As is well known, the U.S. economy came out of a deep recession about a year ago but growth has been slow. As a result, payroll employment has increased this year by less than 100,000 a month, less than half of the rate necessary to start reducing unemployment. The Democrats, facing large losses in the upcoming elections, are therefore devising programs to spur employment, including the small business aid now being pushed in Congress and the newly proposed infrastructure plan.

While all of this is common knowledge, it is at least not really the whole picture: The monthly payroll employment data come from the establishment survey. The latest figure for August showed an increase in employment in the private sector of 67,000. Less publicized are the employment data from the household survey. These tend to be more reliable around economic turning points, such as in a recovery from a recession. They also tend to lead the payroll employment turning points (Chart 1).

This year employment data from the household survey paints a different picture than that exhibited by the data from the establishment survey. Employment in the private sector has grown faster this year than in the two prior recoveries.  In August it soared by 891,000, the largest gain in a decade. While the monthly data are highly volatile due to the relatively small sample, (chart 2) and hence it would not be surprising if future data moderate the August jump, it is unlikely that the relatively fast growth trend of this year to August will be significantly altered.

Chart 2:

There are several factors contributing to the difference between the results of the two surveys. For example, a person holding two jobs is counted as one in the household survey and as two employees in the establishment survey. Also, the establishment survey is based on data provided by large employers while the employment in small businesses is just a guess. What accounts for the difference this year is hard to analyze but growth according to the household survey is about three times as large as that reported on the basis of the establishment survey.

Assuming that the data from the household survey better reflect economic growth this year, can it be concluded that growth has passed the critical point and will be self sustaining henceforth? Unfortunately not. Several forces will be acting to slow the economy in the intermediate term. On the domestic front they include the fiscal drag at the federal level with an added drag of the state and local level, the ongoing problem in the housing market and the rise in mortgage defaults and repossessions, and the continuing process of deleveraging of the consumer that could last for years. Globally the risks and impediments to growth are severe too. The Chinese economy is weak but with inflation they consider too high. In the EU the financial problems have not been resolved but only postponed. Half of Europe is close to recession but has adopted tighter fiscal policies. And Japan, as usual is barely growing, suffering from the strong Yen and dependent on Chinese demands. Finally back in the U.S, most leading indicators are still pointing down (the ECRI indices turned flat a couple of months ago).

Against this background it is essential that the economy gets another boost. This could come initially in the form of another quantitative easing by the Fed that in the best case scenario would achieve its impact through a push to the stock market. On the fiscal side, it is doubtful that the newly proposed Administration programs could pass in Congress before or after the elections.  Maybe the only thing that can be done in the short term is to revise the terms and conditions on the $75 billion mortgage refinance plan already budgeted but remains largely unused, in order to make it effective.

The Stock Market

The market has fluctuated in the last three months in a wide range and is now approaching the top of that range. The latest rally was supported by economic data that were marginally better than (weak) expectations. In the past couple of weeks it has produced strong technical buy signals. It could break the top of the range and move higher if the relatively strong employment data from the household survey translate into other, more visible data and if confidence increases that the Fed will come up with QE2. Note however that these two requirements may be mutually exclusive. With presently low interest rates even a moderate economic growth of 2% may suffice for a market advance.   However the risks to the market, like the risks to the economy, are exceptionally high.