Employment situation worse than expected
Nonfarm payroll employment declined 113,000 in August after an upwardly revised gain of 13,000 in July. This was the third drop in five months. The three-month moving average of nonfarm payrolls has been below zero for four straight months. Payroll figures for 2001 are a far cry from the strong gains posted in the late 1990s. Rather than getting better, the situation is getting worse. The bulk of the declines are concentrated in the goods-producing sector with a whopping 141,000 drop in factory payrolls. Construction employment managed a slight uptick in both July and August. But the service-producing sector is showing weakness. Retail trade and transportation payrolls declined in August, depressing the overall gain for the service-producing sector. Not only are payrolls diminishing, but employees are also working fewer hours. The average workweek stands at 34.1 hours, a low for this cycle.

The civilian unemployment rate jumped to 4.9 percent in August from 4.5 percent in July. Nearly one million workers lost their jobs as measured by the household employment survey. Even though employment figures are adjusted for seasonal variation, these data tend to get out-of-whack in summer months. In any case, the household employment data has for many months shown greater employment weakness than nonfarm payrolls.

Average hourly earnings rose 0.3 percent in August, roughly in line with the average of the past several months. This put the year-over-year gain at 4.2 percent, a bit better than the two previous months but again in line with the trend of the past year.

On the whole the employment situation appears to show that the economy is deteriorating rather than bottoming out, helping to firm the consensus that the Fed will once again lower rates at the next FOMC meeting in early October.

NAPM Surveys
The non-manufacturing NAPM business activity index declined in August to 45.5 percent from a level of 48.9 percent in July. Notice that this index has hovered near 50 percent since the beginning of the year, but has been below the growth mark more often than not. Remember that any level below 50 percent signals declining activity rather than economic growth. The non-manufacturing NAPM has a shorter history than the regular NAPM survey for manufacturing so it doesn't have the same credibility. Nevertheless, equity investors did not view the report kindly.

The diffusion index for the manufacturing NAPM survey actually showed improvement in August - notice the index jumped to 47.9 percent during the month from a level of 43.6 percent in July. The chart above does show an improving trend in the manufacturing sector from the lows posted at the beginning of the year. But again, it is important to keep in mind that a level below 50 percent signals decline. So an increase in the index only means that manufacturing activity was falling at a slower pace.

Residential outpaces nonresidential sector
Construction expenditures edged down 0.1 percent in July after posting a 1 percent drop in June. Despite the downtick, total construction spending was up 8.5 percent from year ago levels. In July, residential investment spending decreased 0.7 percent, while nonresidential investment spending rose 0.7 percent. On a year-over-year basis, the trend is quite different as residential investment is up 6.7 percent, but nonresidential investment is down 1.5 percent.

Declining mortgage rates have spurred housing activity lately, but commercial building doesn't react in the same way to lower interest rates since profits also matter when making investments in office buildings and factories & plants. Some analysts have suggested that some overbuilding may have occurred in the commercial sector where vacancy rates are rising. This could lead to more declines in investment spending in the nonresidential sector in the next few months.

Car sales trending lower, but trucks stable
Total motor vehicle sales fell to a 13.2 million-unit rate in August from a 13.4 million-unit rate in July. Notice the dramatic decline in car sales over the past several months. Truck sales are down a bit from lofty levels seen in 2000, but are still relatively healthy. Typically prices of light trucks (SUVs and minivans included here) tend to be higher than most cars; auto manufacturers should be relieved to some extent that higher-margin vehicles are still selling. Of course, auto manufacturers are offering rebates on both cars and trucks, depending on the make of the vehicle.

Based on the chart below, it doesn't appear that rising gasoline prices have had much impact on purchases of light truck gas-guzzlers over the past two years. The chart below compares the percentage of trucks sold relative to total motor vehicles and the price of unleaded gas. While higher gas prices may not impact current owners of gas-guzzlers, one would expect new truck sales to fall off with rising gas prices. Nevertheless, the majority of vehicles on the road now appear to be light trucks rather than cars.

Many analysts like to monitor consumer confidence measures to gauge consumer sentiment. We've found that motor vehicle sales do a better job of showing consumer optimism. After all, actual purchases of large-ticket items are more revealing than a simple survey. Auto sales are down; truck sales are not. The combined total shows that motor vehicle sales have hovered in the same range since last October. Perhaps consumers aren't entirely pessimistic about economic conditions after all.

Productivity growth revised down modestly
Nonfarm business productivity grew at a 2.1 percent rate in the second quarter after inching up at a 0.1 percent rate in the first quarter of the year. On a year-over-year basis, nonfarm productivity has exhibited a downward trend and is only 1.5 percent higher than a year ago. The lower productivity figures are not unexpected given the sluggish pace of GDP growth over the past three quarters. At the same time, unit labor costs have accelerated over the year, up 4.9 percent compared with a year ago. Higher labor costs reduce corporate profit margins.