Monday, January 7, 2008



Friday’s employment report reinforced the perception that the economy is waning: Job growth slowed to 18,000 from 115,000 and the unemployment rate rose to 5.0% from 4.7%. Goods-producing sectors, such as manufacturing and construction, lost 75,000 jobs while service sectors, such as education and health, grew by 93,000.

This continues the struggle between the goods-producing and service sectors. The former have contracted while the latter have grown. Those who forecast recession believe the goods-producing losses will eventually overwhelm the service-sectors’ gains, and the overall economy will begin losing jobs. As you can see from the chart below, we’re almost there now.

Job Growth

(Click on chart to enlarge)

Recessions shaded

There is always noise in the data – random monthly swings from the trend line. But the trend is definitely downward. If it continues, we will be in negative territory soon.

The employment pessimism stems from the manufacturing and residential-construction malaise. The Institute for Supply Management reported that its manufacturing index fell to 47.7% in December: Examine the chart below to place that figure in perspective.

Purchasing Managers’ Index

(Click on chart to enlarge)

Recessions shaded

Once again, the trend is clear: The index is falling, and any figure below 50 is evidence of contraction.

The residential-construction slump is responsible for manufacturing’s drop. The building slowdown affects a host of manufacturing industries: Lumber and building materials; heating, cooling, kitchen and laundry equipment, and furniture and furnishings. The news here is grim, and keeps getting grimmer.

The Census Bureau recently announced 647,000 new homes sold in November: Compare that to the trend in the chart below.

New Home Sales

(Click on chart to enlarge)

Recessions shaded

There are two observations that leap out at the viewer. First, new-home sales have fallen by half and keep on shrinking. Manufacturing and overall employment will continue to deteriorate as long as new-home sales maintain their downward trend. Second, the enormity of the 1995-2005 boom is apparent: and raises this question: Are we over built? If we are, then the upcoming slump could last for some time. An excess inventory of new homes could depress building for a while, keeping manufacturing and employment in the doldrums.

(The charts were taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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