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The May employment situation released this past Friday did not fall into the category of “bad news” but it clearly was a mediocre report. The labor market is still quite soft. This mediocre news led traders to see Fed policy as on hold—that is, no early tapering of quantitative easing.
 Equities pulled off a rally for the week with gains on Thursday and especially Friday making the difference. But the whole week again was about strength or not in the economy and how the Fed might react. Sluggish indicators were seen as good news on the Fed front while strong news was seen as negative, possibly leading to early tapering in asset purchases.
The net gain for the week was hardly certain even as Monday was a positive start. Comments by Atlanta Fed President Dennis Lockhart supporting continued easing added lift to equities. Also, a disappointing ISM report on manufacturing weighed on markets. Construction spending was up but less than expected. Motor vehicle sales were healthy but the final tally was not until after market close.
On Tuesday, Kansas City Federal Reserve Bank President Esther George urged the Fed to ease off its aggressive bond purchases, making traders skittish about potential early tapering. Stocks dropped sharply at mid-week on a stronger-than expected ISM non-manufacturing report with the composite rising higher into positive territory—adding to worries about early tapering by the Fed. The Fed’s Beige Book was mediocre but markets focused on ISM. Curiously, a sluggish ADP report on private payrolls did not induce a market response on the upside for the day.
 But the ADP report did show up in market sentiment Thursday as traders placed their bets on Friday’s job report. More took the view that the labor market is sluggish and the Fed will maintain asset purchases. Initial jobless claims dipped for the latest week but this news was offset by an upward revision to the prior week
Equities jumped Friday as the May employment situation was seen as “Goldie Locks” in terms of balancing economic growth and Fed reaction. Essentially, payroll gains were modest and in line with expectations but still sluggish enough to likely keep Fed asset purchases at its current pace.
Equities were up this past week. The Dow was up 0.9 percent; the S&P 500, up 0.8 percent; the Nasdaq, up 0.4 percent; the Russell 2000, up 0.4 percent; and the Wilshire 5000, up 0.7 percent.
Equities were up for the year to date. The Dow was up 16.4 percent; the S&P 500, up 15.2 percent; the Nasdaq, up 14.9 percent; the Russell 2000, up 16.3 percent; and the Wilshire 5000, up 15.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields firmed somewhat this past week. After little change Monday, rates nudged up Tuesday on bets that the Fed would be slowing quantitative easing later this year. But on Wednesday, that reversed on a soft ADP private employment report. Rates basically were flat Thursday. The big move came Friday as money moved from bonds to equities on news of a sluggish but as expected modest rise in payroll employment — indicating continued Fed asset purchases at the current pace.
For this past week Treasury rates were up moderately as follows: 3-month T-bill, up 2 basis points; the 5-year note, up 6 basis points; the 7-year note, up 5 basis points; the 10-year note, up 5 basis points; and the 30-year bond, up 6 basis points. The 2-year note was unchanged.
 The spot price of West Texas Intermediate rose notably this week. Crude gained more than a $1-1/2 per barrel on Monday after the dollar declined on a weak ISM manufacturing report. After little change Tuesday and Wednesday, spot WTI increased a dollar a barrel following the prior day’s report of a decline in stockpiles. The oil market reacted more favorably in direct terms on Friday to improvement in payroll jobs. Traders saw the recovery as gaining modestly more momentum.
Net for the week, the spot price for West Texas Intermediate gained $4.49 per barrel to settle at $96.15.
The second quarter is turning out to be soft—with growth perhaps even slower than in the first quarter. The bright spots are housing and autos. The labor market remains sluggish.
 May payroll jobs came in a little higher than expected but modest downward revisions were offsetting. Total payroll jobs in May increased 175,000 after rising a revised 149,000 in April (originally up 165,000). Market expectations were for a 167,000 gain for May. The net revisions for March and April were down 12,000. April was revised from up 165,000 to up 149,000 while March was revised to up 142,000 from up 138,000. The unemployment rate edged up to 7.6 percent from 7.5 percent in April. Expectations were for a 7.5 percent unemployment rate.
Turning back to payroll data, private payrolls rose 178,000 after gaining 157,000 in April (originally 176,000). Expectations were for a 178,000 boost.
