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Economy is in the eye of the policy beholder

- The Washington Times - Sunday, July 8, 2012

Reading the economy these days is like taking a Rorschach test: Optimists see signs of progress in each economic report, while pessimists see the end of the expansion and many others host middling views.

Friday's much-anticipated jobs report was a case in point. While nearly everyone disparaged the news of only 80,000 jobs created during June as "disappointing," a few optimists saw a silver lining in the report: an uptick in wages and hours worked that they say will put more money in consumers' pockets and spark a revival of growth later this year.

That was the reading by Harm Bandholz, an economist at UniCredit Research. While conceding that June's lackluster" jobs growth was "hardly any reason to get excited," he contended that a strong 0.4 percent increase in aggregate hours seen in the report - the first since February - might signal a turning point for the economy as employers may be starting to crank up hours and production in anticipation of better days.

Pointing to that sign of emerging strength, Mr. Bandholz said he expects "payroll gains will reaccelerate in the second half of the year." He expects consumers to get a second wind as gradually rising wages and increasing jobs combine with plummeting oil and gasoline prices to increase their purchasing power.

Such a sunny reading of the jobs report finds a ready audience among natural optimists as well as political incumbents such as President Obama, who lauded the report as a "step in the right direction."

To pessimists, the enigmatic jobs report contained nothing but foreboding news.

"The evidence is mounting" that the economy may be headed toward a double-dip recession, said Tom Porcelli, chief economist at RBC Capital Markets.

Mr. Porcelli said the jobs report showed the economy had a "pretty weak pulse" last month. But even more alarming was a report on June manufacturing activity from the Institute for Supply Management earlier last week that showed manufacturing fell into a contraction for the first time since the recession.

"This is painting a pretty bleak picture for what lies ahead," he said. The jobs report "only added fuel to the fire." Mr. Porcelli dismissed signs of a pickup in wages and hours in the jobs report, saying that was counter to the prevailing trend.

"Clearly momentum has downshifted," he said. "Activity will slow further as we head toward an already challenged year-end," when he expects the economy will be roiled by the presidential election and political grandstanding over the budget and debt ceiling, as well as another possible credit downgrade of the U.S. like the one that torpedoed growth last year.

Readings like Mr. Porcelli's find a ready audience among chronic doomsayers as well as political challengers such as former Massachusetts Gov. Mitt Romney. The presumptive Republican presidential candidate gave a gloomy reading of the jobs report, saying it showed how Mr. Obama's attempts to revive the economy have failed.

Yet other analysts look at the June reports and see an economy on hold moving neither up nor down. They say job growth was anemic because businesses held off making hiring decisions as they awaited resolution of monumental issues during the month.

Among the events that might have caused hesitation among employers was a much-anticipated Supreme Court decision at the end of the month on whether President Obama's mandate that everyone have health insurance was constitutional, and a Greek election on June 17 that many executives feared might lead to the breakup of the eurozone and cause major turmoil in the economy and financial markets.

Joseph G. Carson of AllianceBernstein is one economist who thinks the economy has been whipsawed recently by businesses trying to anticipate and react to such events.

He said the June manufacturing report showed that U.S. manufacturers, who ship more exports to Europe than any other region, were particularly paralyzed by worries about a catastrophe breaking out in Europe, so they moved ahead of time to curtail orders and cut inventory in case that happened.

No such collapse occurred. Pro-European Union forces triumphed in the Greek elections, and the event passed quietly. But the damage was already done in the manufacturing sector, where factories slashed new orders at a precipitous rate rarely seen in the past 30 years, Mr. Carson said.

"U.S. companies feared potential fallout from the unfolding crisis in Europe," he said, adding that such attempts by corporations to anticipate bad news rather than reacting to it afterward like they did in the past account for much of the recent economic volatility.

Mr. Carson found proof that the big drop in orders in the manufacturing report was only precautionary and did not signal a slip into recession, oddly enough, in the jobs report.

In the past, manufacturers in a real crisis would have slashed jobs as well as orders, he said, but they did not do so last month. In fact, the jobs report showed they added 11,000 workers in June despite their misgivings about what might happen in Europe.

It all adds up to a big pause in the expansion, with activity likely to resume at more normal levels later this summer, according to the AllianceBernstein analysis. Businesses will see that they were overly cautious.

"U.S. firms will probably take their cue from how their end customers respond," and reports show that consumers never stopped spending, Mr. Carson said. In fact, a report last week on U.S. car sales in June was outright robust, showing sales increased to a rate of nearly 14 million a year. Other reports on consumer spending have shown mixed results.

"Demand did not collapse, which should offer some comfort to U.S. companies," Mr. Carson said.

Mr. Carson's analysis shows how an insightful reading of the dozens of economic reports released each month can be complex, circuitous and hard to understand if one is a lay person or part of the echo chamber of Washington officials who wait breathlessly for the job news each month.

Some economists have become fed up with the parade of politicians who claim the jobs report backs their ideological views within minutes of its release each month, and the bizarre machinations of economists trying to find a way to reconcile the many conflicting signals sent out by the economy.

Dan Croushore, chairman of economics at the University of Richmond and a former economist at the Federal Reserve, advised people to ignore the highly publicized jobs reports and the marked slowdown in employment they displayed.

He said the big fluctuations in employment with jobs growing by an average 226,000 a month in the first quarter and then dropping to 75,000 a month in the second quarter likely will disappear when the Labor Department gets better data and revises the reports in future months.

Mr. Croushore detects a quirky seasonal pattern that has emerged in the past three years, when employment appeared to surge during the winter to great accolades, but then receded during the spring to alarm and disappointment.

It's normal to become concerned about such a drop in job growth, he said, but "the fact is these data may not be an accurate representation of what is really going on in the economy because the seasonal pattern of employment may have shifted."

When the department revises the reports, Mr. Croushore said, "the overall patterns will look smoother and of less concern." A better measure of how the economy is doing, he said, is to look at the one-year average of job gains, which, at 148,000 per month, is up 50 percent from last year.

So there it is: In reading just two reports, four different economists have concluded that the economy is accelerating, decelerating and standing still all at the same time.

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