Tuesday, September 30, 2008
In anticipation of the U.S. employment report that releases on Friday, I decided to look at labor market conditions for several key global economies. Unemployment is rising in key economies and leading indicators indicate a broad-based economic slowdown. A global slowdown is not a common occurrence; it will require a joint expansionary effort to jointly pull international economies out of this rut.
Here is a report about Japan’s labor market, released yesterday:
Here is a similar report about the Irish economy: “The economy had shrunk by 0.3% in the first quarter of the year. Technically, a recession is defined as two or more successive quarters of negative growth. It is the first time Ireland has experienced a recession since 1983.” There are a slew of reports out there, especially about the U.K. and the U.S., but overall, the global economic sum is teetering on recession.
The Labor Market
The labor market is very important in defining a recession (which, by the way, is NOT simply defined as 2 consecutive quarters of negative GDP). The U.S. employment report on Friday is expected to bring some pretty grim news: -100,000 jobs lost and the unemployment rate sticking at 6.1%. This is a reasonable number since the auto industry’s problems have worsened, the unemployment claims are super elevated, and credit issues make it unlikely that jobs are being added. Thus, the report will show the ninth consecutive monthly decline in jobs, which has never happened during a non-recessionary period.
But enough about the U.S., what’s happening across the globe?
The chart above represents the unemployment rate across five key economies. The first thing to note is that global unemployment rates do not always move in tandem. It is completely feasible for Canada to be growing above potential (unemployment is low), and Germany to struggle with rising unemployment, as it was in the 2003-2004. A global unemployment slowdown is not a common event. In all of the economies, except for Germany, the unemployment rate has risen in the first half of 2008. Also note that the economic slowdown started long ago - in the first half of 2008 when unemployment rates were rising (ex Germany, who is seeing its labor market strengthen) - and is not the product of the latest two weeks of banking reports.
If I had to compare, I would say that Canada is in the best position relative to the other countries in the sample. With its strong Petrodollar (and commodity) inflows, Canada has been quite resilient in spite of its struggling manufacturing sector and economic debacle to its South. Further, the strong inflows have kept the Canadian dollar strong and put a lid on core inflation, which rests at 1.5% for four consecutive months.
A broader measure of economic strength: The Organisation for Co-operation and Development’s (OECD) leading economic indicators index (LEI):
I believe the LEI index to be a lagged composite of macroeconomic and financial indicators, rather than a forward-looking indicator, but it does offer a common measure of economic strength/weakness. It uses slightly different components for each economy, but the composition of the LEI for each country is similar that in the U.S. (the + or – means that the component improved or reduced the LEI for the latest data point, July):
- Spread 10-yr to federal funds rate (+)
- Michigan consumer sentiment: expectations (+)
- S&P 500 (+)
- Consumer goods orders (+)
- Real M2 balance (money supply) (-)
- Real non-defense capital goods orders (-)
- Factory Workweek (-)
- Initial Claims (-)
- Building permits (-)
- ISM (manufacturing) supplier deliveries (-)
Overall, the economies have moved into a slowdown phase, and this indicator is lagged (latest data point is July). However, it does confirm a joint economic struggle, which is not always the case (see late 2007), dating back to April 2008.
The U.S. labor report is one of the most important indicators followed by markets, politicians, and economists alike. It is the first data release for the month of September and is not expected to paint a pretty picture of releases going forward. With a weak employment report, consumption is likely to be measly, income is likely to be suffering, housing variables will surely struggle, etc.
The U.S. is not alone; however, it has led many economies into their own slowdowns. A global slowdown is an occurrence that will require joint expansionary policy (and some new regulations by some) on the part of global governments and central banks in key developed economies to jointly pull the sum economies out of this rut.