Economic Report Summary: Manufacturing Rebound, Steep Losses in Retail Jobs

by: Tim Iacono

Following is a summary of last week's economic reports. Stronger than expected manufacturing activity and wage growth were more than offset by the weakest nonfarm payrolls total since 2004, though this seemed to make little difference to equity investors.

Stocks and bonds ended the week with the S&P 500 Index rising 0.8 percent to 1506, now up 6.1 percent on the year, and the yield of the 10-year U.S. Treasury note down 6 basis points to 4.64 percent.


Personal Income and Spending:
Personal income increased 0.7 percent in March, matching the upwardly revised gain from February with the important "wages and salaries" component rising 0.7 percent as well. On a year-over-year basis incomes have risen 5.7 percent, well above reported inflation, but not enough for many to keep pace with rising costs such as energy and medical care. The personal savings rate (total disposable income minus consumption) remained in negative territory at -0.8 percent but was an improvement over last month's -1.2 percent. The personal savings rate has been negative for more than two years.

Though the headline number for personal spending was plus 0.3 percent in March following a 0.6 percent increase in February, inflation adjusted spending fell 0.2 percent. This was only the second decline in real spending over the last eighteen months and the lowest reading since Hurricane Katrina. Overall consumer prices as measured by the PCE (personal consumption expenditures) price index were unchanged at 0.4 percent.

ISM Manufacturing Index: The Institute for Supply Management's manufacturing survey rose from 50.9 in March to 54.7 in April, its highest reading since April of last year. Particular strength was seen in new orders (up from 52.6 to 58.5), backlog orders (up from 47.0 to 54.5), and employment (up from 48.7 to 53.1), however, rising prices (up from 65.5 to 73.0) once again played a big role in the overall increase, largely driven by higher energy costs.

This is certainly a good sign for the manufacturing sector as the nation's broadest measure of manufacturing activity has been below the 50 level (indicating contraction) twice in the last six months. Most recent regional manufacturing reports have been weak, so it is not known with any certainty whether this was a one-off event related to inventory adjustments or the start of a trend.

Pending Home Sales: Influenced by unseasonably cold weather during the reporting period, pending home sales saw their steepest drop in a year falling 4.9 percent in March after a modest 0.7 percent increase in February. On a year-over-year basis the pending home sales index is down 10.5 percent.

Factory Orders: Factory orders rose 3.1 percent in March following an upwardly revised gain of 2.3 percent in February. Orders for durable goods rose 3.7 percent, exceeding the 3.4 percent increase indicated in last week's durable goods report, and orders for nondefense capital goods (excluding aircraft) rose 4.8 percent, the sharpest increase since October of 2004. This was a particularly good report coming at a time when serious doubts continue to develop about manufacturing activity and the willingness of consumers to continue purchasing big ticket items.

ISM Non-Manufacturing Index:
The Institute for Supply Management's non-manufacturing index rebounded sharply from a four-year low of 52.4 in March to 56.0 in April. Strength was seen in new orders and employment while price rose only modestly.

Productivity and Labor Costs:
Productivity grew at an annualized rate of 1.7 percent during the first quarter following a 2.1 percent increase in the fourth quarter. The increase in unit labor costs slowed sharply from a 6.6 percent annualized pace in the fourth quarter to just 0.6 percent. The wage data in this report is at odds with the personal income reported earlier in the week painting a confusing picture of labor compensation trends during the first quarter, a time when bonuses and government pay increases also play a role.

Labor Report: Overall, nonfarm payrolls increased by 88,000 in April, the smallest increase since late-2004. This is part of a continuing decline in the number of new jobs added each month since averaging close to 200,000 per month from 2004 to 2006 and peaking at 351,000 per month in late-2005.

For the first time in a very long while, there were downward revisions to the previous two months of data, the February total being revised from 113,000 down to 90,000 and the count in March falling from 180,000 to 177,000. In the first four months of the year, the average monthly increase has been 129,000.

The health care industry provided the bulk of the job gains with 47,400 new positions while governments and restaurants each added another 25,000. Professional and business services added 24,000 spots highlighted by over 11,000 each for computer systems designers and technical consultants.

Posting net job losses for the month were retail trade (-26,000), manufacturing (-19,000), construction (-11,000), and financial activities (-11,000). Within the retail trade category, a whopping 41,000 positions were lost at department stores and general merchandise stores.

The household survey showed a tiny increase in the unemployment rate, rising from 4.4 percent to 4.5 percent, and average hourly earnings rose 0.2 percent to $17.25.

Summary:
Rising income and a rebound in manufacturing and services activity were offset by a disappointing employment report where the number of jobs created fell to a two and a half year low. Though initial jobless claims have fallen back in recent weeks, it is still likely that further weakness in employment will develop in the months ahead as the long-awaited construction layoffs finally show up in the labor statistics.

Perhaps of more importance in the most recent employment report were the steep job losses in retail trade. While this is a volatile category, it may be signaling a slowdown in consumer spending. Higher consumer prices in recent months may have painted a misleading picture of the health of the consumer sector (i.e., paying higher prices for fewer goods boosts overall spending but requires fewer workers).

The Week Ahead: The Federal Open Market Committee meets on Wednesday and no changes are expected for interest rates or the Fed's policy outlook. Economic reports in the week ahead will be highlighted by retail sales on Friday. Also scheduled for release are consumer credit on Monday, import/export prices and international trade on Thursday, and producer prices on Friday.