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Economics Repap Of US Markets


Before an ugly ending, the holiday shortened week got off to a good start on Tuesday as Greek pre-election opinion polls showed voters supporting pro-bailout parties. This offset a disappointing consumer confidence number and a rating cut to Spain. On Wednesday, the slide in stocks started in earnest after Chinese news agency Xinhua said there was no plan to introduce stimulus measures of the scale seen during the depths of the global financial crisis in 2008 to revive growth. Also, pending home sales unexpectedly dropped and sharply.

On Thursday, employment news outweighed positive news from Europe. Initial jobless claim rose notably and ADP's estimate for private payrolls growth came in weaker than expected. Partially offsetting was a report of possible plans to help Spain deal with its banking crisis. First quarter GDP was revised down but matched expectations.

The big downdraft came Friday after a near negligible rise in payroll jobs and an uptick in the unemployment rate. A 69,000 rise in total payroll jobs for May was sharply lower than the median forecast for 150,000. Downward revisions to March and April added to downward momentum. Other indicators for the day (personal income, ISM manufacturing, PMI manufacturing, and construction outlays) were about as expected and moderately positive but were overwhelmed by the employment news.

Equities were down significantly this past week. The Dow was down 2.7 percent; the S&P 500, down 3.0 percent; the Nasdaq, down 3.2 percent; the Russell 2000, down 3.8 percent; and the Wilshire 5000, down 3.2 percent.

Equities were down sharply in May. The Dow was down 6.2 percent; the S&P 500, down 6.3 percent; the Nasdaq, down 7.2 percent; the Russell 2000, down 6.7 percent; and the Wilshire 5000, down 6.5 percent.

After a terrible May, the first day of trading in June tipped the balance for some index gains in 2012, leaving the Dow and others in negative territory for the year. For the year-to-date, major indexes are mixed as follows: the Dow, down 0.8 percent; the S&P 500, up 1.6 percent; the Nasdaq, up 5.5 percent; the Russell 2000, down 0.5 percent; and the Wilshire 5000, up 1.5 percent.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.


The factors for the bond market this past week were not complicated. It was flight to safety over Europe (notably Spain this past week) and anemic labor market data for the U.S. Also, Treasury yields eased when it became apparent that China would not be engaging in a massive stimulus program.

After Friday's extremely disappointing employment report for May, the 30-year T-bond yield hit a record low, posting at 2.52 percent at close. The 10-year rate fell below 1.5 percent.

For this past week Treasury rates were down as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 4 basis points; the 5-year note, down 14 basis points; the 7-year note, down 24 basis points; the 10-year note, down 28 basis points; and the 30-year bond, down 32 basis points.

Treasury yields for longer maturities have been trending down significantly over the last three months and are at or below lows seen during the worst of the financial crisis in 2008.


The spot price of crude dropped sharply this past week. After a quiet open for the week on Tuesday, spot West Texas Intermediate fell almost $3 per barrel on speculation that U.S. crude stockpiles were up significantly and on weakness in the euro. A sizeable boost in crude oil inventories bumped the spot price down further on Thursday (holiday delayed release) with disappointing initial claims and ADP employment also coming into play. Friday's employment report knocked crude down by over $3 per barrel.

Net for the week, the spot price for West Texas Intermediate dropped a dramatic $7.43 per barrel to settle at $83.23. This is the lowest settle since October 7, 2011 when WTI closed at $82.98.

The Economy

There actually was some moderately positive economic news this past week-emphasis on some. But an extremely sluggish employment report for May and other labor data outweighed everything else.

Employment growth slows to a crawl

The May employment report showed the economy slowing sharply. The unemployment rate rose to 8.2 percent in May from 8.1 percent the prior month. Payroll jobs in May rose only 69,000, following increases of 77,000 in April and 143,000 in March. The net revisions for March and April were down 49,000.

Private payrolls gained 82,000 in April after an 87,000 advance the prior month.

Goods-producing industry employment fell 15,000 after a 4,000 rise in April. For the latest month, manufacturing increased 12,000; construction fell 28,000; and mining edged up 1,000.

Private service-providing industry employment rose 97,000, following an 83,000 increase in April.

The public sector continued to shrink with a 13,000 drop in government employment.

