The Economy’s Ever-Narrower Margin for Error

by Dan Burrows | August 10, 2012 10:31 am

From productivity figures to jobless claims to the trade deficit, even good economic data have downsides these days.

Take the latest rebound in the nation’s productivity figures. Over long periods of time, productivity gains are the only way the economy can grow faster than population  growth. When businesses generate a greater output of good of services using the same number of workers, that boosts bottom lines and paychecks.

Indeed, major gains in productivity — thanks to technologies like fertilizer, seeds and machines — is what allows the U.S. to be the world’s breadbasket with only 3% of its population working in agriculture. A century ago it was closer to 70%.

Unfortunately, squeezing more labor out of anyone lucky enough to have a job these days doesn’t bode well for the hiring outlook.

Productivity jumped 1.6% in the second quarter, reversing a 0.5% decline to kick off the year. When productivity fell in the first quarter, it led to some chatter that hiring would have to pick up in order to boost output.

That sure didn’t last.

Output, or the amount of goods and services produced, increased 2%, but hours worked increased only 0.4%.

As long as companies can get more output from the same number of workers, there’s no reason to hire more of them — especially when there’s no increase in demand. And yet, at the same time, wages have slipped 0.5% over the last year when adjusted for inflation, which hurts demand. It’s a vicious cycle.

This week’s better-than-expected trade data[1] were also a case of be careful what you wish for.

The U.S. trade deficit, or the gap between what we import and what we export, fell sharply in June to hit its lowest level since December 2010. The good news is that will boost second-quarter GDP, since imports are an expense.

The bad news is both imports and exports slowed significantly because the global economy is weak and getting weaker. U.S. demand for international goods remains weak, and international demand for U.S. goods isn’t robust, either.

It’s that same dynamic at work that takes all the fun out of falling oil prices. Crude futures traded in New York fell sharply Friday because a slew of data out of China[2] indicated the global economy is even weaker than we thought.

Except for figures out of the housing market, the data are softening. Initial jobless claims dropped this week to beat Wall Street’s forecast, but the more-important four week moving average ticked up. Consumer credit grew at the slowest pace since October 2011, and most of it was for student loans, meaning it created no demand in the real economy.

Yes, the muddle-through recovery[3] is still muddling through, but we have little or no room for error — not with much of Europe in recession and China slowing markedly.

Stocks, of course, are ultimately driven by corporate profits. If there’s a silver lining to be found there, at least they’re being set up for easy comparisons in the second half of 2013.

  1. better-than-expected trade data:
  2. slew of data out of China:
  3. muddle-through recovery:

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