We know the fourth quarter was bad. Now the data will start to give us an idea of how the first quarter is shaping up. The current betting among economists is: not well. This week offers the first round of major January indicators that will set the tone for what to expect. The Institute for Supply Management’s reports on both manufacturing and nonmanufacturing activity will be key benchmarks, but the Labor Dept.’s employment report is sure to attract the most attention.
The recent acceleration in job losses goes hand-in-hand with the sharp cutbacks companies are making in their capital spending and inventories. Those cuts are shaping up to be major drags on growth in the first half. Further significant inventory reductions will lead to more cutbacks in production and payrolls, especially in manufacturing. Ratios of inventories to sales spiked higher across the board through yearend 2008, with sharp increases from retailers to wholesalers to factories.
One feature of this recession is the severity of the job losses among service-sector companies, which account for more than 80% of private-sector payrolls. Manufacturing and construction jobs always suffer large declines in a recession, but so far those losses are still on a pace with those in past severe downturns. What’s different this time: In the second half of last year, private-sector service payrolls fell at a pace greater than at any time during the severe recessions in 1973-75 and 1981-82. That’s a big reason why payroll losses have been so large in recent months.
January is unlikely to bring any let-up. Job losses averaged more than 500,000 per month during the fourth quarter, and the return to a very high level of initial unemployment claims—555,000 per week through Jan 24—suggest another drop of that size. Moreover, the unemployment rate for insured workers continues to rise, hitting 3.6% in the last week, up from 3.4% in previous weeks. The jump suggests another big increase in the overall unemployment rate, which spiked to 7.2% in December from 6.8% in November.
The steep increase in joblessness over the past year, from 4.9% in December 2007, is raising important questions about just how high the jobless rate will go. Right now, economists are generally betting on a peak rate of about 8.25% to 8.5%. That’s based on an expected 3% or so peak-to-trough drop in real GDP. The concern is that a rate significantly higher than that would fuel conditions for deflation, or a broad decline in prices beyond the downdraft on inflation from falling energy prices.
The fear is that excessive slack in the labor markets could create a self-reinforcing downward spiral between wages and prices. Right now, that’s a small risk—but one that is on the Federal Reserve's radar. After its Jan. 27-28 meeting, the Fed said it saw “some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”
One thing seems certain. As the January employment report is expected to show, the labor markets are sure to get significantly worse before they get better.
Here’s the weekly economic calendar:
|Top Reports||Date||Time||For||Median Estimate||Last Period|
|Personal Income||Monday, Feb. 2||8:30 a.m.||December||-0.2%||-0.2%|
|Personal Consumption Expenditures||Monday, Feb. 2||8:30 a.m.||December||-0.8%||-0.6%|
|ISM Index (Manufacturing)||Monday, Feb. 2||10:00 a.m.||January||32.5||32.9|
|Construction Spending||Monday, Feb. 2||10:00 a.m.||December||-0.9%||-0.6%|
|Domestic Auto Sales (Millions)||Tuesday, Feb. 3||afternoon||January||3.5||3.6|
|Domestic Light Truck Sales (Millions)||Tuesday, Feb. 3||afternoon||January||4.1||4.1|
|ISM Index (Nonmanufacturing)||Wednesday, Feb. 4||10:00 a.m.||January||39.5||40.1|
|Nonfarm Productivity (Preliminary)||Thursday, Feb. 5||8:30 a.m.||Q4||0.5%||1.3%|
|Unit Labor Costs (Preliminary)||Thursday, Feb. 5||8:30 a.m.||Q4||3.3%||2.8%|
|Factory Orders||Thursday, Feb. 5||10:00 a.m.||December||-2.3%||-4.6%|
|Nonfarm Payrolls (Thousands)||Friday, Feb. 6||8:30 a.m.||January||-500||-524|
|Manufacturing Payrolls (Thousands)||Friday, Feb. 6||8:30 a.m.||January||-118||-149|
|Unemployment Rate||Friday, Feb. 6||8:30 a.m.||January||7.4%||7.2%|
|Average Hourly Earnings||Friday, Feb. 6||8:30 a.m.||January||0.2%||0.3%|
|Average Weekly Hours Worked||Friday, Feb. 6||8:30 a.m.||January||33.3||33.3|
|Consumer Credit ($Billions)||Friday, Feb. 6||3:00 p.m.||December||-$2.3||-$7.9|
|ICSC-UBS Store Sales||Tuesday, Feb. 3||7:45 a.m.||Jan. 25-31|
|Johnson Redbook Weekly Store Sales||Tuesday, Feb. 3||8:55 a.m.||Jan. 25-31|
|Pending Home Sales||Tuesday, Feb. 3||10:00 a.m.||December|
|Housing Vacancies||Tuesday, Feb. 3||10:00 a.m.||Q4|
|Mortgage Applications||Wednesday, Feb. 4||7:00 a.m.||Jan. 25-31|
|Initial Unemployment Claims||Thursday, Feb. 5||8:30 a.m.||Jan. 25-31|
|SPEECH: Philadelphia Fed President Plosser||Thursday, Feb. 5||8:30 a.m.|
|SPEECH: St. Louis Fed President Bullard||Thursday, Feb. 5||1:00 p.m.|
|SPEECH: San Francisco Fed President Yellen||Friday, Feb. 6||5:45 p.m.|