The Week's Economic Reports

Following is a summary of last week's economic reports. Steady employment growth, inline with expectations, highlighted the week causing many to breathe a sigh of relief that the labor market, if not exceptional, remains stable during a period when other parts of the economy are showing weakness. For the week, the S&P 500 Index rose 1.1 percent to 1,403 and the yield of the 10-year U.S. Treasury note rose 7 basis points to 4.59 percent.


ISM Non-Manufacturing Index: The Institute for Supply Management's non-manufacturing index came in well short of expectations in February, falling to 54.3 from a January level of 59.0 (reading above and below 50 indicate expansion and contraction, respectively). Declines were led by backlog orders and new orders. This is the lowest reading since April of 2003 and is a clear indication that the services sector is now slowing along with the manufacturing sector. Note that the ISM manufacturing index, reported last week, bounced up to 52.3 after showing contraction in two of the three prior months.

Productivity and Labor Costs: Productivity fell and labor costs rose - not a good combination for policy makers at the Federal Reserve. In line with the downward revision to fourth quarter GDP reported last week, annualized productivity for the fourth quarter fell from an earlier estimate of 3.0 percent to a revised 1.6 percent. For the year 2006, productivity also stands at 1.6 percent, the lowest level since 1997.

Unit labor costs increased much more than expected, rising from an annualized rate of 1.7 percent to 6.6 percent, following an annualized rate of 1.1 percent in the third quarter. The increase was a result of both higher hourly compensation and lower productivity. For the year 2006, unit labor costs rose 3.4 percent, the largest increase since 2000.

Factory Orders: Factory orders plunged 5.6 percent in January, the largest decline in more than six years, led by a decline in aircraft orders. This follows last week's 8.7 percent drop in new orders for durable goods, further evidence of a slowdown in the nation's manufacturing sector.

Pending Home Sales: After two consecutive months of gains, pending home sales dropped 4.1 percent in January, the decline attributed to inclement weather in much of the country during the reporting period. On a year-over-year basis, pending home sales are down 8.9 percent.

Consumer Credit: After a downwardly revised increase of $5.0 billion in December, consumer credit rose $6.5 billion in January. The bulk of the new debt was non-revolving credit (e.g., vehicle sales) rather than revolving credit (e.g., charge cards) despite weak automobile sales.

Labor Report: The employment report for the month of February showed a total of 97,000 new jobs and an unemployment rate that fell 0.1 percentage points to 4.5 percent. Upward revisions were reported for the two prior months - the gain of 111,000 initially reported in January increased to 146,000 and the December increase of 206,000 improved to 226,000.

For the month, categories showing improvement were Government (+39K), Leisure and Hospitality (+31K), Education and Health Services (+31K), and Professional and Business Services (+29K). Construction declined sharply (-62K) along with Manufacturing (-14K).

As shown in the chart below, even the now-dubious employment data from the BLS shows an underlying trend that is changing dramatically, just in the last few months. While the weather was blamed for the most recent job losses in construction, the sharpest monthly decline since 1991, there has been a steady erosion in this category for many months now as other categories such as education and health, leisure and hospitality, and professional services have remained firm.


Looking at the detail behind the construction employment data, it appears that the nonresidential construction hiring spree may now be over. Again, weather was surely a factor, but February's declines erased almost all of January's gains for nonresidential building and specialty trade, following two very weak months to close out 2006.

Residential construction employment (both residential building and specialty trade) has been declining steadily since early 2006 and took another turn for the worse last month.


On a year-over-year basis, nonfarm payroll employment increased by 1.5 percent in February. Average hourly earnings rose 0.4 percent in February after a 0.2 percent increase in January and wages are now up 4.1 percent from year ago levels. The average workweek fell slightly from 33.8 hours in January to 33.7 hours in this report.

Despite new claims for unemployment that have been rising in recent months, from a moving average of near 300,000 per week to near 330,000 per week, nonfarm payrolls have yet to show any real distress. To some degree, the loss of construction jobs was masked over by the sharp increase in new government jobs, and as always, this data is subject to massive revisions in the months ahead.

Yes, housing is a lagging indicator but, so far, there is no clear distress in the labor market.

International Trade: The trade deficit narrowed from $61.5 billion in December to $59.1 billion in January, largely a result of higher exports led by sales of civilian aircraft. While oil prices rose during the reporting period, the dollar amount of imported consumer electronics fell a whopping $1.4 billion, helping to narrow the gap.

The trade deficit with China once again grew, from $19.0 billion in December to $21.3 billion in January and, as a result of higher oil prices, the trade gap with OPEC countries widened from $7.9 billion to $9.3 billion. Trade with the European Union became more balanced, the December deficit of $9.0 billion narrowing to $6.5 billion.

Beige Book: Anecdotal information gathered from the 12 Federal Reserve districts showed a modest expansion of economic activity during the month of February. Retail sales remained strong, particularly consumer electronics, while automobile sales were weak. Housing shows continuing signs of distress both in real estate sales and for home-improvement retailers.

Summary: The case for a soft landing was bolstered by this set of economic reports. A decline in productivity and slowing growth in the ISM Services index along with plunging factory orders were countered by a narrowing trade deficit and respectable employment growth, even after a sharp decline in construction jobs. Wage pressure is still present, as evidenced by higher unit labor costs and average hourly earnings, but, the most important economic statistic of all, job growth, continues to surprise many.

The Week Ahead: Two important inflation reports will be released next week - producer prices on Thursday and consumer prices on Friday. Also scheduled for release are retail sales on Tuesday, import/export prices on Wednesday, two regional manufacturing reports and international capital flow on Thursday, and both industrial production and consumer sentiment on Friday.