Payrolls record 4th straight gain
Nonfarm payrolls increased a relatively meager 39,000 in August, although July's gain was increased to 67,000 from virtually unchanged. Nonfarm payrolls have now risen for four straight months, boosted by improvement in the service sector. The goods sector continues to shed workers - primarily in manufacturing where payrolls declined by 68,000 in August. In the prior months, factory employment declines had softened, hinting that perhaps this sector would stop bleeding so many workers. But August reversed the improving trend. Construction employment increased in August, but merely reversing a drop in July. Construction employment is essentially unchanged since April. The services sector looks better as payrolls increased 108,000 in July and 72,000 in August. Retail trade was particularly soggy in August, but this was offset by gains in temporary workers as well as the government sector.

All in all, the payroll figures are in line with the pattern we saw in the recovery following the 1990-91 recession. Employment was stagnant for more than a year and increases were modest in the second year of recovery.

The civilian unemployment rate fell to 5.7 percent in August from 5.9 percent in July. Labor Department officials do not consider this apparent improvement statistically significant. Going out two decimal places in the jobless rate shows that the improvement was 0.15 percentage points, but in order for it to be considered significant, the jobless rate must change by 0.22 percentage points. In any case, the household survey shows that employment rose twice as fast as the labor force and unemployment fell. The good news shouldn't be discounted entirely even if the improvement could be partly attributed to problems with seasonal adjustment as teens left the labor force to go back to school.

Additional friendly news came from the employment report. The average workweek edged up 6 minutes to 34.1 hours in August. When demand starts to pick up, employers typically increase the number of hours worked before they start hiring new workers. In addition, average hourly earnings rose 0.3 percent for the month. The increased number of hours worked coupled with higher earnings will help boost personal income for the month.

Motor vehicle sales zoom
Market players seem hyped on declines in consumer confidence because they fear that this signals slower consumer spending. However, that was certainly not the case in August when domestic auto and light truck sales rose to their highest selling pace since last October, a time when healthy incentives were first introduced. Cars sold at a 6.6 million-unit rate in August, up from a 6.5 million-unit rate in July. Light trucks were sold at an 8.9 million-unit rate, up from an 8.2 million-unit pace in the previous month. It is difficult to imagine how this selling pace can continue in coming months. Initially, automakers were inclined to let the incentives lapse in August. But not so in the end, as one by one the Big Three announced extensions this week.

The spurt in motor vehicle sales in July and August is already setting up the stage for pretty healthy consumption expenditures in the third quarter and will help to boost real GDP growth. Several economists have pointed to a 3.5 percent rate of growth in real GDP (three times as fast as the 1.1 percent rate posted in the second quarter). One should keep in mind that income growth is limited and, even with incentives, motor vehicle sales are unlikely to sustain the August pace very long. Furthermore, consumers are becoming accustomed to sweet deals. It will limit automakers' profit margins if incentives are needed indefinitely.

ISM shows slowdown
The non-manufacturing ISM business activity index fell back to 50.9 in August from a level of 53.1 in July. Any level above 50 percent represents expansion, but the drop in the index suggests that the rate of economic activity in the service sector has slowed in the past few months. Officials from the Institute for Supply Management, where this series is compiled, refrained from predicting a double-dip recession, but were nevertheless concerned about the slower pace of activity. The only other reasonable figures on the service sector come from nonfarm payrolls. Service sector payrolls did moderate in August relative to July, but the two-month average was well above the previous three months, suggesting improvement over the quarter.

Surprisingly, the ISM manufacturing index remained unchanged at 50.5 in August. The NAPM-Chicago, reported the previous week showed significant improvement in the Chicago region and these two series often move in the same direction, if not by the same magnitude. The factory payroll figures certainly concur that manufacturing activity softened in August.

Factory orders on the mend
Factory orders jumped 4.7 percent in July, more than reversing the previous month's drop. This incorporated a revised 9.2 percent surge in durable goods; nondurable goods orders inched down 0.3 percent. Nondefense capital goods orders, a barometer of capital spending, jumped 14.3 percent in July. New orders for high tech goods were less impressive, rising 4.6 percent in July but not quite offsetting June's 5.5 percent drop. As a result of the monthly spurt in nondefense capital goods, orders were up on a year-over-year basis as well. However, as evidenced in the chart below, the drop in nondefense capital goods orders was steep in 2001. The recovery will take a long time given the modest pace.