 In the private sector, relative strength continued to be in the private service-providing sector. Private service-providing jobs increased 179,000 after a 172,000 boost in April. The May gain was led by professional & business services (up 57,000), leisure & hospitality (up 43,000), retail trade (up 28,000), and education & health services (up 26,000).
Goods-producing jobs were little changed in May, edging down 1,000 after dropping 15,000 in April. Construction increased 7,000 in May with mining flat. Manufacturing employment was decreased 8,000.
Government jobs declined 3,000 in May, following a decrease of 1,000 the prior month. Federal jobs fell 14,000; state jobs were down 2,000; and local government employment rose 13,000. Federal jobs likely were affected by sequestration.
Wages were unchanged in May after a 0.2 percent increase in April. The median forecast was for a 0.2 percent advance. The average workweek was 34.5 hours, matching the number for April. The market consensus was for 34.5 hours.
Turning to detail for the household survey, household employment in May gained 319,000 after a 293,000 increase the month before. The labor force increased 420,000, following a 210,000 rise in April.
Looking ahead, private aggregate earnings rose 0.2 percent in May and suggest a modest rise in the private wages & salary component of personal income. The manufacturing component of industrial production may be weak as production worker hours in manufacturing slipped 0.1 percent in May.
The May employment situation was somewhat in line with expectations but disappointed on the wages portion and on the unemployment rate. The labor market is improving but barely above a snail’s pace. The latest numbers are not likely to lead the Fed to early tapering but to leave quantitative easing in place as is.
 Discretionary spending is up based on May vehicle sales, rising 2.6 percent to a slightly higher-than-expected annual rate of 15.3 million units. This followed a 2.3 percent decline in April.
The May gain was split about evenly between cars and trucks and between imports and domestics. Sales of domestic-made vehicles came in at a 12.1 million rate versus April's 11.9 million.
Low interest rates and manufacturer deals continue to support sales along with a slowly improving labor market. The latest sales numbers from manufacturers suggest a healthy gain in the auto component of retail sales.
The manufacturing sector showed a little life in May with strength weighted slightly to the second half, based on Markit's PMI which ended May at 52.3 versus a mid-month reading of 51.9 and compared to a final April reading of 52.1. These readings are all very similar and point to modest and steady monthly growth.
But Markit's sample may be picking up steam in the months ahead based on a 5 tenths gain for new orders to 53.3 and a full 1 point gain for backlogs to 51.2. Order growth reflects strength in the domestic market as new export orders are flat at 49.8.
The sample's output growth is steady and modest as is employment growth. Prices show very little pressure while inventories are flat.
Though modest, growth in Markit's report has been among the strongest of the manufacturing reports where government data have been soft including back-to-back contractions in the manufacturing component of the industrial production report.
However, the ISM report was actually on the negative side for May. The ISM's manufacturing sample reports the weakest level of general activity since June 2009 as the May PMI fell to 49.0 to signal monthly contraction versus April.
And it does not look like ISM's sample will be popping back quickly as new orders fell substantially, from 52.3 to 48.8 for the lowest reading since July last year. Backlog orders are also down, 5 points lower to 48.0 for the lowest reading since January.
Production, at 48.6, was especially weak in the month with employment, at 50.1, once again dead flat for a second month. Delivery times shortened, inventories edged lower as did prices -- all consistent with slowing conditions.
The manufacturing sector has definitely been bumpy. Manufacturing surveys and the employment report numbers on manufacturing suggest a weak May.
 The U.S. trade balance in April widened on a rise in imports-surprisingly for non-petroleum imports. The trade gap grew to $40.3 billion from $37.1 billion in March. The consensus forecast was for a deficit of $41.2 billion. Exports rose 1.2 percent after decreasing 1.0 percent in March. Imports rebounded 2.4 percent after declining 3.7 percent the month before.
The worsening in the trade gap was primarily due to the nonpetroleum goods deficit which expanded to $37.8 billion in April from $33.7 billion the month before. The petroleum deficit improved to $19.7 billion from $20.5 billion in March. The services surplus was unchanged at $18.3 billion.
 Exports were led by consumer goods which increased $2.0 billion, followed by a $0.9 billion gain in capital goods excluding autos. Imports suggest that businesses are counting on more consumer spending ahead. Imports of consumer goods gained $3.0 billion while automotive increased $1.3 billion and capital goods excluding autos rose $1.0 billion.
