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Economic Week in Review: A modest May for economy and employment

June 07, 2013

The economic word in May for Federal Reserve districts and employer payrolls was modest. Analysts believed that the increase in nonfarm payroll employment wasn't enough for the Fed to halt its efforts to stimulate the economy through its bond-buying program—at least in the short term.

For the week ended June 7, 2013, the S&P 500 Index rose 0.8% to 1,643 (for a year-to-date increase of about 16%). The yield on the 10-year U.S. Treasury note rose 1 basis point to 2.17% (for a year-to-date increase of 39 basis points).

Employment buds in May

More employers hired workers, and more workers sought employment in May, with nonfarm payrolls rising 175,000 and the unemployment rate up slightly to 7.6%. Ironically, the uptick comes from more people entering the workforce after standing on the sidelines for some time.

A number of sectors saw job growth, including business and professional services (up 57,000), food service and drinking (up 38,000), retail (up 28,000), and health care (up 11,000). A slowdown in the global economy—especially in European countries that represent some of the United States' best export markets—and a decrease in public spending are having an effect on manufacturing and some construction. Government cutbacks also affected federal public employment numbers, which declined by 14,000.

The 7.6% unemployment rate remains higher than the Fed's 6.5% threshold for policy tightening.

U.S. unemployment rate

Beige Book reports beige economic growth

Of the 12 Federal Reserve districts, 11 reported modest to moderate growth since the last Beige Book report, with Dallas reporting strong growth. Residential real estate and construction activity rose at a moderate to strong pace in all districts, while residential construction continued to contribute to growth for manufacturers supplying the materials. Since the last report, bank lending was up modestly, while credit quality generally improved. Demand for new mortgages is rising relative to refinancing, as home purchases pick up steam.

Erratic weather patterns affected agricultural growth across districts, with Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City getting too much rain and Dallas and San Francisco not getting enough.

While hiring rose at a measured pace, New York, Philadelphia, Richmond, Minneapolis, Kansas City, and Dallas reported problems finding qualified workers to fill vacancies. Wage pressures stayed in check despite the hiring difficulties reported by those districts. Most districts saw slight to moderate growth in consumer spending, while price increases were level to mild.

Construction spending up, but less than expected

Construction spending rose 0.4% in April to $860.8 billion, according to the U.S. Department of Commerce. Overall, spending came in below economists' expectations of 0.8% growth, thanks to a drop in public construction spending (down 1.2% to $258.8 billion) and a dip in residential construction (down 0.2% since March, but up 18.3% since April 2012).

The picture for private-sector construction was more sunny than cloudy. While fewer home-improvement projects clouded the overall residential results, new home construction was up for both single-family homes (1.4% since March and 38.6% since April 2012) and multifamily homes (3.4% since March and 48.6% since April 2012). Total nonresidential construction also picked up momentum in April, increasing 0.7% to $552.5 billion. Power building surged 7.8% to $92.6 billion, while sewage and water disposal swelled 7.7% to $21.5 billion.

Manufacturing contracted, while non-manufacturing bounced back

The Institute for Supply Management's (ISM's) manufacturing index for May was down for the third consecutive month, falling 1.7 percentage points to 49%. Along with being the first time the index dropped below 50% since November 2012 (when Hurricane Sandy hit the East Coast), it also reached its lowest level since June 2009, when it was 45.8%. Economists had expected a much smaller decrease of 0.2 percentage point.

The service sector provided some counterbalance to manufacturing results in May. The ISM's non-manufacturing index was 53.7%, up 0.6 percentage point over the previous month. New orders reached a three-month high of 56%, but the drop in the employment gauge to 50.1% (the lowest since July 2012) added a touch of gray to the results.

For both indexes, a number under 50% indicates contraction, while one above 50% indicates growth in activity.

"Initial market concerns over the manufacturing release abated somewhat, thanks to stronger growth in the service sector," said Vanguard economist Andrew J. Patterson. "Going forward, market participants will continue to watch the ISM surveys for both sectors, particularly the new orders and employment indexes."

International trade deficit widened

The international trade deficit of $40.3 billion in April was up 8.5% (or $3.2 billion) from March's revised deficit of $37.1 billion. While the United States exported $2.2 billion more in goods and services (the second highest increase since data tracking began), the $5.4 billion increase in imports (a 2.4% rise) more than offset that number.

Imports swelled in two big categories: consumer goods, up $3.0 billion thanks in part to consumer demand for popular mobile phones, and autos, driven up $1.3 billion. Weakness in the global economy—especially the European Union, where U.S. exports declined 7.9%—kept export increases in check.

There's some good news though. The trade deficit was lower than economists' consensus estimate of $41.0 billion. Also, for the year so far, the annual deficit rate of $491.9 billion is running 8% below 2012's deficit of $534.7 billion.

Transportation pushes new manufacturing orders up

April brought a little spring to new orders of manufactured goods, with a 1.0% rise after a dismal March, when they dropped 4.7%. The volatile transportation industry was a major contributor for the increase. Orders for commercial aircraft and parts were up 16.9% to $12.2 billion, and those for the defense industry were up a whopping 53.3% to $4.4 billion, while ships and boats were up 14.4% to $1.5 billion. Stripping out transportation, new orders were down 0.1%.

Looks can be deceiving when it comes to the drop in labor costs

For the first quarter of 2013, the 4.3% drop in unit labor costs is somewhat less dramatic than it appears because of the period to which it's compared. Labor costs in the fourth quarter of 2012 took a huge 11.8% jump, with a 9.9% spike in hourly compensation, as many employers accelerated payment of January bonuses in anticipation of tax-policy changes effective January 2013. In comparison, compensation per hour in the first quarter of 2013 fell 3.8%.

Employee productivity was up 0.5% for the first quarter of 2013, slightly lower than the 0.7% estimated in an earlier report. Consensus expectations were that the estimate would remain unchanged.

The economic week ahead

Reports on retail sales and business inventories are slated for release on Thursday, while the Producer Price Index and industrial production are scheduled for Friday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
June 3 Construction Spending (April)
Source: Commerce Department
+0.4% +0.8% –3 bp +0.6%
  ISM Index (May)
Source: Institute for Supply Management
49.0 50.5    
June 4

U.S. Trade Balance (April)
Source: Commerce Department

–$40.3 billion –$41.0 billion +1 bp –0.6%
June 5 Nonfarm Productivity (1Q annual rate)
Source: Labor Department
+0.5% +0.7% –4 bp –1.4%
  Unit Labor Costs (1Q annual rate)
Source: Labor Department
–4.3% +0.5%    
  Factory Orders (April)
Source: Commerce Department
+1.0% +1.5%    
  ISM Non-Manufacturing Index (May)
Source: Institute for Supply Management 
53.7 53.8    
  Beige Book 
Source: Federal Reserve Board
   
June 6 Initial Jobless Claims (week ended June 1)
Source: Labor Department
346,000 345,000 –2 bp +0.8%
June 7 Unemployment Rate (May)
Source: Labor Department
7.6% 7.5% +9 bp +1.3%
  Nonfarm Payrolls (May)
Source: Labor Department
+175,000 +168,000    
  Consumer Credit (April)
Source: Federal Reserve Board
+$11.1 billion +$12.5 billion    
      Weekly change +1 bp +0.8%

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 possible loss of the money you invest.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
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