Can Employment Statistics and Inflation Uncertainty Predict Future Spending?

The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor will release employment statistics for December this Friday. Since there are misconceptions about how these numbers are derived -- and having been a methodology and statistics wonk back in college -- I'd like to provide some quick background information from the BLS on how these numbers are currently estimated: "There are about 60,000 households in the sample [used] for [the employment] survey. This translates into approximately 110,000 individuals ... people are considered employed if they did any work at all for pay or profit during the survey week. This includes all part-time and temporary work, as well as regular full-time, year-round employment ... [which] includes any person who worked without pay for 15 hours or more per week in a family-owned enterprise operated by someone in their household ... Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work." reported this morning that "After apparently hitting a peak of 10.2% in October, unemployment fell to 10% in November. Another month like that could indicate the economy has stopped shrinking and is even beginning to expand." Forbe's then posits the question "Is inflation next?" and goes on to state "With the Treasury and Federal Reserve essentially printing U.S. currency and handing it to banks and overstretched lenders like Fannie Mae, there is always the chance that too many dollars chasing a fixed amount of goods will lead to higher prices." Quoting David Resler, Chief Economist for the U.S. at Nomura Securities in New York the article additionally points out, that "A sustained increase in temporary employment -- the sector added 52,000 jobs in November -- would provide the classic leading indicator that businesses believe the economy is improving and are willing to risk adding jobs." Though Resler also says in the column to not "be surprised if Friday's release shows two different trends. Employment could rise while unemployment ticks up as well." Forbes concludes "Only a stunning drop in unemployment to below 9.5% (still well above the 6.8% in November 2008) would cause economists like Resler to revise their views about low inflation. And that's unlikely."

So what shall we expect to occur in 2010 with reference to consumer and business spending? A long debated conundrum within macroeconomic forecasting -- aka crystal ball gazing -- is whether, or not, the forecasts themselves influence economic behavior. To a small extent they probably do given that those who pay huge sums for the forecasts are likely motivated to justify their expenditure. But since economic forecasts are notoriously inaccurate -- to say nothing of their presumed confidence levels indicated by decimal points -- let's go with what we think we know. The Forbes article states that "employment in the besieged manufacturing sector has been declining for decades and that long-term trend is unlikely to reverse ... [but that] Productivity has increased so much, especially in recent years, that U.S. manufacturing output is higher than it ever has been." Combine these trends with the fact that employment data considers a person "employed if they did any work at all for pay or profit during the survey week" -- a marginal definition of "employment" by any standard -- and we have a rather humble current macroeconomic scenario that is not likely to produce significant increases in overall spending anytime soon.

William Busch

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