The latest report on international trade may be a modest vote of confidence by businesses that the recovery is becoming more entrenched.
 Activity for the bulk of the nation's economy is on the upswing—but not yet employment. The ISM's non-manufacturing index rose 6 tenths in May to 53.7. Business activity rose 1.5 points to 56.5 and—in a key plus—new orders also rose 1.5 points to 56.0 for the best reading since February.
But employment, at 50.1, was dead flat and showed its weakest reading since July last year. But backlog orders were up slightly, and together with the gain in new orders, hopefully point to gains ahead for employment.
The manufacturing sector may be in a flat spot but the non-manufacturing group, which includes services, construction, and mining, continues to move ahead based on continued domestic demand. The second quarter has been sluggish for the overall economy but it may be showing some improvement in May.
 Moving past volatile winter months (large seasonal factors), the construction sector is showing some improvement. Construction spending rebounded in April, but not nearly as much as expected. Construction outlays rebounded 0.4 percent in April after dropping 0.8 percent in March. The consensus called for a 1.0 percent boost.
The April gain was led by private nonresidential outlays which advanced 2.2 percent after dipping 1.1 percent in March.
Detail shows further gains in new residential outlays. Private residential slipped 0.1 percent after gaining 1.4 percent in March. Weakness was in non-new housing spending which fell 3.3 percent in April, following a 0.2 percent rise the month before. For new housing, one-family outlays gained 1.4 percent after a 2.2 percent boost the month before and multifamily spending rose 1.7 percent in April after a 2.1 percent boost the prior month.
Public outlays fell 1.2 percent, following a drop of 2.9 percent in March.
Construction is gaining a little momentum outside of the public sector. New private outlays are improving notably while private improvement outlays in the single-family subcomponent have been volatile but on an uptrend. While private construction is improving, it is still from a low base. Nonetheless, construction is providing modest forward momentum for the recovery.
According to the latest Beige Book, overall economic activity expanded at a "modest to moderate pace" since the previous Beige Book. The prior Beige Book described growth as at a "moderate pace" during the reporting period from late February to early April.
In contrast to some regional Fed reports, the Beige Book says that the manufacturing sector expanded in most Districts. Most Districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales.
Most Districts noted that consumer spending increased during the reporting period, ranging from slight to moderate gains. Vehicle sales generally increased moderately across Districts.
A notable positive was from real estate. Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Commercial real estate and construction activity grew at a modest to moderate pace in most Districts. And there appears to be some increase in willingness by banks to lend-though the baseline is likely low. According to the Beige Book, overall bank lending increased since the previous report. Credit quality and deposits increased, while credit standards were largely unchanged.
A key area in the report is the labor market since the Fed is focusing on this area as a trigger for the next change in monetary policy. This report is on the positive side but hardly something to be enthusiastic about. Hiring increased at a measured pace in several Districts, with some contacts noting difficulty finding qualified workers. Wage pressures remained contained overall, although several Districts reported a modest or moderate rise for selected occupations. "Measured pace" for hiring does not hint at cutting back on quantitative easing.
Districts reported level prices to mild price increases.
Overall, the Beige Book is in line with most recent releases of economic indicators with the exception of slightly more optimism about manufacturing-though not a lot. Economic growth is soft and the labor market is improving slowly. Likely, quantitative easing will remain in place as is instead of tapering in the near term.
The recovery is continuing but at a modest pace. Very modest improvement in the labor market is not likely to be enough to inspire the Fed to slow its pace of asset purchases.
The consumer sector has been wavering a bit with employment sluggish. Although unit new motor vehicle sales posted a solid gain in May, traders will be parsing this week’s core retail sales, excluding autos and gasoline sales. Industrial production was down in April and early reports on manufacturing for May have soft. The May report on industrial production will be a key update on whether this sector is still adding to the recovery or not. The Fed is focusing on labor market changes to decide on when to pull back on quantitative easing. This coming week’s labor market news includes JOLTS for April and weekly initial jobless claims.
The NFIB Small Business Optimism Index jumped 2.6 points in April to a 92.1 level that is back over the recovery average of 90.7 but still well below the historical average of 100. Improvement in the economic outlook led the month's gains which also included gains for sales expectations and hiring plans. Earnings trends have been a special strength in this series but were unchanged in the latest report.
