Friday, February 26, 2010

>Character of Recovery: Yes, It Is Very Different This Time

Production: Slow But Catching on Nicely
Industrial production was slow to catch on to the recovery but in recent months has improved sharply (top graph). The manufacturing sector continues to make progress for both auto and non-auto components. Over the last three months there have been double-digit gains in high-tech and 8.7 percent gains in manufacturing ex-high-tech.

The most recent ISM report indicated expansion in orders, production and employment along with longer delivery times. Therefore, the outlook remains positive for production.

Sales: On Track and Not Far off the Usual Recovery Pace
Real manufacturing and trade sales have generally followed the typical recovery path, although the pace of sales is below trend. This is to be expected given the rebalancing of the American household balance sheet and the limitations on credit given the new ethic of caution on the part of both borrower and lender (middle graph). For 2010 our outlook is for real final sales growth of less than two percent which is down from the 2.5 percent of 2007 with much of the weakness centered in personal consumption spending.

Employment: Economic Outlier, Political Problem, Policy Driver
The outlier in this pretty economic recovery picture is employment (bottom graph). While recent months have seen a decline in the loss of jobs there is clearly a pattern of below-average job recovery as the economy has improved. There are obviously two problems—supply and demand.

On the supply side, the U.S. has had an issue for years of an oversupply of low-skilled and semi-skilled workers and a shortage of high-tech scientists and engineers. In an era of the closed U.S. economy of the 1950s-1960s, increases in U. S. production were met with increased demand for workers of all types, and as such the excess supply of low-semi skilled workers was not as apparent. Meanwhile, the immigration of health professionals, engineers and scientists continued to make up for a shortage of domestic professionals.

In the 21st century, we deal with the realities of a global trading/production model. In this case, increases in U.S. domestic demand are not met by an equal increase in domestic supply. On the contrary, increases in domestic demand are frequently met by increased imports. In this way, the response in the domestic job market lags the rise in domestic demand. Yet, on the supply side, many workers are unable to respond to changing skills demand since the development of human capital often takes more time than the market desires. Two results are evident in recent data. First, job growth lags economic recovery. Second, many unemployed are unemployed because of a mismatch of skills—not just due to weakness in the economy.

To read the full report: CHARACTER OF RECOVERY