National Job Gains Stall, Household Net Worth Rises

The first half of 2012 has taken on an eerily similar look to 2011, and while that may be good in some instances, it’s certainly not when analyzing comparatives from an economic standpoint.

There had been initial positive hope that the national recovery was kicking into high gear, but recent figures for May have subsequently dashed those earlier projections. The sharp warm-weather-inflated job gains at the turn of the year have not been sustained. Job gains in the three months to February averaged a decent 252,000. But in the three months to May, they averaged a mere 96,000.

The 422,000 jobs added in the household survey looks like good news, as is the return of 642,000 to the labor force – even though that did drive the unemployment rate up to 8.2 per cent from 8.1 per cent. But the household survey is volatile. Over the last three months, the average employment gain in the household survey was just 74,000, worse than the payroll survey.

The latest figures from the Labor Department cast doubt on whether the economy has enough momentum to achieve even the 2.2 per cent growth rate anticipated for this year. Getting an accurate reading on all sectors can be somewhat skewed given the seasonal sensitive sectors such as construction where some months employment levels will be notably higher than others. With the seemingly never-ending uncertainties with several nations dealing with the Eurozone crisis and the upcoming fall federal election, it’s not a big surprise to see some businesses going into hibernation when it comes to staffing expansion.

It’s expected that the Federal Reserve may attempt to keep pumping in stimulus incentives in the second half of the year, but what those are remain unclear. It’s quite possible those at the Fed don’t yet have a definitive answer.

The flat jobs report will only fan the flames for those who’ve warned the economy has stalled for some time now. There are also those who believe it could also damage President Barack Obama’s re-election. Many economists believe the Federal Reserve will almost assuredly be forced to take further action in an effort to help kick-start the lagging economy. But with rates already at historic lows, it seems uncertain as to how much more can actually be done from that perspective.

Adding to the doom and gloom, the federal Labor Department confirmed the national economy created far fewer jobs in the previous two months than first thought. The revised figures reveal that 49,000 fewer jobs were created than initially reported. The unemployment rate rose for the first time in 11 months, edging up to 8.2 percent from 8.1.

The ripple effect of the economic news also hit commodities, where the price of gold immediately shot up by about $30 with investors once again looking to gold as a safe haven to place their money and investments during volatile economic times such as these.

Josh Feinman, global chief economist with DB Advisors, said the report raises the distinct possibility that the Federal Reserve will do more. It’s unclear what, if anything, can be done but another round of bond purchases may be one option.

The slowdown in the economy comes when the global economy is mired in the doldrums and looking for some positive news – from anywhere. Europe’s financial crisis is still making headlines around the world with countries such as Greece, Spain and Italy all on the verge of economic collapse while others are not that far behind. In fact, almost half the 17 countries in the Eurozone are in an economic recession. Even China, the world’s second-largest economy, is also showing signs of weakness where the manufacturing sector is decelerating due to a lack of demand for its products from North America, Europe and Asia.

Mitt Romney, Obama’s Republican challenger, has made the economy the central theme of his campaign. No president since the Great Depression has sought re-election with unemployment as high as 8.2 percent, and past incumbents have lost when the unemployment rate was on the rise so history is working against the current administration and time is running out to have it turned around.

Construction firms cut 28,000 jobs, the steepest drop in two years. Professional services, government, hotels, restaurants and other leisure industries also lost jobs. But not all industries cut jobs. Manufacturers added 12,000 jobs. Transportation and warehousing created nearly 36,000. Education and health care added 46,000.

Consumer Spending

Meanwhile, consumer spending adjusted for inflation rose 0.3 per cent in April. Looking into the details, however, shows a somewhat less optimistic picture, according to Gregory Daco, principal economist at IHS Global Insight. About 40 per cent of the total increase came from a strong jump in spending on household utilities. Most notably, spending on natural gas came up (15.4 per cent) from extremely low levels (due to a warm winter) to more normal levels in April. Meanwhile, spending on recreational and food and accommodation services was down for the month. Automotive sales continued to press forward providing some offset.

