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Economic Week in Review: Job numbers jump

May 02, 2014

Employment surged by 288,000 jobs in April and the unemployment rate dropped to 6.3%, its lowest level since September 2008. The improving jobs data lent credence to the Federal Reserve's decision, announced earlier this week, to further unwind its stimulative bond-buying in May. For the week ended May 2, 2014, the S&P 500 Index was up 1% (for a year-to-date total return—including price change plus dividends—of about 2.4%). The yield of the 10-year U.S. Treasury note was down 8 basis points to 2.6% (for a year-to-date decrease of 44 basis points).

Jobs picture brightens but discouraged workers still see gray

The economy added 288,000 jobs in April, about 78,000 more than economists expected. The gain spread across sectors, with growth in professional and business services, retail trade, food services and drinking places, and construction.

The unemployment rate fell to 6.3%, down from 6.7% in March. The number of people without jobs for 27 weeks or longer, who make up 35.3% of the unemployed, also fell, declining 287,000 to 3.5 million. However, the gains didn't translate into improvement for discouraged workers (those not currently looking for work because they believe no jobs are available for them). That number stood at 783,000, little changed from a year ago.

U.S. unemployment

Fed stays on track with tapering its bond buying

Despite a slowing in some early 2014 economic figures because of the harsh winter, the Federal Reserve cited its confidence in "the underlying strength of the broader economy" as a reason it could keep tapering its stimulative bond purchases. The Fed is cutting back its buying of asset-backed mortgage securities to $20 billion a month and longer-term Treasuries to $25 billion a month, a total additional reduction of $10 billion.

The Fed intends to keep the federal funds rate to 0%–0.25% for some time after it winds down its bond buying, especially if inflation remains below its 2% target. Fed officials pledged to adjust their policies as necessary to respond to economic and employment conditions.

"Although there's a lot of focus on the unemployment rate, the Federal Reserve uses a wide range of indicators to evaluate the overall health of the labor market," said Vanguard economic analyst Ravi Tolani. "Although the labor market has improved recently, there are still concerns regarding discouraged workers and other structural issues which would need further clarity before the Fed makes any decisions on interest rates."

GDP growth experiences a winter chill

Real gross domestic product (GDP) in the first quarter of 2014 rose at a 0.1% annual rate, below economists' expectations and the slowest pace since the fourth quarter of 2012, according to the Commerce Department's advance estimate. Some economists ascribed the slowdown to effects of the harsh winter. In comparison, real GDP rose at a 2.6% annual rate in the fourth quarter of 2013. Consumer spending grew at a 3% annualized rate but their purchases were offset by decreases in investment, government spending, and net exports.

Employment costs nudged upward

Employment compensation ticked up 0.3% for the first quarter, the Labor Department reported. This rate was slightly below economists' expectations. Benefit growth decelerated for the second consecutive quarter, as both private-sector and government-benefits costs increased less than in the previous quarter.

For the 12 months ended March 31, overall compensation was up 1.8%. The rate slowed slightly from the 2.0% annual rate rise reported at the end of December and the 1.9% annual rate rises reported for each of the previous three quarters. Private-sector employment compensation rose 1.7%, with the increase closely split between wages (+1.7%) and benefits costs (+1.8%). State and local governments paid 1.9% more in compensation; however, a greater portion of the increase went to benefits costs (+3%) than to wages (+1.2%).

Personal income rises, with spending up even more

The 0.5% increase in personal income that the Commerce Department reported for March exceeded economists' estimates. Disposable income also rose 0.5% ($68.0 billion). Personal spending rose 0.9%, almost twice as much as in February and surpassing economists' expectations. The savings rate took a hit, though, falling to 3.8% from February's 4.2%.

Construction spending rises less than expected

The 0.2% increase in construction spending that the Commerce Department reported for March (to an estimated annual rate of $942.5 billion) was below economists' consensus expectations. Residential construction was the strongest driver of private construction spending, up 0.8% from February to $369.8 billion. By percentage, the boost in construction of multifamily housing, up 4.4%, was much bigger than that of single-family housing, up 0.2%.

