Posted by: Josh Lehner | September 16, 2010

Economic Update: Oregon, Employment and Growth

Earlier this week, the Oregon Employment Department released the August employment report. The report is basically more of the same. The unemployment rate is 10.6 percent, essentially unchanged for the past 10 months, where it has fluctuated between 10.5 and 10.7 percent. Total nonfarm employment fell 1,500 from July to August. July’s previously estimated loss of 3,000 was revised upward to show a loss of 2,100. In August, the private sector shed 800 jobs, while the public sector lost 700 (Census employment declined 854). Strong gains were seen in the Professional and Business Services (+1,000) and Educational and Health Services (+900) industries.

On a year-over-year basis, total nonfarm employment has decline 0.1 percent since August 2009, or 1,600 jobs. The private sector is down 0.3 percent year-over-year, or 4,200 jobs. The private sector has seen positive month-over-month growth in April, June and July of 2010. These year-over-year figures are the best the state has seen since the summer of 2008, however the small percentage declines are due to the stabilization of Oregon employment as opposed to sustained job growth. As mentioned previously, we are bottom fishing with no bait.

On a monthly basis, Oregon employment peaked in February 2008 and has declined in 26 of the 30 months since. Total job loss since peak employment is 142,700 through August 2010, or 8.21 percent. Thirty months into the early 1980s recession, employment had fallen 10.04 percent, or 107,800 jobs.

One sector that added jobs earlier this year is the federal government, due to increased temporary hiring for the decennial U.S. Census. As the Census continues to unwind, federal government employment in Oregon will continue to decrease. Census employment in Oregon declined 854 between July and August, leaving 1,099 census workers in the state.

Recent activity in unemployment initial claims and the labor force do not bode well for the near future or indicate a labor market that is improving. The initial claims per 1,000 labor force metric has increased in recent months, first due to a declining labor force number and now, most recently, due to seasonally adjusted claims increasing month-over-month. So, at first the denominator decreased, driving the ratio higher, now the numerator is increasing, driving the ratio higher. At the U.S. level, both initial claims and the labor force have held relatively steady. (Note: data is through August 2010)

Now onto the larger question of why economic growth has been so sluggish and why expectations in the near term are relatively subdued. This obviously is a much deeper question but below are a couple of graphs that highlight a few relevant points that help explain the current situation.

First, as CalculatedRisk notes, the contribution of residential investment to GDP growth is very important in the initial phases of an expansion. A recent paper by 2002 Nobel laureate Vernon Smith and co-author Steven Gjerstad examines business cycles over the past 90 years and highlights housing’s leading indicator ability. From the paper’s conclusion (p. 30, PDF p. 31):

“In the immediate aftermath of most recessions, housing expands more rapidly than any other component of GDP, and inflation falls. Through the first part of the expansion, housing increases and inflation remains low. In the latter part of expansions, housing ceases to respond to loose monetary policy, but inflation starts to develop. In response to developing inflation, the Fed tightens monetary policy in order to rein in inflation, housing begins a sharper decline, and the economy enters a recession.”

This pattern can be seen in the graph below. While residential investment (new housing construction) is not an especially large component of the nation’s economy (typically 4 or 5 percent), it plays an important role in the economic growth changes over the business cycle. Prior to each recession, residential investment, as a percentage of GDP, fell and then began increasing as the economy began to recover. The primary exceptions being the 2001 recession, when new construction kept growing and the current recession, where it has not increased measurably despite economic growth the past four quarters. Given that new housing construction is one of, if not the best leading indicator of near term economic growth, it is now a major reason why GDP growth has been sluggish coming out of the Great Recession (absent the inventory cycle). The forecast calls for subdued residential investment for the next few quarters, thus economic growth will continue to limp along at below potential growth rates. The reasons for low levels of new housing construction need not be rehashed here, however, among them are the level of foreclosures, negative equity, the oversupply of housing, continued high levels of unemployment and low levels of household formation. These all affect new construction and these factors are not expected to improve substantially in the near future.

Another question/issue is why are there not more jobs being created, especially considering GDP has grown for four consecutive quarters. Businesses, primarily the large type, are currently in relatively strong positions. They cut costs (i.e. layoffs) sharply during the recession and as sales have rebounded in the past year or so, profits have returned, however large increases in hiring have not. Two important issues stand out, but are not the only issues involved. First, demand continues to remain relatively weak, especially for smaller businesses. The National Federation of Independent Business released a report showing that the single most important problem facing small businesses is “poor sales”. If there is not enough money coming in the door for a business, they cannot nor will not hire an additional employee. Similarly, even if a business sees increases in sales but has doubts as to the sustainability of the increase, the business is unlikely to hire an employee just to fire him/her should the level of sales decrease again. This uncertainty in the level of aggregate demand (sales) is contributing to the lack of hiring.

Another note regarding business: the relative lack of investment made by firms is partially due to the overcapacity that already exists. Yes, investment in equipment and software has increased in recent quarters, however investment in physical structures remains very weak. The graph below illustrates the Federal Reserve’s capacity utilization data through August. The August figures show that just 72.2 percent of the manufacturing capacity in the U.S. is currently being used (the total industry figure is 74.7 percent in August). This is a sizable increase from last summer when the utilization level troughed, however it remains one of the weakest readings on record. In fact, of the 752 months (nearly 63 years) worth of data, the 10 worst capacity utilization months on record were January through October 2009. Not the ten worst consecutive months, but the ten worst individual months. August 2010 is the 50th worst month on record (the 7th percentile). If only 72 percent of the capacity is being used, then there is no need to invest in a new plant or manufacturing facility as there are plenty of existing ones currently sitting empty and/or idle.

Note that the Federal Reserve publishes the capacity index and the capacity utilization rate figure. The author then calculated the utilization level based on the two published numbers.


Responses

  1. One point I’d add with regard to the sluggishness of the housing market is the almost total lack of credit for acquisition, development and construction (AD&C). While the points you cite are valid – foreclosures, oversupply, etc. – they do not equally afflict all markets or submarkets, but even where demand can be demonstrated to exist, banks are not lending. Stated generally, the AD&C money that is available is either self-funded (i.e. larger or publicly traded builders) or through venture capital, both of which are (a) scarce and (b) have ramifications for housing production and price.

    In other words, the lack of credit is, I believe, a key factor in housing’s lack of performance because it keeps even good, market-appropriate projects from being built.

    Longer term, the lag of housing production behind housing demand will cause price escalation due to scarcity once the economy recovers a bit, simply because there is very little in the pipeline.

    he reasons for low levels of new housing construction need not be rehashed here, however, among them are the level of foreclosures, negative equity, the oversupply of housing, continued high levels of unemployment and low levels of household formation. These all affect new construction and these factors are not expected to improve substantially in the near futur

  2. […] (below) or across metros (shown in the presentation) really is tied directly to local job growth. Historically housing has led the economic recovery — as the Fed cuts interest rates after inflation falls, it unleashes pent-up demand, driving […]

  3. […] and financial crisis — it wasn’t a huge surprise to see housing lag the recovery, even if it used to be the first thing to bounce back. However in recent years the lack of construction has become a big issue in terms of eroding […]


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