The week's economic reports

Following is a summary of last week's economic reports. Anemic first quarter growth was confirmed and labor markets remained steady amid more signs of a nascent recovery in manufacturing and consumer confidence. Stocks and bonds ended the week with the S&P 500 Index up 1.4 percent to a new all-time high of 1536, now up 8.3 percent on the year, and the yield of the 10-year U.S. Treasury up 9 basis points to 4.96 percent.


Consumer Confidence: Consumer confidence as measured by the Conference Board bounced back from a two-month decline, rising from an upwardly revised 106.3 in April to 108.0 in May. Most of the gains were achieved in the present situation index as the expectations index rose only modestly. While the outlook on jobs was virtually unchanged, rising gas prices pushed the one-year inflation expectations index from 5.1 percent to 5.5 percent, almost three percentage points higher than the current year-over-year inflation rate of 2.6 percent as reported by the Bureau of Labor Statistics.

It appears as though consumers have once again become accustomed to higher gas prices which had affected this index during the early months of the year. Higher stock prices are likely contributing to the rebound in consumer outlook as equity markets around the world continue to make new highs.

Gross Domestic Product: Coming in below consensus estimates, the second of three readings on first quarter real GDP saw last month's advance estimate of 1.3 percent reduced by more than half. The downward revision was attributed to lower than expected inventories and a wider trade deficit due largely to higher oil prices. The final reading on first quarter GDP will be available at the end of June.

Consumer spending was revised upward from a 3.8 percent increase to a 4.4 percent increase. It contributed just over three percentage points to overall GDP growth, from which negatives like residential investment and the trade deficit were then subtracted to get to the 0.6 percent figure.


On a year-over-year basis, real GDP rose 1.9 percent, a sharp slowdown from the fourth quarter's year-over-year gain of 3.1 percent.

Many analysts are forecasting a rebound in the second quarter as a number of economic indicators have shown noticeable improvement in recent weeks, the thinking being that this will lead to higher capital investment and higher inventories.

What has not shown noticeable improvement in recent weeks are residential construction and consumer spending. Absent a huge turnaround in the weeks ahead, housing will be a net negative for second quarter GDP and, as always, personal consumption remains the most important wild card, now accounting for more than 70 percent of economic activity.

The inflation gauge used to adjust nominal economic growth to real economic growth, otherwise known as the PCE deflator, was unrevised from the initial estimate of 4.0 percent. Core PCE, excluding food and energy, was also unchanged at 2.2 percent.

Chicago PMI: A large jump in both manufacturing and non manufacturing activity in the Chicago area was reported last month as the purchasing managers index rose from 52.9 in April to 61.7 in May. This report is plagued by volatility due to small and changing sample sizes, however, the rebound is in line with other indicators showing a pick up in activity.

Construction Spending: Construction spending rose 0.1 percent in April after an upwardly revised increase of 0.6 percent in March. Private residential construction continued its long decline, falling 1.0 percent for the month, while private nonresidential construction gained 1.5 percent.

Labor Report: Employment strengthened in May, nonfarm payrolls posting an overall increase of 157,000 jobs after downwardly revised gains of 80,000 in April and 175, 000 in March. The downward revisions for March and April totaled 10,000. On a year-over-year basis, payrolls have increased 1.4 percent, unchanged from last month.


Strength was seen in services industries led by health care and social assistance (up 36,000), food service (up 34,000), and professional and business services (up 32,000). Manufacturing payrolls fell 19,000 and construction employment was flat.

There has been much controversy surrounding construction payrolls as reported by the BLS (Bureau of Labor Statistics) amid the sharp slowdown in housing.

It is important to note that for the month of May, before seasonal adjustments, a total of 215,000 new construction jobs were reported by state insurance agencies. To this total, 40,000 were added to account for the formation of new businesses via the birth/death model, and the seasonal adjustment of -255,000 brings the total new jobs for the month of May to zero, as reported by the BLS.

