David Rosenberg

From Wednesday's Globe and MailPublished on Wednesday, Sep. 08, 2010 6:00AM EDTLast updated on Wednesday, Sep. 08, 2010 6:48AM EDT

The idea that the economy is going to be able to “muddle through” from here has a certain currency right now. If only we can make some vague headway, this line of thinking goes, things will eventually work out.

The U.S. employment report for August, much like the ISM and chain store numbers, had the sort of “muddle through” thumbprints all over it that set some minds at ease.

If, however, you are in the camp that thinks a “double-dip” scenario is more likely, and particularly if you have exposure to the equity and bond markets, then this latest round of economic data is probably just enough to trigger any number of violent – if inconclusive – reactions.

To my mind, the data do not alter the outlook for a double-dip scenario unfolding before year’s end.

It’s true that the bright spots in the employment report cannot be readily dismissed. Private payrolls came in with a gain of 67,000, which was more than the consensus estimate of 40,000. This, along with the upward revision to the headline number of 123,000 jobs created and the 0.3-per-cent gain in the wage number, has the bulls rather excited.

Seven Cases

But there were many other parts of the report that left much to be desired. Here’s an unlucky seven examples of softness beneath the surface:

1. Aggregate hours worked were flat.

2. All the employment gains were part-time; full-time employment plunged 254,000.

3. Those working part-time for “economic reasons” surged 331,000 – the biggest increase in six months.

4. While private payrolls were better than expected, 10,000 of the 67,000 tally reflected returning construction workers who had been on strike.

5. Manufacturing employment was down 27,000 and total goods-producing jobs were flat – hardly signs of a robust economic backdrop.

6. The diffusion index for private payrolls (which shows you how much and how many sectors contributed to the change in payrolls) actually fell to 53.0 from 56.7 in July – a seven-month low – and was 68 at the April high, all of which is consistent with an economy slowing down to stall-speed.

7. The labour market gap widened with the all-inclusive unemployment rate rising to a four-month high of 16.7 per cent from 16.5 per cent in July. This is why the odds are stacked against a sustained acceleration in wages.

Looking at a larger swath of the recent data is even more confusing, to say the least.

For example, the chain store sales data were skewed by one-offs like retroactive jobless benefit cheques that were mailed out in early August and the growing number (17 this year) of U.S. states offering sales tax holidays.

Manufacturing

The ISM manufacturing index, which really got the ball rolling on this “take out the double-dip” trade, managed to spike even though the three leading components – new orders, backlogs and vendor performance – all declined in what was a 1-in-100 event.

Not only that, but the employment subindex of the ISM surged to its highest level since December of 1983, and yet the manufacturing employment segment of the payroll survey fell for the first time this year. The manufacturing diffusion index actually slumped to a seven-month low of 47 from 53 – in other words, fewer than half the subsectors within the industrials were adding to staff requirements last month. It leads to the question as to what exactly the ISM is measuring.

And the list of inconsistencies in the data didn’t stop there. The entire increase in private sector employment in August was in the service sector – mostly health and education, which says little about the cyclical state of the economy. Yet 90 minutes after the jobs number was released we got the ISM non-manufacturing survey and it flashed a contraction in services employment to a seven-month low of 48.2 from 50.9 in July.

Just a tad confusing.

The employment report did not detract from the view that the economy is losing steam. The fourth quarter of a recovery typically sees real GDP growth of more than 6 per cent at an annual rate; however, in this post-bubble credit collapse, we are seeing 1.6 per cent in the second quarter, and there is nothing in the data to suggest anything but a further slowing in the third quarter. The only reason why there is no contraction this quarter is because it looks as though we are getting another lift from inventories.

Pull the camera back even further and you see that while capital spending remains a linchpin as businesses replace obsolete machinery and equipment, its contribution to overall growth is actually showing signs of receding and we see nothing really in the consumer, housing, commercial construction, net exports or state and local government sectors to get us excited over the macroeconomic backdrop.

And even with sentiment in the financial markets moving away from the idea of a “double-dip” outcome, equity investors still have to confront what even a “muddle through” scenario might mean for corporate profits. It would stand to reason that if there is vulnerability, it is highly unlikely that we will see profits rise 20 per cent in the coming year as is currently the consensus view in the marketplace.

One can easily draw the conclusion from the data that we have dodged a bullet, but that does not mean we are out of the woods.