May 12, 2008
Productivity rises due to decline in hours worked.
A Department of Labor report showed that productivity, as measured by output per hour of all persons, increased at a seasonally adjusted annual rate of 2.2 percent in the first quarter of 2008. The increase exceeded market expectations and was slightly up from last quarter’s rate of 1.8 percent. However, productivity gains in the first quarter largely reflected a drop in the number of hours worked. Businesses cut back on hours by 1.8 percent and increased output only 0.4 percent. Strikingly, the manufacturing sector increased productivity at a 4.1 percent annual rate, but both output and hours worked declined as factories responded to the bleaker market outlook. In fact, total nonfarm productivity gains over the past year have been due in large part to businesses scaling back hours, which while good for companies’ bottom line poses troubles for the labor market. (See Chart)
Trade deficit declines as both imports and exports fall.
The Census Bureau and the Bureau of Economic Analysis reported that the U.S. trade deficit in goods and services narrowed in March, decreasing from a revised February estimate of $61.7 billion down to $58.2 billion. The monthly change largely reflected a decrease in net imports of goods while net exports declined (trade in services remained virtually unchanged). Though the declining value of the dollar has helped to increase the attractiveness of American exports, this month’s report shows that the shrinking trade deficit value reflected more the declining U.S. demand for imports, such as automotive products, industrial supplies and consumer goods rather than an increase in U.S. exports. While some may applaud the recent readjustment in the U.S. trade balance, declining import demand hints at broader weakness underlying U.S. market fundamentals.
When the Commerce Department released first quarter GDP estimates last week -- showing growth of 0.6 percent at a seasonally adjusted annual rate – the general reaction was “it could have been worse”. Unfortunately, there are several signals that overall economic performance may be deteriorating in ways not captured by the quarterly GDP number.
Although the quarterly growth figure was positive, there is an indication that GDP was declining by the end of the first quarter. Although Commerce only provides quarterly GDP estimates, monthly estimates are made by Macroeconomic Advisers, a private forecasting firm. Their data show that the annual rate of GDP in December 2007 was at $11,701 billion, increased to $11,777 in January, but declined in March to $11,686. The total decline over two months is about $100 billion, a record since the survey began in 1992.
The behavior of real disposable personal income (DPI), which is an important determinant of household consumption, exhibited a pattern similar to that of GDP. Although real DPI rose 1.4 percent between the last quarter of 2007 and the first quarter of 2008, real DPI did not grow between February and March.
And of course total nonfarm payroll employment has continued to fall throughout 2008. Since December 2007 employment has been reduced by 260,000 jobs. Moreover, the hours worked by those who are employed have declined. In the first quarter of 2008, hours worked in nonfarm business employees fell by 1.8 percent. This decrease in hours worked is the largest decline since the first quarter of 2003.
There are also signs of a continuing credit squeeze, which will constrain future economic activity. Results from the April Senior Loan Officers Survey, which is conducted quarterly by the Board of Governors of the Federal Reserve, indicate that many U.S. banks continued to tighten lending standards in the first quarter of 2008. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey. Lending standards for commercial and industrial loans to large and middle-market firms were tightened by about 55 percent of banks, up from about 30 percent in the January survey. (See Snapshot) About 70 percent of banks raised credit spreads above the bank cost of funds, up from 45 percent in January.
Unsurprisingly, given accelerating housing price declines and rising foreclosure rates, terms for bank-provided residential mortgage credit also tightened. About 60 percent of respondents raised standards for prime mortgages, up slightly from January.
These employment, credit, and output data suggest that the fiscal stimulus package, which is just now being implemented through tax rebate checks sent to households, may not be enough to help jumpstart the economy and the Administration needs to work with Congress to consider enacting a second stimulus package.
Tuesday, May 13 | Advance Monthly Sales Report and Food services (April 2008) | ||||||
Import and Export Prices (April 2008) | |||||||
Business Inventories (March 2008) | |||||||
Wednesday, May 14 | JEC Hearing - Is the Credit Crisis Over and What Can the | ||||||
Federal Government Do to Prevent Unnecessary | |||||||
Systemic Risk in the Future?” with Former Fed Chairman Paul A. | |||||||
Volcker, 216 Hart Senate Office Building, 9:30 a.m. | |||||||
Consumer Price Index (April 2008) | |||||||
Thursday, May 15 | Industrial Production and Capacity Utilization (April 2008) | ||||||
Housing Starts and Building Permits (April 2008) |
Apr | Mar | Feb | Jan | Q1 2008 | Q4 2007 | Q3 2007 | Q2 2007 | 2007 | 2006 | 2005 | |
Economic Activity | |||||||||||
Real GDP (% growth) | 0.6 | 0.6 | 4.9 | 3.8 | 2.2 | 2.9 | 3.1 | ||||
Unemployment (% of Labor Force) | 5.0 | 5.1 | 4.8 | 4.9 | 4.9 | 4.8 | 4.7 | 4.5 | 4.6 | 4.6 | 5.1 |
Labor Productivity Growth (%) | 2.2 | 1.8 | 6.0 | 2.7 | 1.8 | 1.0 | 1.9 | ||||
Labor Compensation Growth (%) | 3.0 | 3.4 | 3.1 | 3.5 | 3.4 | 3.1 | 3.3 | ||||
CPI-U Inflation Growth (%) | n.a. | 3.7 | 0.0 | 4.9 | 4.3 | 5.0 | 2.8 | 4.6 | 2.9 | 3.2 | 3.4 |
Core CPI-U Inflation Growth (%) | n.a. | 2.4 | 0.0 | 3.7 | 2.5 | 2.5 | 2.5 | 2.0 | 2.3 | 2.5 | 2.2 |