Q2 employment dives
Nonfarm payrolls dropped 114,000 in June, more than expected by market participants. The manufacturing sector led the decline as factory payrolls plunged 113,000 in June. This was the 32nd drop in factory payrolls over 38 months! Although it posted the largest decline, the manufacturing sector wasn't the only component to suffer. Construction payrolls fell 7,000 among goods-producers. Among service-producing industries, declines were rampant among the various sectors that included transportation & public utilities, wholesale trade, finance, insurance & real estate, and services. Retail trade and government were the only two sectors to add to payrolls.

The civilian unemployment rate edged up 0.1 percentage points to 4.5 percent in June, back to the April rate. This put the jobless rate for the second quarter 0.3 percentage points above the first quarter average, bringing it to its highest average level since the third quarter of 1998. From an historical perspective, the jobless rate remains rather low, but it is the trend that matters and the trend is moving in the wrong direction if one is looking for signs of economic improvement. Average hourly earnings rose 0.3 percent for the third straight month and now stand 4.2 percent above year ago levels. It appears that December 2000 saw the largest year-over-year rise.

The quarterly employment figures suggest that second quarter real GDP is likely to be negative. The chart below compares total hours worked (the average workweek times private employment) in the private sector relative to GDP growth. The two main variables that are missing from the equation are public sector spending and productivity. By far, productivity tends to be the larger of the two variables in the discrepancy between total hours worked and GDP growth. The big gaps between growth in hours worked and GDP during the second half of 1999 and the first half of 2000 are attributable to productivity gains. As productivity growth has waned in the past couple of quarters, the gap in these two series has narrowed significantly. The hours worked data for the second quarter suggest that real GDP could decline at a 1.5 percent rate in the second quarter. Economists will use this indicator along with other spending figures to refine their forecasts, but most are likely to predict a drop in second quarter growth. This can't be labeled a recession yet, since the rule of thumb is that it takes two consecutive declines in GDP growth for the U.S. economy to be in recession.

Manufacturing data still headed lower
Factory orders rose 2.5 percent in May, reversing about two-thirds of the April drop. Nevertheless, total factory orders still are showing a decline in April and May relative to the first quarter, albeit by a smaller amount than in the first quarter of the year. Nondefense capital goods, a barometer of capital spending, also decreased by a smaller magnitude in the second quarter, perhaps suggesting that businesses may start increasing their spending in the second half of this year. Information technology, which was the last sector to deteriorate, has accelerated its pace of decline in April and May.

The NAPM Survey of manufacturing conditions showed some improvement in June as it rose to 44.7 percent for the month from a level of 42.1 percent in May. While that may have heartened investors when the figures were first reported earlier in the week, one must keep in mind that any level below 50 percent still signifies a declining manufacturing sector.

In contrast to the NAPM survey of manufacturing activity, the non-manufacturing index actually jumped several points in June to reach a level of 52.1 percent, putting it back in the plus column after two months below the 50 percent mark. This means that non-manufacturing activity is on the rise. It does, of course, conflict with the employment report which showed a fairly negative picture of the overall economy in June.

Personal income and spending moderate
Personal income rose a meager 0.2 percent in May, matching the April pace. Given the declines in nonfarm payrolls over the past three months, that doesn't come as too much of a surprise. Wages and salaries, the largest portion of personal income, have moderated dramatically in the past couple of months relative to the beginning of the year. Transfer payments and dividend income are stable, but interest income has declined over the past five months. Personal consumption expenditures increased 0.3 percent in May after gaining 0.5 percent in April. Incidentally, the consumption figures were initially reported as a 0.5 percent gain on Monday, until Federal Reserve economists questioned some of the underlying data. By Thursday afternoon, the Commerce Department issued a revised report. It turns out that human and computer error contributed to a miscalculation of truck sales. The chart below shows annual growth rates in real income and spending and reveals that the gap between these two series is not really narrowing. Consumption expenditures have moderated significantly in the past year, but so has income growth. As a result, the personal savings rate remains nearly unchanged at a negative 1.1 percent.

While consumer spending moderated in May, we may see a lift in June. Motor vehicle sales rose in June with increases in car and especially truck sales. While motor vehicle sales are not running at the strong sales pace seen in 2000, they are holding their own. Consider that consumer confidence has plunged relative to a year ago and that stock prices are not showing much recovery from their lows. Personal income is moderating and employment is falling, but car and truck sales keeping on running and running. While consumer confidence measures have some merit, actual consumer spending patterns give us a more accurate picture of the economy. Motor vehicle sales are not recessionary quite yet.