Employment situation stable but not improving
The civilian unemployment rate edged up 0.1 percentage point in October to 5.7 percent. The Bureau of Labor Statistics does not consider a change of this magnitude statistically significant. One is better off looking at the general trend in the series anyway. The chart below shows that the jobless rate has remained in a tight 5.5-to-6.0 percent holding pattern for the past year. Workers' decisions to leave and enter the labor force can play just as important a role in determining the jobless rate as the number of unemployed workers. That's why many economists and policymakers also follow the employment-population ratio which doesn't consider labor force changes. This ratio edged down to 62.9 percent in October from a recent high of 63 percent in September. January and July 2002 were low points for this indicator at 62.6 percent. Taken in combination, both the employment ratio and the unemployment rate signal a weak market.

Nonfarm payroll employment decreased 5,000 in October after an upward revised gain of 123,000 in August and a downward revised drop of 13,000 in September. After accounting for revisions, employment levels did dip but not that badly. But there is no question that employment growth is stalled. The chart below compares monthly changes in nonfarm payrolls to their 3-month moving average, which peaked in August and has since been coming down. That is not the correct direction for economic recovery.

The composition of growth in nonfarm payrolls has not changed all the much - manufacturing employment continues to spiral downwards, although the declines have become smaller over the past six months if that is any consolation. In October, wholesale trade employment dropped more sharply than usual. Employment figures on temporary help workers also declined. Many consider this a leading indicator of employment since many employers avoid adding permanent staff if they suspect that new demand will not be sustained.

The number of hours worked fell to 34.1 in October from 34.2 in September. The drop was larger in the manufacturing sector - to 40.7 from 40.9. During the West Coast dockworkers' lockout, some manufacturing concerns were forced to slow down due to inventory shortages. The workweek for wholesale trade posted an even larger decline - to 38.1 from 38.5. Wholesalers would have felt the brunt of the dockworkers' lockout in October. The lockout was over by the time the survey was taken, but it doesn't mean that workers went immediately back to the job - nor were they working at their highest level of productivity. All in all, it is hard to find any good news in this employment report. It is possible that the lockout impacted the data slightly, but labor conditions are pretty soggy even without this excuse.

GDP growth accelerates in Q3
The Commerce Department's advance estimate shows that real GDP expanded at a 3.1 percent rate in the third quarter, faster than last quarter but below the first quarter pace of 5 percent. Two key factors reveal that the third-quarter growth rate is more solid than in the three previous quarters. Government spending surged in the fourth quarter of 2001 and the first quarter of 2002. There is nothing inherently wrong with a rise in government spending, except that investors take private sector growth more seriously. In the third quarter, government spending expanded at less than a 2 percent rate. Total final sales were stronger in third quarter as business inventories were roughly unchanged from the previous three months. In contrast, a sharp slowdown in the rate of inventory liquidation added to the first quarter GDP growth. It was one of the reasons that many analysts discounted the first-quarter growth rate.

In the third quarter, personal consumption expenditures grew at a 4.2 percent rate due to a spurt in motor vehicle sales. This will likely be reversed in the fourth quarter, unless automakers can pull a rabbit out of a hat. Investment spending on structures continued to plunge, but capital spending on equipment and software rose at a 6.5 percent rate - about twice as fast as the previous quarter and the second straight rise in a row. Residential investment spending dipped at a 0.8 percent rate, but analysts have expected to see a moderation in this sector. Net exports, as usual, were a drag on GDP growth, but with both exports and imports rising between 2-to-2 ½ percent, the drag was minuscule. Commerce Department officials aren't yet sure whether the West Coast longshoreman lockout had an impact on these figures.

On the whole, the GDP figures are not showing an economy with zest. The recession was mild, keeping down pent-up demand that the economy needs right now. One can hardly expect a much better report.

Looking ahead to the next couple of quarters, economists are looking for similarly moderate growth stemming less from the consumer sector and more from capital spending. Residential investment spending will probably slow, but the nonresidential sector could start taking up some of that slack.

Manufacturing: one-two punch for knockout
First, the NAPM-Chicago reported that general conditions index fell to 45.9 in October from a level of 48.1 in September. Just one day later, the ISM manufacturing index reported that its comparable index fell back to 48.5 in October from 49.5 in September. The national index didn't drop as sharply as the regional one, but the story remains the same: manufacturing activity is floundering. Among its components, the new orders index and the supplier delivery index both remained above 50 percent in October (a good sign!). The production index decreased to 49.3 for the month, the lowest level since November 2001. Inventories retreated to 40.2 in October - its lowest level since December 2001. These two are not good signs since they suggest that manufacturers are leery about building inventories in this environment.

Factory payrolls and workweek, the ISM manufacturing index, and the Philadelphia Fed's business outlook survey all point to a negative number for October's index of industrial production. As it stands, industrial production fell in August and September as well.

Inflation in good standing
The employment cost index rose 0.8 percent in the third quarter, less than the 1 percent gain posted in the previous three-month period. This pushed down the total yearly rise in this compensation measure to 3.7 percent from a 4 percent gain in the third quarter. Wages and salaries only grew 0.5 percent during the period and only 3.2 percent from a year ago. As usual, benefits jumped 1.4 percent in the July-to-September period, faster than the three previous quarterly gains. The year-over-year rise was a record 4.9 percent. While benefits include vacations and holidays, they also include health insurance, which is usually the culprit behind rapidly rising benefit costs for employers.

Some analysts believe that changes in compensation costs are a leading indicator of inflation. If employers find that they must pay more to workers, then they will also raise product prices. The flip side of the argument is that workers are playing catch-up with their wages when consumer prices are rising. In fact, the chart above compares yearly gains in the employment cost index with the GDP deflator and the consumer price index. Notice that the GDP deflator was still moderating its rate of growth through the third quarter, while the CPI has accelerated slightly in the both the second and third quarters. The employment cost index has shown only a modest slowdown lately despite the recession and mild recovery. Despite the discrepancy in inflation rates, it doesn't appear to be an issue these days.