Average hourly earnings edged up 0.1 percent, matching the pace in April. The average workweek slipped to 34.4 hours from 34.5 in April. Analysts called for 34.5 hours for May.

Back to the household survey, there are additional signs of a more sluggish labor market. The median duration of unemployment rose to 20.1 weeks from 19.4 weeks in April. The expanded definition of unemployment and underemployment increased to 14.8 percent in May from 14.5 percent the prior month.

Looking ahead, the employment numbers suggest negative numbers for upcoming reports on personal income and industrial production. The private wages & salaries component in personal income for May is likely to be soft as aggregate private earnings declined 0.1 percent. The manufacturing component in industrial production is likely to be negative as production worker hours in manufacturing fell 0.5 percent.

Personal income and spending post gains in April,

Income growth in April was modest but consumers were spending at a healthy pace as gasoline prices dipped. Personal income in April rose 0.2 percent, following a 0.4 percent increase the month before. The important wages & salaries also slowed to a 0.2 percent rise from a 0.3 percent boost in March.

However spending is outpacing income. Consumer spending in April picked up the pace with a 0.3 percent gain after a 0.2 percent rise in March. By components, durables jumped 0.6 percent while nondurables declined 0.2 percent and services gained 0.4 percent.

Chain-weighted (constant dollar) spending increased 0.3 percent in April, following no change the month before. This is a good start for second quarter GDP estimates.

Inflation numbers are coming in soft and will let the Fed keep its policy options flexible. The headline PCE price came in flat versus a 0.2 percent rise in March. The core rate rose 0.1 percent after a 0.2 percent boost in March. Year-on-year, headline prices were up 1.8 percent, compared to 2.1 percent in March. The core was up 1.9 percent versus 2.0 percent in March. Both numbers are below the Fed's inflation goal of 2 percent.

Job growth may be anemic but consumers (at least those with jobs) are doing more than their part to keep the recovery going.

Motor vehicle sales dip in May but remain relatively healthy

The number of vehicles sold in May fell a sizable 4.4 percent from April to an annual rate of 13.8 million which is the lowest rate of the year. Weakness was centered in cars which on average cost less than trucks and which should help limit the monthly effect on the government's retail sales report which is measured in dollars. Still, May was a disappointment especially given industry and press reports that the month's sales were strong. Nonetheless, the May pace is quite a bit healthier than the recession low of 6.7 million for April 2009 and even a recent low of 11.6 million seen in June 2011.

Consumer confidence slips in May

In contrast to the recent improvement in the Reuters/University of Michigan consumer sentiment index, the Conference Board's measure retreated in May. The consumer confidence index fell 3.8 points to 64.9 from a downwardly revised 68.7 in April. This decline is in direct contrast to the consumer sentiment index which broke out to new recovery highs.

The expectations component of consumer confidence declined to 77.6 from April's 80.4, showing the least optimism since January. The assessment of the present situation index also dropped, to 45.9 from 51.2.

First quarter GDP revised down

First quarter GDP growth was downgraded with the Commerce Department's second estimate. Real GDP grew a modest 1.9 percent, compared to the initial estimate of 2.2 percent and fourth quarter pace of 3.0 percent, annualized.

The downward revision was due to lower estimates for durables PCEs, services PCEs, inventory investment, and government purchases and a higher estimate for imports. Partially offsetting were higher estimates for nondurables PCEs, nonresidential fixed investment, residential investment, and exports.

Demand numbers actually improved marginally. Both final sales of domestic product and final sales to domestic purchasers were bumped up to 1.7 percent from 1.6 percent for the first quarter. The first came in at 1.1 percent in the fourth quarter while the latter posted at 1.3 percent in the same period.

Separate from the direction of revisions, the increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, residential fixed investment, private inventory investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

Economy-wide inflation according to the GDP price index was a little warmer than originally believed, rising a revised 1.7 percent versus the original figure of 1.5 percent for the first quarter,

ISM manufacturing better in details for May

The ISM composite index for manufacturing slipped to 53.5 in May from 54.8 the prior month. The latest is still well within positive territory, indicating moderate growth. But details are even better.

