Weekly Economic Update

(-) The ISM Manufacturing report came in a bit weaker than expected, falling from April’s 50.7 to 49.0 for May, compared to the 51.0 level anticipated and pushing the measure to its lowest level in three years.  Weaker underlying components included forward-looking new orders and production, while inventories rose by a few percentages points.  The underlying employment segment, however, was largely unchanged.

(+) The May ISM Non-Manufacturing index, on the other hand, came in higher than the previous month and a bit better than expectations, at 53.7 versus 53.5.  Details were mixed, with new orders and business activity improving, while employment continued to fall (a significant drop since January).  This index, like its manufacturing counterpart, continues to plod along near its lowest level in three years, but with the diffusion index being over 50, suggests slow/moderate growth looking forward.

(-) Factory orders gained +1.0% for April, which disappointed somewhat relative to the anticipated +1.5%; however, March orders were revised down by an additional 0.7%, which tempers the overall April change.  Core capital goods shipments were revised up a bit for both months, and non-durable inventories fell a bit.  This looks to be more of a flat period for factory orders, while the lack of inventory is a bit of a negative influence.

(-) Construction spending for April rose +0.4%, which lagged the consensus guess of +0.9% growth; however, March’s decline revised by half.  The non-residential segment rose +0.7%, running counter to March’s decline, while residential spending declined by -0.2%.  Unsurprisingly, spending for Federal and state/local governments fell again, by -1.2%, resulting in a year-over-year decline of over -5%.  Private construction made up the difference, up +1.0% on the month and +9% for the 12-month period.

(+) Total vehicle sales for May exceeded expectations after falling off a bit in April, as seasonally-adjusted annual units totaled 15.2 million versus the 15.1 million expected.  Domestic vehicle sales as a portion of this were on target at 11.95 million.  This is reassuring in that demand has not fallen off too much during a period of mixed spring economic data.   In the recent recessionary years, partially as a consequence of consumer uncertainty about the economy and high and unemployment levels—and partially due to improved product quality—the average age of autos on the road lengthened to about the longest it’s ever been (over 10 years if memory serves).  But, there is a finite life for these and other durable goods and purchases can be only be postponed so long.  It appears the trend has improved dramatically from lows of under 10 million/cars a year during the crisis to a number more in line with the long-term 20-year average.

(+) The U.S. trade balance (aka deficit) widened a bit less than expected in April to -$40.3 billion versus a forecasted -$41.1 billion.  Exports grew a percentage point, with help from a double-digit gain in consumer goods, even though imports grew by nearly 2.5%.  A key component in the monthly change, other than usual volatility in petroleum, was a reversal in the trade deficit with China.

(0) The most recent Fed beige book, which covers anecdotal business activity through the dozen different Fed districts, reported that economic growth is occurring at a ‘modest to moderate pace,’ which is a slightly less buoyant description than the ‘moderate’ noted in the last report.  From district to district, conditions were relatively consistent with the national trend other than the Dallas Fed, which was described as ‘strong.’  Overall, the manufacturing slowdown noted in other data was less pronounced in this report, which continued to note an expansion.  This was at least partially due to construction and other real estate-related activity, which continued to be a bright spot in many regions (more on the residential side than commercial).  Slowness due to sequester effects in the defense industry, though, was notable, particularly in the Richmond district where this plays a significant role in the local economy around D.C., as well as in the Atlanta region.  This affected employment in those areas, but anecdotes do not appear any worse than noted in previous reports.

(0) With no special adjustments or considerations, initial jobless claims for the June 1 week dropped as expected, to 346k, relative to the forecasted figure of 345k—and bringing the 4-week moving average of claims to 353k.  Continuing claims for the May 25 week came in at 2,952k, which was lower than the 2,973k forecasted figure and continued to trend lower.

(-) The ADP employment report, which comes out mid-week in advance of the closely-watched government report, came in a bit weaker than expected, showing a gain of +135k jobs versus a forecasted +165k number.  Looking at these figures from an industry/size standpoint is informative.  Manufacturing jobs fell by -6k, which is largely in line with weaker manufacturing survey output; construction jobs gained by +5k; and services jobs rose by +138k.  From a size standpoint, large firms added 58k jobs, while mid-sized and smaller firms added 39k jobs each.  All-in-all, the relationship between ADP and the monthly government report is not always consistent (as both have a high degree of statistical error embedded), but this release offers a unique and potentially useful supplemental snapshot.

(0) In other employment measures, first quarter nonfarm productivity grew +0.5%, which was just a tenth of a percent below forecast and was revised down from an initial +0.7% figure quoted.  Unit labor costs fell -4.3% for the first quarter, which was a bit of a surprise relative to the expected increase of a half-percent.  This is a fairly extreme reading (in fact, the biggest per hour drop in per hour labor compensation since the series began in the late 1940’s)—however, it appeared to be the result of a one-time tax-related distortion….the hourly compensation for Q4-2012 was revised from +2.7% to +9.9%.

(0) The government employment situation report released on Friday showed a payroll increase of +175k jobs, which was slightly better than the +163k expected; however, there were downward revisions for some prior months.  Composition of new jobs was consistent with recent history, with gains of +57k in professional/business services, +43k in hospitality/leisure and +28k in retail; manufacturing, by contrast, lost -8k and the Federal government continued to bleed jobs at a rate of nearly -10k a month (excluding the USPS, which has its own problems).  The latter note was of interest for possible indications of sequester effects on the job market—these seem to be somewhat modest so far.

(0) The unemployment rate was expected to come in at last month’s figure of 7.5%, but, instead, rose a tenth of a percent to 7.6% (actually, 7.555% for those interested in more nuanced detail), much of which was due to a larger labor force participation pool.  From the household survey this figure is tied-in with, employment rose +319k.  Average hourly earnings were unchanged in May, despite expectations of a slight +0.2% increase (growth over the last twelve months was +2.0%, consistent with other wage growth measures), while private aggregate weekly payrolls did actually increase +0.2%.  Average weekly hours worked were unchanged at 34.5.


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