The employment report was very encouraging.
Most importantly, aggregate hours worked were unchanged at 91.1 as compared to 104.1, 101.7 and 99.7 over the last three quarters. An unchanged reading is a massive improvement from the 8% to 9% rate of decline over the past three quarters. With positive productivity this impies that thrird quarter real GDP growth could easily be positive..
Moreover, the manufacturing work week rose from 39.5 to 39.8 hours and overtime hours were 2.9 hours versus 2.8 in the second quarter. Much of this was auto and confirms the other reports that at least auto output is rebounding. The hours worked together with productivity strongly impies that manufacturing output rose in July — to be reported about mid-month. Moreover, the average workweek and overtime hours are traditional leading indicators.
Wage growth improved, but not enough to reverse the sharp slowing in average hourly earnings growth.
With hours worked stable and hourly earnings rising average private weekly earnings rose from $611.49 to 614.34.
The improvement in weekly earnings is a welcome sign for what I consider the greatest risk to the recovery, the unprecedented decline in nominal, repeat nominal, income so far this year. For a sustained recovery nominal and real income growth has to improve at some point. Normally, real income growth is a lagging indicator at bottoms but it also kicks in soon after the bottom. Tax cuts are offsetting some of this weakness but a sustained recovery requires growth in real income.
The consensus forecast is for a very weak recovery. But the consensus forecast is always for a weak recovery. The actual historic record is for recoveries to be proportional to the recession. That is, severe recessions have strong recoveries and mild recessions have weak recoveries.
I’m not making a forecast or taking a position that the consensus is wrong, or that those who expect no recovery are wrong either. But at every bottom economists always have a long list of reasons why this recovery will be weak. And they are usually wrong. In 1981, I won the National Association of Business Economists annual forecasting contest by forecasting an average or normal recovery from the 1980 recession. It was the strongest forecast in the competition.
Footnote. Despite the increase in the minimum wage the teenage unemployment rate actually fell.