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The Jumbled Numbers Still Add Up To A Soft Landing


Business Outlook: U.S. ECONOMY

THE JUMBLED NUMBERS STILL ADD UP TO A SOFT LANDING

On the day many Americans left work early to start the Labor Day weekend, the government released its monthly take on the labor markets. But those who stayed in the office to examine the data in hopes of finding a clear sign of the direction of the economy and monetary policy should have gone on and left with everyone else.

The August report was a mixed bag. Nonfarm payrolls increased by a robust 249,000, but the gain was not broad, and the July increase was revised sharply lower. The unemployment rate dipped from 5.7% in July back to 5.6%--its June reading--but the nonfarm workweek was cut, and hourly wages fell.

Other data also give conflicting views. The nation's purchasers said industrial activity declined in August, and the government's composite index of leading indicators fell 0.2% in July. Consumer spending was flat in July, but auto makers reported healthy sales gains in August. Construction in July remained upbeat, led by a rebound in housing.

Confused? Don't be. Taken together, the recent data show that the economy remains on its soft-landing path of slow growth and little inflation. For one thing, overall hours worked are rising this quarter at a pace that suggests economic growth of about 2% (chart). Also, none of the numbers preclude an interest-rate cut at the Federal Reserve's meeting on Sept. 26.

POLICYMAKERS meeting at Jackson Hole, Wyo., gave little clue to their thinking. The Sept. 1-2 confab of Fed officials, academics, and Fed-watchers concentrated on fiscal policy and government debt, although Fed Chairman Alan Greenspan cited an academic paper recommending caution in cutting rates while Congress and the White House work out cuts in the budget deficit. That suggests the Fed will want to wait for the final 1996 budget before easing again.

But the budget may not be resolved for months, and most Fed policymakers believe monetary conditions already are restrictive. The data give the Fed the leeway to take another quarter-point baby step later this month to ensure that the expansion stays on track.

Some insurance may be needed because August job growth was not as strong as the top-line number suggested. More than 70,000 of the new jobs were in government, the result of more school districts starting classes in August rather than September. Temporary help, which had flattened out in the previous three months, jumped by 44,000.

Job growth is slowing down in 1995. Since March, an average of 113,000 jobs have been added monthly, down from 269,000 in the previous six months.

Moreover, the nonfarm workweek fell 12 minutes in August, to 34.4 hours. Most of the decline could be traced to a 24-minute drop in the workweek for utility workers, however, as the return to more seasonal weather after July's heat wave reduced overtime. The workweek could bounce back in September.

THE BEST NEWS was a turnaround in factory payrolls. Factory jobs managed a tiny gain of 12,000 in August, but it was the first increase in five months. And the factory workweek rose 12 minutes, to 41.5 hours, with longer overtime. That gain, plus the rise in payrolls, suggests that the worst may be over for manufacturers and that factory output probably increased in August.

But while the August job report was saying positive things about manufacturing, the National Association of Purchasing Management told a grimmer tale. The NAPM's index fell to 46.9% in August, from 50.5% in July. The August reading was below 50%, suggesting industry contracted last month.

All the major components--employment, orders, production, and inventories--fell, but the decline in new demand was severe. The orders index slid to 46%, from 53.3% in July. The decline was split between falling domestic and foreign demand. One undisputed positive sign for the economy was the NAPM's price index. Prices paid for materials soared in the first half, but purchasers now report some price reductions (chart).

Still, any weakness on the production side of the economy is not as important as the performance of the demand side. So far this quarter, consumer spending and incomes still look healthy, as does housing. Demand for new offices and industrial parks is leading a resurgence in business construction.

After ending the second quarter on a high note, consumers began the third quarter with less vigor. Consumer outlays for goods and services, adjusted for inflation, were flat in July, compared with June. They surged 1% in May, followed by a 0.4% advance in June. Durable goods accounted for July's sluggishness, with a drop-off in car-buying contributing almost all of the weakness.

EVEN THOUGH IT BEGAN MEEKLY, however, don't expect third-quarter spending to stay puny. Because outlays were on the rise at the end of last quarter, they already show a 2.7% annual rate of growth, compared with the second-quarter average.

And August buying should bounce back, if only because car sales recovered. Sales of cars and light trucks, both domestic and imported, had fallen to an annual rate of 13.7 million, from 14.7 million in June, but August sales jumped sharply to 15.7 million.

Income growth looks strong enough to support solid spending gains. Personal income rose a strong 0.7% in July, reflecting strength in the key wages-and-salaries component. Adjusted for inflation and taxes, real disposable earnings rose 0.4%, starting the quarter at a 3.7% annual rate of growth from the second.

Despite the 0.2% decline in the average hourly wage rate in August, a clear trend toward slightly faster wage growth is now emerging. During the past three months, hourly earnings have grown 3% from the same period a year ago. That's up about half a percentage point, compared with this time last year. Hourly earnings are now starting to keep up with inflation, after lagging far behind for more than a decade.

Better earnings and lower interest rates have combined to lift housing demand this summer. Residential construction was a big downer last quarter, but now it seems to be turning around. Inflation-adjusted construction spending in the private sector soared 2.2% in July, lifting outlays well above their second-quarter level. Real residential building increased 1.6%, while business construction jumped 3.5%.

Housing is now ready to reinforce the gains in business construction, which is galloping along at a 15% annual pace (chart). During the past year, building of offices, motels, and other commercial structures is up 20%, as vacancy rates have fallen. Building of industrial plants and warehouses has also risen 20%.

By and large, the sectors that were the biggest drags on growth in the first half--housing, exports, and inventories--appear to be looking brighter in the second half. And while it's not yet clear from the data, the expansion is now on better footing.BY JAMES C. COOPER & KATHLEEN MADIGAN


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