Economy rolls along dragged down by unemployment, real-estate and inflation

Recent evidence suggests the economy is still growing since the 2nd quarter GDP was released as a 3.3% gain. But real estate continues to deteriorate, the unemployment rate hit a 5-year high and inflation has been soaring.

Yesterday, the Commerce Department released its wholesale inventories report. They said that inventories climbed 1.4% after increasing by a downwardly revised 0.9% in June. The overall ratio of inventories to sales edged up but sales of non-durables (e.g., crude oil and gasoline) declined by 0.7% while durable goods orders increased by 0.2% in July after rising 1.6% in June. But the durable goods component would have been even better if not for autos: Car inventories rose 2.3% while auto sales declined 1.4%. Petroleum sales have crashed 5.9% since January 2007.

Pending home sales (i.e., sale contracts signed) resumed falling, dropping 3.2% in July after rising 5.8% in June.

The Labor Department said on September 5th that 84,000 payroll jobs were lost in August representing the eighth straight monthly reduction in jobs. Job losses in June and July were revised downwards. July's job losses were severely revised downwards to 100,000 from an original estimate of only 51,000. Separately, their household survey reported a 6.1% unemployment rate.

Inflation is a world-wide problem due, at least in part, because of U.S. economic strength and a wide array of important products (e.g., crude oil) priced in U.S. Dollars. Today, Japanese wholesale prices were said to have risen 7.2% in August - remaining near a 27-year high. Back in the U.S., inflation that is caused by the weak dollar has ameliorated somewhat as the dollar has strengthened since mid July. But nothing is being done to stop rampant food cost inflation due to the mandated use of corn-based ethanol in gasoline.

Confusion in 4 sources of employment data

There are four sources of employment data: ADP provides a snapshot of how many jobs it thinks have been added or lost in the U.S. economy based on their managing roughly 1/6 of all non-government payroll jobs. Last Thursday ADP reported an increase of 40,000 jobs in May. So far, good strength in the labor market.

The U.S. Labor Department reports once a month on jobs based on their "household survey" and their "payroll survey". The "household survey" reports gained or lost jobs by calling families (some 70,000). This picks up people who have jobs but are not in the payroll system (they pay estimated taxes - or they're tax cheats) and is responsible for the unemployment rate which increased for May from 5% to 5.5% Score one for a weak job market. But why didn't these people who lost their jobs apply for unemployment insurance (more about that below)?

The Labor Department "payroll survey" reported a loss of 60,000 jobs during May. The Labor Department calls the biggest 300,000 companies for their survey. How could their survey and the ADP survey both be correct at the same time? But, again, why didn't these people who lost their jobs apply for unemployment.

How do I know that most of them didn't apply for unemployment insurance? Because the Labor Department also produces a weekly report of new unemployment claims. According to these reports, new unemployment claims have fallen for 3 out of the last 4 weeks. In the most recent report new claims were 357,000 from a revised 375,000 the previous week. If lots of folks were losing their jobs I think most of them (except for those who aren't in the payroll system) would end up collecting unemployment checks.

Adding all of this up: the evidence points to a moderately strong labor market. I think we have to discount the "household survey" because it is known to be volatile at this time of year due to an influx of college kids into the job market. As to the "payroll survey" - the only way this loss of jobs makes sense in accordance with no increase in unemployment claims (and ADP's report of an increase in jobs) is if the people who lost jobs were able to get new ones in companies that were not part of the government's survey. ADP must have a much wider cross section of the U.S. economy.