Jobless rate jumps; payrolls plunge
The civilian unemployment rate jumped 0.5 percentage points in October to 5.4 percent, its highest level since December 1996. The labor force increased modestly in October, but the number of employed declined 619,000 - reversing a good chunk of the September gain. The pool of available workers is also starting to pick up steam. Remember that Greenspan & Company had been worried about labor supply until a year ago or so. That certainly is not an issue now. The unemployment rate is considered a lagging indicator of economic activity, but it carries a lot of political weight.

Nonfarm payroll employment plummeted 415,000 in October after a downward revised drop of 213,000 in September. Beginning with April's drop, payrolls have declined in five of seven months. In October, declines were widespread across industries although the bulk of the weakness remained concentrated in manufacturing where payrolls have posted year-over-year declines for three years now! Among service-producing industries, temporary workers took the biggest hit (-122,000), followed by eating and drinking places (-81,000), and transportation & public utilities (-55,000).

Not only did payrolls post a significant drop during the month, but the average workweek was also off. The private workweek was reduced by 6 minutes to 34 hours in October; the factory workweek declined by 12 minutes to 40.4 hours. This means that total hours worked in the economy decreased dramatically - and this will play a role in dampening real GDP in the fourth quarter.

GDP declines, first step toward recession
Real GDP decreased at a 0.4 percent annual rate, the first drop since 1993 and the largest drop since 1991, yet still surprisingly mild. Economists were generally expecting a drop closer to 1 percent. It is worth noting, though, that the advance GDP figures are not complete and the Commerce Department does need to estimate various components including inventories and net exports. But regardless of the magnitude of the drop, it is the first step towards recession. While the official arbiter of business cycles, National Bureau of Economic Research, determines recessions by a wide swath of indicators, the rule of thumb followed in the market place is that two consecutive declines in real GDP means recession. Some economists are predicting fourth quarter declines in real GDP as large as 3 percent. The October employment report alone corroborates such a large decline.

In the third quarter, personal consumption expenditures moderated significantly as did residential investment, but both still showed positive growth. The net export deficit narrowed, which had the effect of adding to GDP growth. The largest weakness came from a plunge in business fixed investment with sharp declines in equipment & software as well as nonresidential structures. Businesses continued to liquidate inventories at a rapid rate. The good news about the inventory liquidation is that real final sales growth has exceeded real GDP growth for five straight quarters. This suggests that as soon as demand picks up, production will increase because the inventory correction may be nearly over.

Manufacturing in the dumps
The NAPM survey, which managed to hold its own in September, plunged to 39.8 in October showing a deepening recession in the manufacturing sector. The weakness in the NAPM report was pervasive across underlying components.

The September factory orders report showed similar disconcerting news. Total new orders fell more sharply in the third quarter than in the second quarter - particularly for nondefense capital goods and information technology equipment. These figures suggest that we are likely to see at least a few more months of declining industrial production. It also confirms the view that fourth quarter real GDP growth is likely to post a larger decline than in the third quarter.

Will the consumer get us out of this mess?
Personal income was unchanged in September after inching up 0.1 percent in August. While a few tax rebate checks went out in the mail early in the month, the bulk of the rebates had been completed in July and August. Consequently, disposable income fell 1.1 percent in September after rising 1.8 in July and 1.9 in August. Nevertheless, the year-over-year rise in real disposable income remained in line with the previous month's gain.

At the same time, personal consumption expenditures dropped 1.8 percent in September (-1.3 percent after adjusting for inflation). Since the decline in spending was larger than the drop in income, the personal savings rate jumped to 4.7 percent, a level not seen since 1999. Consumers typically start saving more in rougher economic climates. This means that consumers will have some cash to spend when they feel more comfortable about current conditions. Or when they feel that they will get a bargain.

Motor vehicle sales surged in October, as U.S. automakers offered zero percent financing on cars and light trucks. The financing incentive is running through the third week of November. But consumers surely feel that this once in a lifetime opportunity is not to be missed even in these uncertain times! Perhaps retailers might find that their sales will increase over the holiday season if they take a lesson from the automakers. Perhaps such fire sales will hurt the bottom line for automakers, but in the wider picture they keep auto industry workers employed and in the spending stream. It is likely that at least some of the increased auto and truck sales are borrowing from future quarters, but sales now help psychology.

What about current market psychology? The Conference Board's consumer confidence index fell to 85.5 in October from a level of 97 in September. The index for current conditions fell more sharply than future expectations. This index is highly dependent on labor market conditions and all the layoff announcements were bound to influence the sample for this survey. The University of Michigan's sentiment survey is not so aligned with unemployment and actually showed a slight uptick in the index for the month.