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December 5, 2003
The mortgage market this week made it through the most dangerous water since summer; after ten days in the low sixes, we're back in the high fives. Sailing into the new year looks good, if weird.
Odd, peculiar, out-of-pattern, inexplicable... there aren't good words to describe the magnitude of the disconnect between the very rapid economic growth on the surface and the hollow sensation in the belly.
The '60s motto for moments like this: "When the going gets weird, the weird get going...." Here we go: 3rd quarter GDP has been revised up to an 8.2%(!) annualized growth rate. The reports for November from the purchasing managers' group (now "ISM") were as strong as any in twenty years, consistent with 7%(!)-plus 4th quarter growth, which only a week ago was supposed to have tailed to 4%.
The bond market was on deathwatch all week, waiting for the sure-to-be-explosive November payrolls number due at dawn today. GDP shrieking, payrolls must have popped the lid at last, maybe a quarter-of-a-million new jobs, and the Fed would yank its "considerable period" stay-put as early as next Tuesday's meeting.
Ahhh... no. Payrolls grew, now for the fourth-straight month, but only 57,000 jobs. Peanuts. We need to be running 250,000-300,000 monthly to begin -- begin -- to catch up to population growth and to recoup the '00-'03 losses. Average hourly earnings rose one measly cent in November, and grew only 2.1% in the whole year.
Productivity, the holy grail of national wealth-building, soared at a 9.4% annual rate in the 3rd quarter, once again exceeding the GDP pace. Productivity is output divided by labor; if productivity is growing faster than output, then labor is gradually getting mashed out of the economy.
"Great news!" shout the traditional optimists. Labor is supposed to get mashed from time to time (when it resists mashing, economies get in trouble with inflation or inflexibility). Unit labor costs are collapsing at a 5%-something annual rate, and the result should be huge profits which should recycle into capital spending and business expansion, and then hiring. Labor's temporary sacrifice will be rewarded! Should be... supposed to be, anyway.
Consumer confidence is up from the low 80s to low 90s (on a scale where 110-120 reflects a healthy and happy economy), and surveyors attribute gains to a better job market. It is better, but only in that jobs are more secure: unemployment claims are down to 360,000 monthly, roughly 20% below the prior two-year average.
Labor economics are slippery, as real people constantly adapt in ways unsuspected by historical models. The mashing of labor shows in movement away from pressure: in 2003, an unprecedented 400,000 people opted for new self-employment. Because they would do better than their old salary, or because something is better than nothing? In 2003, Social Security claims for disability have jumped by 20%, way out of pattern; is the disability payment better than the old salary, or a last-ditch option?
Little tidbits... Thanksgiving weekend retail sales were mixed at best, and off last year's pace, more than peculiar in a time of 7% GDP growth. Apartment rents are falling nationwide, and the 9.9% national vacancy rate is the highest since records began in 1956. Some vacancy comes from tenants turning into home buyers, but, as the national fraction of home-ownership is steady... something else is going on.
Nobody really knows what. The productivity-based optimists may be dead right. Instead, some of the rest of us may be right: that the American standard of living is under near-desperate competitive pressure, and the domestic and trade deficit props are wearing thin. Either way, there is no brief for inflation, and no reason for the Fed to do anything unpleasant for a long time... er, "considerable period."
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