Skip to Content
Investing Specialists

Can Consumers' Muscle-Flexing Lift Employment?

Morningstar's Bob Johnson is betting on strong consumer spending to help the U.S. avoid a new recession.

Mentioned: , , , , , ,

The economic data this week were for the most part positive with the exception of the national purchasing managers' report and the employment report that came late in the week. Factory orders looked good, as did home prices, retail sales, and consumer spending. Equity markets followed the news flow, moving up early in the week with all of the positive news before faltering on the bad news a few days later. The market ended little changed from last week. While the news at the end of the week was bad, it probably wasn't bad enough to stir Dr. Bernanke into reconsidering QE3--hence, the market collapse Friday.

Key Data Points Contradicting Each Other
Unfortunately, all of the data wasn't logically consistent as one might hope. Actual factory orders reported on Wednesday ticked up even as the purchasing managers' report on manufacturing fell yet again on Thursday. Consumer spending remained surprisingly strong even as the official job report showed no job growth. Even Hurricane Irene barely made a dent in the most recent monthly and weekly shopping center data. Despite the fact that most of the East Coast was shut down during key the end-of-the-month selling days, auto sales remained remarkably resilient. For now, I'm placing my chips on the consumer and believe that we will manage to avoid a recession.

Employment Data Disappoints
This week's employment report disappointingly showed no growth for the month of August, falling below expectations of growth of 55,000 jobs. The report was distorted by 45,000 striking  Verizon Communications (VZ) employees who were not counted as employed. Governments also reported a job loss of 17,000 employees, while the private sector grew a still sluggish 62,000, adjusting for the Verizon strike. Almost all that growth came out of the health-care and business services sectors; every other category was virtually unchanged. Even the manufacturing sector, which has averaged 20,000 or so jobs for most of the year, shrank by 3,000 in August. Government jobs continued to shrink, as well. However, the rates of decline in government dropped from 71,000 jobs lost last month to just 17,000 this month (and compared to a trend of down 40,000-50,000 per month). So far this recovery, manufacturing and construction have added close to half a million and the much larger services sector 2 million jobs, while the government has managed to lose half a million jobs, offsetting some of the gains in the private sector. Recall that we lost over 8 million jobs and recovered just under 2 million of those.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.