July 6, 2001
Challenge for Economy in Second Quarter
If you put the pieces of the U.S. economic data together, they would seem to spell a recession in the second quarter of the year. For one thing, productivity, measured as the change in output per labor hour, took a dramatic turn for the worse in the first quarter of the year. With little uptick in business spending on capital equipment, it's probably safe to say that output per hour has not climbed in the months since. And now that we have the June employment figures in, we know that 103,000 fewer people held jobs in the U.S. economy during the second quarter compared to the first.
Declining or flat productivity, multiplied times a smaller workforce, equals lower output, right? We will find out next month, when the preliminary estimates of Gross Domestic Product are presented for the second quarter for the first time. With the re-estimation and subsequent revision of the thousands of data series involved, it will certainly be a very close call.
But if the U.S. economy is in recession as these words are written, it is a very peculiar one. When was the last time we had a recession and a 4.5 percent unemployment rate at the same time? Or one with housing starts still sailing along at or above the rate of 1.5 million new units per year? Indeed, this recession, if it is actually here, comes at a time when consumers remain reasonably confident, and still flush with cash.
The persistence of that confidence, in the face of job losses that are still mounting, is testimony to just how hot the economy had been running prior to the end of last year. Declining demand and
disruptions from the energy sector have hit business profits hard, but consumers are thus far treating the downturn as a welcome breather from the torrid pace of the last three years.
The downward momentum of business hiring carried into June, with business establishments reporting a shrinkage of 114,000 jobs from their payrolls compared to the previous month, the Bureau of Labor Statistics reported. That decline comes on the heels of a revised May job report that turned what was thought to be a mild decline into a mild rise in employment for that month. Still, for only the second time since the recession in 1991, the economy failed to add jobs in the second quarter.
By contrast, in the second quarter of last year, the U.S. economy created a whopping 1.1 million new jobs. The comparison to this kind of white-hot growth, still fresh in our memory, helps explain why this episode "feels" like a recession, even though consumer spending and low unemployment rates say otherwise.
The details of the June job report tell a familiar story. Manufacturing was again hit hard with job cuts, losing 113,000 in the month alone. The rate of job losses in factories continues to accelerate, nearly doubling each quarter since the fall of last year. Anemic growth in services industries employment has not been sufficient to make up the slack. Interestingly, within this broad category of companies, growth in employment in health services industries has hardly skipped a beat, while business services, including temp agencies employment, has faltered badly.
It will be quite a challenge for the U.S. economy to manage positive growth in the second quarter of the year. But with engines of consumer spending still humming, the stall in growth can't last too much longer.
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