Personal income rose 0.2 per cent in April despite a payroll gain of only 77,000 jobs for the fourth month of the year. Wages and salaries made up most of the increase. If there has been any good news, it’s that oil prices have provided a bit of a relief at the gas pumps, but how long that will last remains unknown.

Consumption of goods and services has been growing at a steadier pace than income, prompting many Americans to dip into their savings or rely more heavily on credit card purchases.

“The April saving rate once again hit 3.4 per cent (similar to March), a record low since December 2007, Daco notes. “Needless to say that this pattern of spending financed through savings is not sustainable.”

Household Net Worth Moves Up

While it seems there has been no shortage of negative economic news of late, one bright spot is that household net worth increased by $2.8 trillion (4.7%) quarter-over-quarter in the first three months, which represents a 4.7 per cent increase.  Household assets grew by just under $2.8 trillion while liabilities fell by $48 billion, according to figures released by IHS Global Insight.

According to IHS Director of Financial Economics, Paul Edelstein, holdings of financial assets were driven higher by the equity bull market rally last quarter, which lead to a $1.47 trillion (11.3 per cent) increase in direct equity holdings and mutual fund shares.

“It was about what I expected,” Edelstein confirms to ABJ. “The stock market did really well in the first quarter and we knew that home prices were up a bit as well. We did expect an increase in assets in the order of 1.5 to 1.7 per cent.”

Looking at the liability side of the balance sheet, $286 billion less mortgage credit was borrowed, with $144 billion borrowed in non-mortgage consumer credit (primarily auto loans and student loans), but the value of these liabilities on the household balance sheet nonetheless contracted by $13.7 billion.

“It’s more or less in line with what we’ve been seeing the past few years – negative flows from that sector,” Edelstein continues.

“The housing market hasn’t turned yet. Until then, we aren’t going to see major pickups in mortgage credit growth. We’ve more or less bottomed out, but it will likely remain there for a while. Growth overall in the economy is going to have to come from other sources.”

The boost to household wealth is coming mostly from gains in financial assets, which would be a concern if that trend were to continue. It’s been caused by upswings in equity markets, which have boosted household investments in equities and mutual fund shares. So where would the gains ideally be coming from?

“It could include such things as mortgages, treasury bonds, corporate bonds or lines of credit,” Edelstein advises. “Partly financial assets, partly real estate and retained earnings – retained income,” Edelstein says. “We’d like to see more cash holdings, things of that nature.”

The advancement in real estate asset values and the small increase in bank deposits are positive signs because they indicate that households are a bit less dependent on volatile equity markets for wealth generation. More diversification in household balance sheet portfolios, however, is needed.

At the moment what we’re seeing is that household wealth is swinging up and down with the stock market. Healthier household balance sheets are one of the few positive consumer fundamentals.

“It would be good to start seeing household balance sheets less dependent on the upswings in the stock market, deriving wealth from other sources,” Edelstein notes. “They did get a boost from the real estate side and I’d like to see more of that.”

General Outlook

More positive news is that despite a lot of international turmoil, the U.S. economy has been exceptionally resilient.

“Our economy is slowly and steadily growing,” he continues. “It bottomed several years ago and is climbing. It’s just very slow and unsatisfying. It’s not a smooth linear climb, such as two steps forward, one step back. That’s going to be the case for a while.”

Of course many of those international economies that have been faltering badly are fairly large sized economies in Europe, and thus the greater concern.
“Europe is the biggest risk factor we’re facing right now,” Edelstein opines. “It really all depends on the Eurozone policy response.”

In other words, if policy makers can figure out a way to backstop not Greece’s debt but bigger economic countries such as Spain, Italy, Portugal and Ireland, then it could prevent an even larger and deeper credit crisis that would infect the U.S.

“At the moment, the fallout is limited primarily to our export markets” Edelstein advises. “We only export maybe 2.5 per cent of our GDP to the Eurozone, so we’re not heavily exposed in terms of our exports.”

If the Eurozone holds together and the financial markets don’t collapse, and it’s a matter of the Eurozone being in recession for several quarters then the damage to the U.S. is going to be limited. It’s something everyone is watching very closely.

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