GDP Will Recover, But What About Jobs?

It is almost a foregone conclusion that the technical end to the recession is near and GDP will soon return to positive growth. However the real question is when job losses will turn into job creation. James Picerno from The Capital Spectator discusses why the path to recovery will be long and we are just at the beginning of the journey.

The recession continues to take its toll on the American consumer, new government data released today advises. Disposable personal income dropped a hefty 1.3% in June, reports the Bureau of Economic Analysis. On the other hand, consumer spending rose 0.4% in June. Alas, the pop in Joe Sixpack's willingness to spend is less than it appears.

But first, a closer look at the fall in personal income. One reason for the retreat was the fading of the one-time government stimulus checks (American Recovery and Reinvestment Act of 2009) sent in May. In fact, the loss wasn't nearly as steep once you ignore the government stimulus factor for the last two months. Excluding the checks from Uncle Sam reveals a far more modest 0.1% drop in personal income for June vs. the month before.

More troubling, however, is the ongoing decline in wages and salaries, which fell again in June vs. May by 0.4%. Indeed, it's been falling nonstop since last November. Therein is the frontline attack on the economic outlook. Ok, we all know that the labor market is critical for economic growth. Why, then, is consumer spending up 0.4% for June? One reason is that spending on gasoline rose for the month, thanks to a generally ascending price for fuel. Indeed, consumer spending on energy goods and services jumped a dramatic 8.3% in June, vs. just 0.2% for May, BEA advises in today's update.

But let's be optimistic and recognize that the deepest contraction in the business cycle since the 1930s is easing. There's a strong case for arguing that the technical end of the recession is near, if it hasn't already arrived. But the great question continues to be one of identifying more durable signs of growth, and the jury's still out on that treasure hunt. The end of the recession and the start of a rebound, as the crowd will discover, aren't synonymous this time.

Nonetheless, Ed Yardeni of Yardeni Research advises clients in a note yesterday:

If nothing changes during Q3, real GDP will be up 4.6% during the quarter. This isn’t our forecast. It is arithmetic. If there is no change in final sales to consumers, business, governments, and foreigners, and if nonfarm inventories are unchanged, that’s how much real GDP will increase. This is because nonfarm inventory investment was minus $144.4bn (saar) during Q2. If it is zero during the current quarter, real GDP will surge. The inventory investments component of real GDP has been negative for five consecutive quarters, the longest stretch since Q1-2001 through Q1-2002.

Yes, indeed, but the more pressing issue is not whether GDP will post a rise in the next quarter; rather, the great unknown is the labor market.

“We’ll see a weak economic recovery by past standards,” James O’Sullivan, an economist at UBS Securities, tells Bloomberg News. “For a sustained pickup in consumer spending, we need a clear-cut improvement in the labor market.”

Alas, the only clues to date are that the trend in jobs destruction is slowing, which no one will confuse with job creation.

Rest assured, the recovery will come. In fact, from an economist's perspective, the numbers in the second half of this year are likely to inspire. The deepest fears of six-to-nine months ago are proving to be exaggerated. So it goes in economic forecasting. But it's going to take a lot more a slowing contraction to convince Joe to start making fresh runs down to the local mall to pick up an extra wide screen television.

Yes, we've come a long way since last autumn, although in some ways—arguably in the most crucial ways—the journey has only just begun.

This article has been republished from James Picerno's blog, The Capital Spectator.