NFIB Small Business Optimism Index Consensus Forecast for May 13: 92.3
Range: 91.0 to 94.0
The Labor Department’s Job Openings and Labor Turnover Survey posted 3.844 million job openings on the last business day of March, little changed from 3.899 million in February. In March, the number of job openings was little changed in all industries and regions. The hires rate (3.2 percent) and separations rate (3.1 percent) were little changed.
JOLTS job openings Consensus Forecast for April 13: 3.885 million
Range: 3.800 million to 3.925 million
Wholesale inventories rose 0.4 percent in March, which was dead on trend and not much of a surprise. What was a surprise was a 1.6 percent plunge in sales, a big mismatch that drove the stock-to-sales ratio in the wholesale sector from 1.19 in February to a recovery high of 1.21. A drop in gasoline sales, one tied to easing prices and soft demand, was a major factor driving down sales in the wholesale sector during the month. Also a major factor was a drop in apparel sales which were hurt at the retail level from March's very cold weather, weather that held down sales of spring goods.
Wholesale inventories Consensus Forecast for April 13: +0.2 percent
Range: -0.2 to +0.5 percent
The U.S. Treasury monthly budget report showed a monthly net surplus of $112.9 billion in April and, when looking at receipts separately, for a year-to-date jump of 15.9 percent to $1.60 trillion in total receipts seven months into the government's fiscal year. Other components on the receipt side that also showed strong year-to-date gains included corporate income taxes and social insurance receipts. The spending side was flat with total outlays down 0.6 percent year-to-date at $2.09 trillion. Defense spending was down 4.9 percent year-to-date while Medicare spending was up 11.7 percent. April's $112.9 billion surplus takes down the government's debt so far this fiscal year to $487.6 billion which is a very substantial 32 percent below the deficit this time last year. Looking ahead, the month of May typically shows a deficit for the month. Over the past 10 years, the average deficit for the month of May has been $97.3 billion and $134.8 billion over the past 5 years. The May 2012 deficit came in at $124.6 billion.
Treasury Statement Consensus Forecast for May 13: -$110.0 billion
Range: -$115.0 billion to -$110.0 billion.
Retail sales in April edged up despite a decline in gasoline prices. Core sales actually were somewhat healthy. Retail sales increased 0.1 percent, following a drop of 0.5 percent in March. Motor vehicles were unexpectedly up 1.0 percent after a 0.6 percent dip in March. Ex-auto sales in April slipped 0.1 percent after decreasing 0.4 percent in March. Gasoline sales fell on lower prices. Excluding both autos and gasoline components, sales gained a strong 0.6 percent, following no change in March. Core strength was in building materials & garden equipment; clothing; nonstore retailers; general merchandise; and food services & drinking places. There may be some seasonality issues but discretionary spending appears to be picking up.
Retail sales Consensus Forecast for May 13: +0.5 percent
Range: +0.1 to +0.8 percent
Retail sales excluding motor vehicles Consensus Forecast for May 13: +0.4 percent
Range: +0.1 to +0.7 percent
Less motor vehicles & gasoline Consensus Forecast for May 13: +0.3 percent
Range: +0.3 to +0.6 percent
Initial jobless claims fell 11,000 to 346,000 in the June 1 week but followed a revised 13,000 increase in the prior week. The 4-week average was up for a fourth straight week, at 352,500 which was about 10,000 above the month-ago trend. Continuing claims, in contrast to initial claims, are clearly coming down, to 2.952 million for a sizable 52,000 decline in the latest available data which is for the May 25 week. The 4-week average, at 2.976 million, is at recovery low.
Jobless Claims Consensus Forecast for 6/8/13: 350,000
Range: 340,000 to 360,000
Import prices fell 0.5 percent in April and for a second straight month showed a minus 0.1 percent decline when excluding petroleum. The year-on-year rate was minus 2.6 percent overall and, for ex-petroleum, was minus 0.3 percent. It was the ex-petroleum readings that pointed to the breadth of the declines which included finished goods where prices of imported capital goods were down for three months in a row for a year-on-year rate of minus 0.6 percent. Prices of imported vehicles have fallen for two months in a row and were unchanged year-on-year. Import prices of consumer goods excluding vehicles were up but only fractionally year-on-year at plus 0.3 percent. Export prices showed a 0.7 percent decline overall for April with agricultural prices, an especially important component on the export side, at minus 2.2 percent. The overall year-on-year rate was minus 0.9 percent with the agricultural rate at plus 4.3 percent.
