which conservatives label the redistribution of wealth to those less worthy, in their eyes. The current example is Republicans refusal to give up the Bush tax cuts for the wealthiest, which would restore tax rates of the Clinton era when 22 million jobs were created.

The sad fact is that unless we do begin to level the economic playing field, we are fated to experience more boom and bust cycles that will only debilitate the U.S. economy further, and so our standing in the world. And history will continue to repeat itself. Roosevelt’s Federal Reserve Chairman, Marriner Eccles, understood in 1933 the main cause of the Great Depression.

“… a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand (my italics) for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

Thomas Piketty and Emmanuel Saez among others have documented the disappearance of Middle Class wealth (See Feb. 2003 Quarterly Journal of Economics). The Center for Budget and Policy Priorities (CBPP), a non-partisan think tank, using Piketty and Saez data, verify that income and asset inequality has risen to levels last seen in the 1920s (see graphs).


Income disparities before that crisis and the recent one were the greatest in approximately the last 100 years, according to Harvard Professor David Moss, who is among a small group of economists, sociologists and legal scholars trying to discover if income inequality contributes to financial crises. In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent earned a strikingly similar percentage: 49.74 percent. In 1928, the top 1 percent received 23.94 percent of income. In 2007, those earners received 23.5 percent.

There is no good reason for such wealth disparity, in spite of the severity of this Great Recession. It was a problem that began in the 1970s and only now is catching public attention. An estimated 43.6 million Americans in 2009 were living off incomes below the federal poverty line, or around $11,000 for an individual under 65 or $22,000 for a family of four. The total number, an increase of 3.7 million over 2008, is the largest in 51 years, since the government first started tracking poverty data.

And that is the main reason for the slowness of this recovery. “It’s no coincidence that the last time income was this concentrated was in 1928,” wrote former Labor Secretary Robert Reich in a recent Op-ed. Professor Reich hedges his bets, however. “I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economics declines. The connection is more subtle.”

This debate goes back to the Great Depression, as we have said. By effective demand, Eccles was referring to what economists today define as aggregate demand. Eccles was maintaining that the growth in income inequality created a credit bubble that burst and so led to an sharp diminishment in aggregate demand, which is measured today by our Gross Domestic Product.

The relationship is intuitively simple, yet was hard to verify before Piketty and Saez,, did their research. As more income flowed to the top income brackets, middle and lower income classes had to borrow more to keep up their consumption patterns. And the easy credit available with the housing bubble accelerated that borrowing, to the tune of $2.3 trillion extracted from housing in the last decade. But then the excess of supply produced during the bubble caused housing values to crash, losing more than $4 trillion and counting of the $11 trillion in housing assets.

Professor Reich says we have to find ways to raise the wages of working people—the 90 percent who have suffered stagnant wages since the 1970s. Lowering payroll taxes for the lowest income earners who spend most of their incomes, while restoring the Clinton era taxes on those earning more than $250,000 is the most discussed remedy for such income disparity.

In fact, the underlying effects of such income inequality hasn’t been researched at all. But a new book by Professors Jacob Hacker and Paul Pierson, “Winner Take-all Politics”, is beginning to give us a picture of its results.

Publisher Simon & Schuster’s advertising blurb succinctly describes their thesis: “Winner-Take-All Politics—part revelatory history, part political analysis, part intellectual journey— shows how a political system that traditionally has been responsive to the interests of the middle class has been hijacked by the superrich. In doing so, it not only changes how we think about American politics, but also points the way to rebuilding a democracy that serves the interests of the many rather than just those of the wealthy few.”

There is some good news on the wealth redistribution front. Forty billionaires led by Warren Buffet and Bill Gates have pledged to donate one-half of their wealth to philanthropic causes. From Ted Turner to George Lucas, these 40 billionaires joined Warren Buffett and Bill Gates in making the pledge as part of their The Giving Pledge, a campaign launched earlier this year "to urge wealthy individuals to give the majority of their money to charities of their choice either during their lifetime or after their death," said one headline. If only more of the superrich would follow their example.

Why would they do so? Because it not only helps to build their wealth, but the wealth of those who have lost so much to the wealthiest since the 1970s. This is an economic fact—that greater wealth equality creates more wealth for all—that is increasingly difficult to deny. We are only now becoming aware of the damage that such unequal wealth has wrought to our economy via the excesses of Wall Street and deregulation. It is something that economists weren’t really aware of until Piketty and Saenz did their groundbreaking research.

Harlan Green © 2010

Thursday, December 2, 2010

High Labor Productivity = More Jobs

Financial FAQs

Why are we seeing more job creation? All the indicators—from Challenger and Gray’s corporate layoff and ADP private payrolls surveys, to the U.S. Bureau of Labor Statistic’s (BLS) unemployment report—point to a big pickup in hiring, in spite of government downsizing.

This is because it is becoming too expensive for the existing workforce to produce more as demand grows, hence small businesses in particular are beginning to hire to keep their production costs down. I.e., workers are demanding higher wages and more overtime, says the Labor Department’s Nonfarm Productivity Report.

Companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls, which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent.


The key is unit labor costs (ULC), which have been rising steadily since late 2009. Labor makes up two-thirds of production costs, so any upsurge in those costs is a red flag to businesses. The higher hours worked is also a sign that demand for their goods and services is picking up.

Productivity is up largely due to a 3.7 percent rebound in nonfarm business output after a 1.6 percent rise in the second quarter, as demand for their products and services grew. Also, hours worked continued to grow at a 1.4 percent increase from 3.5 percent in the second quarter. Compensation rose an annualized 2.2 percent after a 2.9 percent boost the quarter before.

ADP employment services, a payroll processor for private businesses, estimates November private payrolls rose by 93,000 vs. a rise of 82,000 in October (revised from plus 43,000). It tends to closely mirror the Labor Department’s November’s nonfarm private payrolls unemployment report, since it represents roughly 500,000 U.S. business clients. During the twelve month period through June 2010, this subset averaged over 340,000 U.S. business clients and over 21 million U.S. employees working in all private industrial sectors, says ADP.


Challenger's count of layoff announcements totaled 48,711 in November, up from October's 37,986. Announcements were up in the government/non-profit sector as well as consumer products and pharmaceuticals. Retail and computers showed a dip in layoffs.


And initial weekly claims for unemployment insurance, the best forward looking indicator of job losses, has been falling sharply of late. Initial claims fell 34,000 in the November 20 week to a far lower-than-expected level of 407,000 (prior week revised slightly higher to 441,000). The four-week average is down 7,500 to 436,000 for a nearly 20,000 improvement in the month-ago comparison.


More good hiring news came from the Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity. New orders came in at 56.6, indicating solid month-to-month growth that's only slightly slower than October's very strong growth of 58.9. The pace of production slowed noticeably but, at 55.0, is still strong though less strong than the prior month's 62.7. And ISM's survey shows businesses are continuing to add employees. The 57.5 index level for employment is very strong for this reading, says Econoday.

We have to remember, though, that all this depends on a continuing demand for goods and services, which in turn needs readily available credit. Banks are only now beginning to lend again to small businesses, as various small business sentiment surveys indicate. Such optimism must continue to grow for the hiring to continue.

Harlan Green © 2010