The BLS concedes that the birth/death model performs poorly during economic transitions and if the housing market continues its current swoon, current birth/death model additions will likely prove to be painting a rosier picture than the reality on the ground. Paul Kasriel at Northern Trust wrote an excellent piece (.pdf) on this subject on Friday that is well worth reading.

Hourly earnings rose 0.3 percent in May, following a 0.2 percent gain in April. On a year-over-year basis, hourly earnings climbed 3.8 percent, up slightly from the year-ago level in April. The average workweek was steady at 33.9 hours and the unemployment rate reported via the household survey was unchanged at 4.5 percent.

Overall, this was not a bad report but it does demonstrate the long-term changes that continue in the U.S. economy. Once again, after a multi-year respite due to the housing boom, job creation for all "goods-producing" categories (natural resources/mining, manufacturing, and construction) is again contracting while service categories expand. Also, annual wage gains of under four percent are ahead of "official" inflation, but many workers feel as though they are falling behind.

Personal Income and Spending: Personal income fell 0.1 percent in April largely a result of higher first quarter compensation due to bonuses and government raises. Consumption remained robust, gaining 0.5 percent and the personal savings rate remained negative.

ISM Manufacturing Index: The ISM manufacturing index rose slightly from an April level of 54.7 to 55.0 in May, providing more evidence of a nascent recovery in the production of goods despite continued job loss in manufacturing (readings above and below 50 indicate expansion and contraction, respectively). After falling below 50 for the first time in November of 2006 and then bottoming in January at 49.3, the broadest measure of manufacturing activity has now risen in three of the last four months.

Gains in April were seen in new export orders (from 57.0 to 59.0) and new orders (from 58.5 to 59.6) while prices paid declined (from 73.0 to 71.0) along with employment (from 53.1 to 51.9). The increase in new export orders to an all-time high is a good sign for U.S. exports that seem to be benefiting from a weaker dollar and strong economies overseas.

Consumer Sentiment: The University of Michigan consumer sentiment index fell from a mid-May level of 88.7 to a final-May reading of 88.3. This is, however, an improvement over the final-April reading of 87.1. American consumers have apparently gotten used to higher gasoline prices and, to some degree at least, their mood is now buoyed by rising equity markets.

Pending Home Sales: The National Association of Realtors reported that pending sales of existing homes fell 3.2 percent in April after an upwardly revised decline of 4.5 percent in March. On a year-over-year basis, pending home sales are down 10.2 percent, marking the lowest level since February 2003.

Last week's reports on new and existing home sales clearly showed that builders are now dramatically reducing prices to move inventory. Individual home owners have yet to make these same concessions in large numbers accounting for the plunge in home sales amid firmer prices. With the summer selling season now in full swing, motivated sellers will be increasingly compelled to lower prices as buyers seem willing to wait them out or consider newly constructed homes that offer better value due to price cuts by builders.

FOMC Minutes: The minutes of the FOMC meeting on May 9th confirmed the hawkish tone of the most recent policy statement, the Federal Reserve viewing the risk of higher inflation as the predominant concern. There are no changes to short-term interest rates on the horizon, though this could change quickly if consumer prices spike upward or if the housing slowdown accelerates and begins to materially impact consumer spending.

Summary: With the bad news of first quarter GDP out of the way, most analysts are now focusing on the improved outlook for second quarter GDP growth based on early signs of a recovery as indicated by a numbers of manufacturing and services indexes. The final report on first quarter economic growth will be reported at the end of June and the advance estimate of second quarter GDP will be published at the end of July.

With no indication of any sort of recovery in the housing market and with gas prices and equity markets still near record highs, employment has been stable and the consumer's outlook has rebounded slightly. It is as if we are all waiting for the next shoe to drop - either some sort of energy crisis or the American consumer finally ending their spendthrift ways.

The Week Ahead: Economic reports in the week ahead will be highlighted by the ISM non-manufacturing index on Tuesday and international trade on Friday. Also scheduled for release are factory orders on Monday, productivity and costs on Wednesday, and consumer credit on Thursday.