Import prices Consensus Forecast for May 13: 0.0 percent
Range: -0.5 to +0.7 percent
Export prices Consensus Forecast for May 13: -0.1 percent
Range: -0.3 to +0.3 percent
Business inventories were unchanged in both March and February. For the latest month, retail inventories dipped 0.5 percent, manufacturers were flat, and wholesale stocks gained 0.4 percent. Sales declined 1.1 percent in March, bumping up the inventory to sales ratio to 1.29 from 1.28 in February. More recently, factory inventories gained 2.2 percent in April.
Business inventories Consensus Forecast for April 13: +0.3 percent
Range: +0.1 to +0.5 percent
The producer price index in April fell 0.7 percent after a 0.6 percent decrease the month before. The core rate, which excludes both food and energy, increased 0.1 percent after rising 0.2 percent in March. Expectations were for a 0.2 percent increase. Food prices fell 0.8 percent in April after rebounding 0.8 percent in March. Energy fell 2.5 percent in April after dropping 3.4 percent the month before. Gasoline decreased 6.0 percent, following a fall of 6.8 percent in March. Within the core rate, leading the April rise, prices for pharmaceutical preparations climbed 0.6 percent. Tugging down were passenger cars, down 0.2 percent after a 0.2 percent rise in March; light trucks, down 0.1 percent, following no change; and computers, down 0.9 percent after a decrease of 0.4 percent.
PPI Consensus Forecast for May 13: +0.2 percent
Range: -0.3 to +0.5 percent
PPI ex food & energy Consensus Forecast for May 13: +0.1 percent
Range: 0.0 to +0.2 percent
The U.S. current account deficit for the fourth quarter came in at slightly smaller-than-expected $110.4 billion. This was an improvement versus $112.5 billion in the third quarter. Improvement in the fourth quarter was centered in the balance on investment income. The balance on goods and services widened slightly in the quarter as did the balance on unilateral transfers. The current account as a percentage of GDP was unchanged from the third quarter at 2.8 percent.
Current account Consensus Forecast for Q1 13: -$111.2 billion
Range: -$117.8 billion to -$105.0 billion
Industrial production in April declined 0.5 percent after gaining 0.3 percent in March. The April manufacturing component fell 0.4 percent after a 0.3 percent dip in March. Excluding motor vehicles, manufacturing declined 0.3 percent in April after a 0.5 percent drop the prior month. Within manufacturing, durable goods moved down 0.6 percent in April. The production of nondurable goods decreased 0.1 percent in April after having fallen 0.3 percent in March. The output of utilities dropped 3.7 percent after jumping a monthly 5.3 percent in March. Production at mines rebounded 0.9 percent after slipping 0.2 percent in March. Capacity utilization for total industry declined to 77.8 percent in April from 78.3 percent the prior month. Expectations were for 78.3 percent.
Industrial production Consensus Forecast for May 13: +0.2 percent
Range: -0.3 to +0.7 percent
Manufacturing production component Consensus Forecast for May 13: +0.3 percent
Range: -0.2 to +0.5 percent
Capacity utilization Consensus Forecast for May 13: 77.9 percent
Range: 77.6 to 78.5 percent
The Reuter's/University of Michigan's consumer sentiment index in May hit a recovery high, reaching 84.5 and up a very big and higher-than-expected 8.1 points from April. A breakdown between the first half, when the index came in at 83.7, and the second half showed the strongest acceleration taking in place in the first half but extending strongly, though at a slightly slower rate, through the second half where the implied reading was 85.3. Both components of the composite—current conditions and expectations—showed strong gains with current conditions at a recovery best of 98.0. The comparison with April's 89.9 hints at improvement in the next set of readings on the consumer in June. Expectations at 75.8, have been higher, but not by much and that was in October and November which was before the series of shocks that began to hit confidence: the year-end fiscal cliff, the first-of-the-year payroll tax hike, and the March sequester.
Consumer sentiment Consensus Forecast for preliminary June 13: 84.5
Range: 82.0 to 86.2
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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