Schunk presents July labor analysis
Highlights from July 2009 data:
South Carolina's unemployment rate dipped to 11.8% in July from 12.1% in June. This decline in unemployment in South Carolina during July is consistent with the national dip from 9.5% to 9.4% in July. While I would prefer to view this as a positive for the state's economy, the underlying data suggest ongoing problems.
Between June and July, the size of the state's labor force declined by roughly 9,800, while the number of officially unemployed individuals dropped by about 7,700. Together, this translates into a 2,100 drop in the number of employed South Carolinians. The drop in the unemployment rate was driven by individuals leaving the labor force, likely due to their inability to find work after perhaps a long period of job search. These discouraged workers drive the official unemployment rate down, while broader measures of unemployment that include these discouraged workers will remain high.
Total employment in South Carolina is down 4.0% over the last 12 months. The total job count across the state was down 77,300 between July 2008 and July 2009. Earlier this year, the 12-month pace of decline was in excess of 4.5%. The recent trends are entirely consistent with an economy that has likely already seen the worst in terms of the overall pace of decline. From this point forward, the year-over-year job losses should continue to shrink. However, for the unemployment rate to post a sustained drop, we need to see not just shrinking job losses, but actual sustained positive job growth.
On a broad level, it appears that the national recession is winding down and may end during the current quarter. In addition to the many unprecedented aspects of this recession, there are also some relatively standard dynamics at work. In particular, the U.S. economy is in the midst of a large, but fairly typical, inventory correction. Over the past several quarters, U.S. businesses have pulled back on production while substantially reducing inventories. Now that business inventories have been drawn down, there will be some increase in production necessary to meet even the current reduced level of demand. Recent regional manufacturing surveys, including the Philadelphia Fed index and the Empire State Manufacturing Survey, are revealing this improvement in production.
In addition, the cash-for-clunkers program -- which has been successful in one specific sense, namely that it has spurred new car purchases -- is also leading to a pickup in auto production. (In other ways, however, the cash-for-clunkers program raises real concerns: Should we really be destroying potentially productive assets? Should we incentivize consumers to incur new debt to finance a new car purchase when the "clunker" is likely already paid off? What will happen to sales and production as the program draws to a close next week?)
These factors -- somewhat technical and perhaps temporary in nature -- will likely lead to positive readings on real GDP in the coming quarters. However, the strength of the coming recovery remains highly suspect. A swing in inventories, increased auto purchases, and ramped up auto production may cause the statistics to move from negative to positive, but the strengths of the positives will be determined by the viability of consumer spending.
The headwinds affecting consumer spending are not fading. We continue to see job losses, weak income growth, and a general trend toward more saving and less debt. U.S. retail sales were fairly weak in July. While auto sales saw a boost, core spending outside of autos was generally negative. A report this week from the Mortgage Bankers Association shows that mortgage delinquencies and foreclosures rose during the second quarter and remain at historically high levels. Perhaps the most disturbing trend in that report was the sharp increase in delinquencies coming from prime borrowers. It is not just a sub-prime problem. Rather, ongoing job losses are causing more prime borrowers to fall behind on payments. These conditions will further constrain consumer spending and overall economic growth.
Overall, I continue to expect that the pace of growth during the coming recovery will be insufficient to generate strong job growth and lower unemployment. While the headline drop in the state's jobless rate in July appears positive, it also points to further increases down the road as discouraged workers choose to re-enter the labor force. In the absence of sufficient job growth, this will drive the unemployment rate higher again.
For additional information, contact: Don Schunk, Research Economist, firstname.lastname@example.org , 843-655-0995 or 843-349-2485.