The ISM's new order index was up 1.9 points to 60.1 for the strongest rate of monthly growth since April of last year. This portends an improvement in manufacturing overall. For May, production growth slowed but remained healthy while employment growth is steady and healthy. Inventories are coming down even as new orders pick up, a combination that points to the need for inventory building which is a solid positive.

Other measures for manufacturing are coming in mixed for May.

Markit PMI decelerates but remains positive

May was a healthy month for US manufacturing based on Markit's PMI which came in at 54.0, safely above 50 to indicate growth compared to April but 2 points below April to indicate a slower rate of growth. Output was steady while new orders came in at a moderate and sustainable rate. However export orders, reflecting weakness in Europe and China, were flat. Total backlogs continued to build while inventories were healthy and steady.

Dallas Fed manufacturing survey points to slowing

The latest Dallas Fed manufacturing survey adds to the argument that manufacturing is slowing in terms of growth-but not declining. It seems factory managers are more nervous than the data. The Dallas Fed general business activity index for current conditions slipped to minus 5.1 in May from minus 3.4 the month before. However, production held steady at 5.5 versus 5.6 in April, reflecting modest growth.

However, forward momentum appears to have turned negative for the near term. The new orders index declined to minus 3.7 from minus 2.6 in April. Unfilled orders improved to minus 4.0 from minus 8.3.

However, plant managers must be somewhat optimistic about future activity as the number of employees index remains moderately positive at 8.5 in May, compared to 11.8 the month before.

For the six-month outlook, the numbers are more favorable. The general business activity slowed to 4.3 in May from 15.7 but remained positive. The production index is relatively strong at 31.6, compared to 38.5 in April. The bottom line is that manufacturing activity is still positive in Texas even as factory managers are a little nervous about the strength of activity.

Pending home sales unexpectedly drop

Last week, housing data suggested that this sector had made it past seasonality issues, leaving housing activity level or up slightly over recent months. But this week's data are not as encouraging, although they are mixed.

Pending home sales had been offering some of the most promising signs for the US housing market. But not after the April results which show a surprising and sharp 5.5 percent monthly drop that includes an even sharper decline in the report's largest region which is the South. April's drop ends three prior months of gains. The results, which are based on contract signings, point to weakness for existing home sales in May and June.

Case-Shiller home prices nudge up in March

The latest numbers are sluggish but at least they are in the right direction. Home prices were on the rise in March and February, up 0.1 percent in March for the adjusted composite 20 index and up 0.2 percent in February. This is the first back-to-back monthly gain since the spring of 2010. The year-on-year rate of minus 2.6 percent is the best reading since December 2010.

Phoenix is really on the rebound with Miami, Tampa, Minneapolis and Dallas all showing a run of stand-out strength. But Atlanta shows continued contraction as does Chicago and New York.

Unadjusted data show no monthly change in March and, like the adjusted data, minus 2.6 percent contraction for the year-on-year rate. Home prices may finally be moving up from the bottom.

Construction outlays show moderate gains

Home Construction spending posted a 0.3 percent gain in April, following an upwardly revised 0.3 percent boost the month before (originally up 0.1 percent). The gain in April was led by private residential outlays which increased 2.8 percent after a 0.4 percent rise in March. For the latest month, new multifamily outlays jumped 4.1 percent while new single-family spending rose 1.8 percent. Public outlays fell 1.4 percent while private nonresidential outlays dipped 0.2 percent in April.

On a year-ago basis, overall construction came in at up 6.8 percent in April, compared to 7.3 percent the prior.

The construction sector is showing modest and gradual improvement. The recovery is not very strong currently but at least there are numerous indications that recession is not back. Slight positive growth certainly is better than decline. However, the latest drop in pending home sales is worrisome.

The bottom line

The recovery currently is wobbly but still positive. The consumer appears to be more optimistic than businesses as spending is moderately strong even though hiring has slowed to a crawl. Manufacturing and housing are still expanding but at a sluggish pace instead of moderately strong some months ago. But inflation is softer, giving consumers more spending power and the Fed more room to remain very accommodative.

