The week's economic reports

The biggest jump in the unemployment rate in 22 years and another decline in nonfarm payrolls highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 2.8 percent to 1,361, now down 7.3 percent for the year, and the yield of the 10-year U.S. Treasury note fell 12 basis points to 3.94 percent.
ISM Manufacturing: The nation's leading indicator of manufacturing activity declined for the fifth month in the last six but remains only slightly below the level of 50 that delineates expansion from contraction.

The ISM manufacturing index rose one point last month, from 48.6 in April to 49.6 in May, led by new orders that rebounded from 46.5 to 49.7.

Now five months into 2008, the average ISM reading is 49.0, the lowest average level since 2003, however, readings in the low-40s are normally associated with recessions leading many to believe that conditions in the manufacturing sector, while weak, do not indicate a recession.
Employment continued to contract reading just 45.5, consistent with the continuing loss in manufacturing jobs as indicated in the labor report on Friday where a net loss of 26,000 manufacturing positions was reported.

Exports, the only category aside from prices that has stayed consistently above 50 over the last year or so, rose from 57.5 in April to 59.5 in May, the highest level since early in 2004. Exports continue to be a bright spot in the manufacturing sector that is otherwise struggling with slack demand and rising prices.

And on the subject of prices, the prices paid metric rose to a whopping 87.0, its highest level since early in 2004, as the vast majority of companies in the survey are experiencing increases in the prices they are paying for raw materials.

Labor Report: The Labor Department reported a sharply higher unemployment rate, from 5.0 percent in April to 5.5 percent in May, and the jobless rate now stands at its highest level since 2004. The rise in the unemployment rate was the largest monthly increase in 22 years, a development that came as a surprise to both financial markets and economists.

Many of those in the "no recession" camp have pointed to the still relatively low unemployment rate as the key bit of evidence in their argument. Clearly, the "no recession" case was weakened by this report.

The unemployment rate reflected an increase of 861,000 unemployed and a 577,000 gain in the labor force. A portion of the sharp overall increase has been attributed to the combination of problems with seasonal adjustments and graduating college students entering the labor market, however, the higher unemployment rate is now consistent with most other labor market indicators whereas, previously, it was not.

Nonfarm payrolls fell 49,000 in May after drops of 88,000 in March and 28,000 in April, which were revised downward by a combined 15,000.
So far in 2008, payrolls have declined by 324,000 and, on a year-over-year basis, only a 0.2 percent increase in jobs remains. Job losses occurred in all the usual categories - trade, transportation, and utilities down 41,000, construction down 34,000, and manufacturing down 26,000 - but the 39,000 job loss in professional and business services reversed much of the promising gains of previous months.

On the positive side of the ledger, education and health services payrolls increased 54,000 and government employment rose by 17,000. While the former has been a consistent area of job growth for years, government job creation has swung wildly from month to month. With many state governments now freezing hiring or cutting jobs, a reversal in government employment could produce some very big overall negative numbers in the months ahead.

Interestingly, the ADP employment report has been showing private sector job gains for some time now, a development that is increasingly at odds with the government labor data.

Summary: It's hard to get past a jump from 5.0 to 5.5 in the unemployment rate. That sort of thing tends to make people sit up and pay attention, something that was long overdue for many analysts who somehow were under the impression that the recent economic downturn would be one of the most shallow and short-lived on record.

During a week that contained not a single report on the nation's battered housing market and aside from Friday's dreadful labor report, the economic news was not really that bad last week. Initial jobless claims fell to new multi-month lows and the ADP employment report continues to show modest job growth. The ISM manufacturing index remains just below the expansion/contraction level with a healthy export sector and the ISM services index posted its second consecutive reading indicating expansion. Productivity exceeded expectations and consumer credit was about as expected.

However, without a doubt, employment is the most important economic statistic and, so far, it has lived up to its reputation as a "lagging" indicator - the time lag being made even worse by what are likely to be massive downward revisions to the payrolls data set to begin in October covering the period from March 2007 to March 2008.

While workers may complain about soaring food and energy prices, being "squeezed" takes on a whole new meaning when the income side of the ledger changes dramatically, as it has for hundreds of thousands of Americans already in 2008 and perhaps twice that amount after all the payroll data has been revised beginning this fall.

The Week Ahead: The coming week will be highlighted by reports on retail sales on Thursday and consumer prices on Friday. Also scheduled for release are reports on pending home sales on Monday, the trade deficit on Tuesday, import/export prices on Thursday, and consumer sentiment on Friday.