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Cracks in the Real Economy

Not too surprisingly, news of general economic activity has taken a backseat to news of the problems plaguing the U.S. financial system. A look at the main data releases of September (which describe the economic activity of August) suggests a picture of weakening across a broad range of the economy. The month opened with the Bureau of Labor Statistics reporting a sharp rise in the unemployment rate, from 5.7 percent in July to 6.1 percent in August, along with a drop of 84,000 in payroll employment. The BLS also revised downward its estimates of payrolls for June and July.

Unemployment Rate
Payroll Employment

Although the unemployment rate is at levels similar to that experienced shortly after the last recession, the drop in payroll employment has been relatively modest in comparison to previous recessions. According to the BLS, payroll employment declined in each month in 2008, though none of the month's losses exceeded 100,000 workers. To put this figure in perspective, note that job losses during the 2001 recession averaged 200,000 workers a month.

Unemployment Insurance: Continued Claims

The employment report for September won't be released until tomorrow, but the unemployment claims data published weekly throughout the month suggest that labor markets continued to weaken during the month. The four-week moving average of continuing claims moved substantially higher throughout August and the first part of September. To be sure, some of these statistics have been negatively impacted by the recent hurricanes in Texas and Louisiana, but even factoring in such events, initial claims and continuing claims remain at high levels.

Durable Goods: Shipments
Industrial Production

While the labor data over the last several months have indicated a deteriorating economy, monthly data on industrial production, durable goods, and retail sales have offered a somewhat mixed picture up through July. In fact, initial reports for industrial production and durable goods shipments and orders for July showed some strength. However, these series turned sharply lower in August, with July data being revised downward, as well. Industrial production fell 1.1 percent from July to August. It is important to caution that one month does not make a trend, and the data are subject to revision. That said, our first look at manufacturing for September shows the sector contracting. The ISM manufacturing index registered 43.5 for September, where an index value below 50 indicates contraction. September's reading of 43.5 was well below August's (49.5) and the lowest since 2001.

ISM Manufacturing Index
Retail Sales

The softening in the goods sector has also been evident in the retail sector. Both July and August showed month-over-month declines in retail sales of -0.6 percent and -0.3 percent, respectively.

Housing Starts
New Home Sales

Residential construction continued to be weak, as both housing starts and new-home sales hit lows not seen since the recession in the early 1990s. This represents year-over-year declines of almost 35 percent for each series, and month-over-month declines of-1.9 percent for single-family-housing starts and -11.5 percent for new-home sales.

Real PCE

Rounding out the month's data for August is this week's report from Bureau of Economic Analysis on monthly personal income and outlays. Real personal consumption expenditures in both July and August were below the second-quarter's levels. This drop reflects, in part, the unwinding of the stimulus package, which had a much larger impact in the second quarter than in July or August. While the data for September are not yet available and the July and August data are still subject to revision, the first two months of data for the third quarter indicate that real PCE growth may well be negative for the current quarter.

In short, almost all major monthly data releases describing economic activity in August show a deteriorating economic environment.

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