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Signals point to recession bottoming out

Productivity and factory orders are up as the U.S. economy continues to flash signals that the recession is coming to an end. However, worries remain about how durable the rebound will be.
/ Source: The Associated Press

Productivity and factory orders are up as the U.S. economy continues to flash signals that the longest recession since World War II is coming to an end. However, worries remain about how durable the rebound will be given lingering problems in the labor market.

Many economists are looking for the overall U.S. economy, which has been shrinking for a year, to begin growing again in the current July-September period. But the problem is that unemployment is expected to keep rising even as the nation's gross domestic product returns to positive territory.

The concern is that if American businesses don't switch in coming months to rehiring workers who have been laid off, consumers won't have the ability or confidence to boost spending. Since consumers account for 70 percent of total economic activity, higher consumer spending is seen as critical to making sure any economic recovery is sustained.

Closely watched reports
More will be revealed Thursday on the state of the labor market and the service sector with the release of two closely watched reports.

The Labor Department will release its weekly look at filings for unemployment claims. In advance of the report, economists surveyed by Thomson Reuters expect claims to fall to a seasonally adjusted 560,000 for last week, down from 570,000 the previous week.

New claims for jobless benefits have been trending lower in recent months but still remain well above the level that indicates a healthy labor market.

In a second report, the Institute for Supply Management will release its monthly look at service companies. Its gauge is expected to show a reading of 48 for August, according to analysts polled by Thomson Reuters. That would be up from a reading of 46.4 in July and would represent the best showing for this gauge in 11 months.

However, any reading below 50 is seen as an indicator that the service sector is still in recession. The ISM on Tuesday said its companion manufacturing gauge moved out of recession territory in August for the first time in 19 months. That good news was bolstered by a government report this week showing that new orders to U.S. factories rose in July, marking the fifth gain in the past six months.

In other positive news, the Labor Department said that productivity, the amount of output per hour of work, rose at an annual rate of 6.6 percent in the April-June quarter, the largest advance since the summer of 2003 and slightly better than the 6.4 percent increase that the government first estimated a month ago.

At the same time, the report showed that unit labor costs fell at an annual rate of 5.9 percent — the sharpest drop since 2000 and slightly more than the 5.8 percent drop estimated a month ago.

'Tricky transition'
Economists said the rising productivity and lower labor costs supported their view that recession was beginning to come to an end. The hope is that the cost cutting that businesses have already done will convince employers to slow the pace of layoffs going forward and eventually resume hiring. That is critical because until the labor market heals, consumers probably won't step up their spending.

On Friday, the government will report the unemployment rate for August. Economists expect the rate to tick up to 9.5 percent, from 9.4 percent in July, and that a net total of 225,000 jobs were lost in August, down from 247,000 jobs lost in July.

The jobless rate is widely expected to top 10 percent by next spring, before a recovery is strong and sustained enough to push that rate down. During this period, there is the risk that any recovery could falter and the economy could fall back into recession.

"This is always a tricky transition, and there are many things that could still derail the economy given that the labor market is still very weak," said Mark Zandi, chief economist for Moody's

In minutes released Wednesday, Federal Reserve policymakers said that a poor jobs market, evaporated wealth, hard-to-get credit and stagnant wages meant that consumers were still facing "considerable headwinds."