On the public side, construction was down 0.6% from February, to $262.9 billion. Educational construction declined 2.3% to $58.4 billion. However, highway construction rose 0.5% to $84.0 billion.

Consumer confidence clouds slightly

The Conference Board's Consumer Confidence Index stood at 82.3 for April, down a greater-than-expected 1.6 points from March. However, the index was still 4 points above February's 78.3 and 10.3 points above its last low reading of 72.0 in November.

The percentage of consumers who believe that current business conditions are bad rose 0.9 percentage points to 24.4%, and those who say jobs are hard to get rose 1.1 points to 32.5%. Their expectations about business conditions over the next six months held steady at 17.4%. Expectations for the labor market over the next six months were a bit more mixed; the percentage of those expecting jobs to be more plentiful rose 0.9 points to 15%, but those expecting fewer jobs also rose, up 0.4 points to 17.9%.

"While sentiment regarding current conditions may have slipped a bit, consumers do not foresee the economy, or the labor market, losing the momentum that has been building up over the past several months," Lynn Franco, director of economic indicators at The Conference Board, said in a statement.

Manufacturing builds on nearly year-long pattern of expansion

The ISM Manufacturing Index rose in April for the 11th consecutive month, up 1.2 points to 54.9. Only one category measured—the Production Index—slipped, down 0.2 points to 55.7. The New Orders Index held steady at 55.1 while the Employment Index rose for the 10th consecutive month, gaining 3.6 points to 54.7.

"Comments from the panel generally remain positive," Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee, said in a statement. "However, some expressed concern about international economic and political issues potentially impacting demand."

Manufactured goods orders up for a second month

New orders for manufactured goods rose in March by 1.1% ($5.3 billion) to $493.9 billion, building on the 1.5% gain in February but slightly below economists' expectations. Shipments were up 0.3% ($1.4 billion) to $494.9 billion; unfilled orders rose for the 13th out of 14 months, up 0.6% ($6.9 billion) to $107.1 trillion; and inventories rose for the 15th out of 16 months by 0.1% ($0.6 billion) to $643.1 billion.

Transportation equipment orders led the growth for durable goods, up 4.0% ($2.9 billion) to $74.2 billion, along with the growth for inventories, up 0.7% ($0.9 billion) to $126.0 billion. Nondurable goods saw a decrease both in new orders, down 0.6% ($1.4 billion) to $257.9 billion, and inventories, down 0.2% ($0.6 billion) to $249.7 billion. Petroleum and coal products were the primary reason for the inventories drop; they fell for the sixth time in seven months, down 2.2% ($1.1 billion) to $47.2 billion.

The economic week ahead

Next week brings four reports of note: The ISM Non-Manufacturing Index on Monday, international trade on Tuesday, and productivity and costs along with consumer credit data on Wednesday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
April 28       +2 bp +0.3%
April 29 Consumer Confidence (April)
Source: The Conference Board
82.3 83.0 +1 bp +0.5%
April 30 Employment Cost Index (1Q)
Source: Labor Department
+0.3% +0.5% –4 bp +0.3%
  Real Gross Domestic Product (1Q annual rate)
Source: Commerce Department
+0.1% +1.3%    
  FOMC Minutes
Source: Federal Reserve Board
   
May 1 Initial Jobless Claims (week ended April 26)
Source: Labor Department
344,000 318,000 –4 bp 0.0%
  Personal Income (March)
Source: Commerce Department
+0.5% +0.4%    
Personal Spending (March)
Source: Commerce Department
+0.9% +0.6%    
  Construction Spending (March)
Source: Commerce Department
+0.2% +0.6%    
  ISM Index (April)
Source: Institute for Supply Management
54.9 54.2    
May 2 Unemployment Rate (April)
Source: Labor Department
6.3% 6.6% –3 bp –0.1%
  Nonfarm Payrolls (April)
Source: Labor Department
288,000 210,000    
  Factory Orders (March)
Source: Commerce Department
+1.1% +1.4%
      Weekly change –8 bp +1.0%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
  • All investing is subject to risk, including the possible loss of the money you invest.
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