Looking Ahead: Week of June 4 through 8

After the past week's deluge of data, the upcoming week is light. Tuesday's ISM non-manufacturing report likely garners attention for signs of whether the economy is as weak as Friday's employment report. Similarly, traders will parse Wednesday's Beige Book for the direction of growth and the possibility of QE3. At week's end, the international trade report will give indications of the impact of Europe on exports and whether businesses are optimistic enough to boost imports on their shelves and in their showrooms.


Factory orders fell 1.5 percent in March for the steepest decline in two years. Among main components, the larger of the two, orders for non-durable goods, rose 0.5 percent on strength in food products. Durables fell 4.0 percent reflecting broad weakness. More recently, durables orders made a slight 0.2 percent comeback in April, following a 3.7 percent decrease the month before.

Factory orders Consensus Forecast for April 12: +0.1 percent

Range: -0.4 to +0.5 percent


The composite index from the ISM non-manufacturing survey slowed sharply in April to 53.5 from a very strong 56.0 in March. New orders posted their lowest monthly growth in six months as did business activity which in this report refers to output. The new orders index eased to 53.5 from 58.8 in March. The ISM's sample added jobs in April but at the slowest pace of the year.

ISM non-manufacturing composite index Consensus Forecast for May 12: 53.5

Range: 52.0 to 55.1


Nonfarm business productivity dipped an annualized 0.5 percent in the first quarter after rising 1.2 percent in the previous quarter. The output component slowed to 2.7 percent from 3.7 percent in the fourth quarter. Hours worked grew to an annualized 3.2 percent in the first quarter from 2.4 percent the prior period. But compensation slowed to 1.5 percent from 3.9 percent in the fourth quarter. In turn, unit labor costs eased to an annualized increase of 2.0 percent, following a 2.7 percent gain in the fourth quarter. Given that GDP growth for the first quarter was revised down from 2.2 percent to 1.9 percent, it is likely that productivity and unit labor costs also will be downgraded.

Nonfarm Business Productivity Consensus Forecast for revised Q1 12: -0.8 percent annual rate

Range: -1.1 to 0.0 percent annual rate

Unit Labor Costs Consensus Forecast for revised Q1 12: +2.1 percent annual rate

Range: +1.2 to +2.5 percent annual rate

The Beige Book is for the June 20 FOMC meeting. More and more question marks are popping up on sector strengths and weakness, so traders will be parsing every section of the Beige Book, although anything related to employment is likely to get extra attention after the disappointing jobs report for May.


Initial jobless claims in the May 26 week climbed to 383,000, up 10,000 from the prior week which was revised 3,000 higher to 373,000. The four-week average was up 3,750 but the 374,500 level still compares well to the level at the end of April which was 384,250. Continuing claims moved lower, down 36,000 to 3.242 million in data for the May 19 week.

Jobless Claims Consensus Forecast for 6/2/12: 379,000

Range: 365,000 to 385,000

Consumer credit outstanding jumped $21.4 billion to $2.54 trillion in March. Prior months showed very sizable gains of $20.0 billion in November, $16.3 billion in December, $18.6 billion in January, and $9.3 billion in an upwardly revised February. The gain was led by non-revolving credit where the gain was concentrated in student loans. Also revolving credit did rise, up $5.2 billion in the month following two prior months of declines.

Consumer credit Consensus Forecast for April 12: +$12.0 billion

Range: +$7.5 billion to +$18.9 billion


The U.S. international trade gap in March expanded to $51.8 billion from $45.4 billion in February. Exports rose 2.9 percent after a 0.3 percent increase in February. Exports hit a record high. They also have risen four months in a row. Imports rebounded a sharp 5.2 percent, following a 2.8 percent drop the month before. The worsening in the trade gap was led by the non-petroleum goods deficit which ballooned to $38.8 billion from $32.8 billion in February. The petroleum goods gap also grew-to $28.6 billion from $27.6 billion. The services surplus expanded to $38.3 billion from $37.9 billion.

International trade balance Consensus Forecast for April 12: -$49.3 billion

Range: -$53.0 billion to -$46.3 billion

Wholesale inventories rose 0.3 percent in March with sales up 0.5 percent to keep the sector's stock-to-sales ratio unchanged for a fourth month in a row at a lean and healthy 1.17.

Wholesale inventories Consensus Forecast for April 12: +0.5 percent

Range: +0.2 to +1.1 percent