Nothing tests the faith of the optimist these days like the U.S. economy.
In less than week, the prospects for a decisive improvement in the pace of hiring and a reduction in the U.S.'s woefully high unemployment rate have gone from good to grim.
Carl Riccadonna, an economist at Deutsche Bank in New York, on Thursday tallied the U.S. employment indicators released since Monday: Six of nine deteriorated in May from April, including the Institute for Supply Management's factory employment index, which dropped to 58.2 from 62.7.
Stock markets also slumped this week as the outlook for the U.S. economy soured. The pall over markets only darkened Thursday after Moody's Investors Service said it would it would put the U.S. government's AAA credit rating under review for a downgrade if politicians in Washington fail to make progress in talks to raise the country's debt limit.
Some investors reacted to the Moody's statement by selling U.S. government debt, pushing the yield on 10-year Treasury notes to 3.03 per cent, according to Bloomberg News. Bond yields move inversely to prices.
On Thursday, the yield on U.S. 10-year debt tumbled below three per cent as investors dumped stocks in the face of weaker-than-expected economic data.
The U.S. Labor Department releases its May survey of the jobs market on Friday morning. Just a few weeks ago, many economists were predicting a breakthrough. Deutsche Bank, for example, foresaw an increase in non-farm payrolls of 300,000 after the U.S. employers added 244,000 positions in April. A result of that kind would be a significant milestone because the United States has created 300,000 jobs or more only twice since the beginning of 2006 after achieving that feat three times in both 2004 and 2005.
Few on Wall Street are expecting such a dramatic turn of fortune now. Deutsche Bank has cut its estimate almost in half, to 160,000. In all, more than 30 analysts lowered their forecasts for May payrolls this week, putting the consensus at about 170,000. That's fast enough job growth to keep ahead of increases in the working population from immigration and new graduates, but nowhere near the pace needed to significantly lower the unemployment rate from the current nine per cent.
"The economy appears to have encountered a soft patch," Mr. Riccadonna advised clients in a note.
The seven million Americans who have lost their jobs since the start of 2008 might be surprised to learn that the U.S. economy ever gained enough momentum to enter a soft stretch.
Joblessness is the biggest issue facing the U.S. economy, as some economists speculate that a significant portion of the unemployment rate is chronic. Troy Davig and Nicholas Tenev of Barclays Capital published research last week that estimated that U.S.'s natural rate of unemployment is now more than six per cent, compared to the Federal Reserve's estimate of around 5.5 per cent.
Messrs. Davig and Tenev cited evidence that suggests unemployed workers are unqualified for the jobs on offer, and that the collapse in home prices is keeping workers from moving to take jobs elsewhere. Their findings argue that at least some of the unemployment is structural, suggesting that it will take more than stronger economic growth to get the U.S. unemployment rate back to pre-recession levels.
Steven Ricchiuto, chief economist at Mizuho Securities in New York, is another who thinks there is a structural element to the U.S. unemployment rate. But another issue is the desire of American publicly traded companies to maintain strong earnings in volatile markets, said Mr. Ricchiuto, who left his relatively pessimistic call for 175,000 additional non-farm jobs in May unchanged. "Corporations are focused on earnings, earnings, earnings," he said in an interview. "What's the fastest way to boost earnings? Fire people."
First-time applications for jobless benefits fell by 6,000 to 422,000 last week, the Labor Department reported Thursday. The decline was less than the median estimate of 50 analysts surveyed by Bloomberg News. Earlier this week, ADP Employer Services latest survey of private employers showed companies added 38,000 workers last month, the fewest since September.
Despite all this, the optimists haven't lost all hope. The disruption to supply chains caused by Japan's earthquake stalled production, slowing the U.S.'s manufacturing-led recovery. The surge in commodity prices, especially fuel, also restricted demand. But those prices have receded lately.
"We are confident that activity will pick up next quarter," Mr. Riccadonna said.