|
It has been the biggest drag on the economy. But the jobs market, according to the latest data, appears to be finally posting moderately strong gains. Still, job increases are sub-par and will, only slowly, eat away at unemployment. Other economic indicators are mostly positive—especially for manufacturing. The recovery appears to be gaining further traction despite problems in Europe.
 Off or on' This past week, it was a risk-on week as equities mostly posted net gains despite conflicted moves at week’s close.
Stocks advanced notably Tuesday, the first trading day of 2012, as better than anticipated economic data globally buoyed investor morale. Construction outlays and the PMI manufacturing index were positive and topped expectations. Equities held gains even as Tuesday afternoon’s release of Fed minutes showed a mixed FOMC with some sentiment for additional ease.
Stocks were little changed Wednesday as positive US economic data offset worries about the Eurozone’s debt problems. Europe's latest sign of stress came from Italy's biggest bank, UniCredit, which plunged after it offered to sell €7.5 billion in shares at a steep discount to shore up its balance sheet, indicating difficulties in raising capital. However, relatively healthy motor vehicle sales for the U.S. were offsetting. Strong factory orders also supported equities.
Stocks were mostly up Thursday after a robust ADP private employment report and a sizeable decline in initial jobless claims. On the downside, however, December retail sales results for major chain stores were mixed, as unseasonably warm weather hurt margins in cold weather categories. A number of retailers, including Target, J.C. Penney and Kohl's, lowered their earnings outlooks following disappointing holiday season sales, which pressured consumer stocks.
Friday’s employment situation topped published expectations but Thursday’s ADP and claims numbers apparently lifted expectations behind the scenes as reaction to healthy jobs numbers was muted. Instead, Europe was the focus on Friday as financing costs for sovereign debt were a concern. Government borrowing costs remained at elevated levels in Europe, with the yield on the 10-year Italian bond above 7 percent. Spanish bond yields also were on the high side.
For the week, most stocks made gains. Weakness was primarily seen in financials (due to Europe) and in the retail sector. Retail was weak not due to employment numbers but due to lowered guidance by retailers.
Equities were up this past week. The Dow was up 1.2 percent; the S&P 500, up 1.6 percent; the Nasdaq, up 2.7 percent; and the Russell 2000, up 1.2 percent. The year-to-date numbers are the same as the weekly numbers.
Earnings season cranks up again next week with the Dow components kicking off with Alcoa reporting fourth-quarter financial results.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields rose moderately this past week as improved economic conditions somewhat offset worries about European sovereign debt. The biggest move in the holiday shortened week was on Tuesday as Treasury prices dipped on a strong ISM manufacturing and construction outlays reports. News from overseas also reduced flight to safety as German unemployment dipped, UK manufacturing PMI improved, and China's purchasing managers’ index was stronger than analysts had expected. Rates rose somewhat on Wednesday on better than expected factory orders.
Rates were little changed Thursday despite a robust ADP employment report and a drop in initial jobless claims. Seasonal adjustment problems led to a discounting of the ADP report. Later in the morning, the ISM non-manufacturing report was somewhat disappointing. Rates dipped Friday despite healthy jobs numbers. Flight to safety was on to some degree as borrowing costs in Europe rose or remained high—notably for Italy and Spain.
For this past week Treasury rates were up as follows: 3-month T-bill, up 1 basis point; the 2-year note, up 2 basis points; the 5-year note, up 2 basis points; the 7-year note, up 5 basis points; the 10-year note, up 8 basis points; and the 30-year bond, up 12 basis points.
 The spot price of oil rose moderately this past week. Key factors were improved economic news in the U.S., better manufacturing data from China and India, and saber rattling by Iran with threats to block the Strait of Hormuz if sanctions are imports on Iranian oil exports. Also, the European Union said foreign ministers are likely to announce harsher sanctions on Iran at their next meeting on January 30. Somewhat offsetting were a boost in crude inventories and worries over European sovereign debt
Net for the week, the spot price for West Texas Intermediate rose $2.31 per barrel to settle at $101.14.
Indicator news this past week was mostly favorable with the employment report being the standout. While the recovery is still sub-par compared to recent recoveries, it appears that it is gaining traction. Manufacturing is regaining the lead based on employment, hours worked, and on private surveys.
 Monthly jobs data show significant broad-based improvement. And the unemployment rate dipped to 8.5 percent. Payroll jobs in December jumped a relatively healthy 200,000 after rising a revised 100,000 in November and increased a revised 112,000 in October. Revisions for October and November were down net 8,000.
Private payrolls again outstripped the total, gaining 212,000 in December, following increases of 120,000 in November and 134,000 in October.
In the private sector, goods-producing jobs rebounded 48,000 after a 6,000 decrease in November and a 6,000 gain in October. Construction jobs increased 17,000 in December after decreasing 12,000 the month before. Manufacturing employment jumped 23,000 after edging up 1,000 in November. Mining increased 7,000, following a 3,000 advance the prior month.
Private service-providing jobs increased 164,000 in December, following a 126,000 gain in November. The December increase was led by trade & transportation (up 90,000) with seasonal hiring for couriers & messengers (think UPS and FedEx) particularly strong (up 42,000) and retail trade adding notably (up 28,000). Health care continued to add jobs in December (up 23,000). Within leisure and hospitality, employment in food services and drinking places continued to trend up in December (up 24,000).
 Some economists indicated that couriers & messengers employment was strong because BLS seasonal factors are lagging behind recent trends for increased e-commerce sales in conjunction with delivery by UPS or FedEx and that January will see a significant reversal due to opposite problems with seasonal factors. If so, BLS likely also is lagging in its seasonal adjustment for retail employees (fewer due to e-commerce) and that may be offsetting in January to courier & messengers jobs decline. That is, courier jobs to some extent have replaced losses in retail employment.
The public sector continued to decline as government employment dipped 12,000, following a 20,000 decline in November. State & local government jobs contracted 14,000 in December with local education employment falling 9,400.
Average hourly earnings strengthened in December, rising 0.2 percent after no change in November. The latest figure matched expectations for a 0.2 percent gain. The average workweek for all workers in December posted at 34.4 hours, compared to 34.3 hours in November. Analysts projected 34.3 hours. The manufacturing workweek also improved, rising to 40.5 hours from 40.4 hours in November.
The latest jobs report includes new seasonal factors for the household survey numbers (payroll data get new factors next month). History is affected back through 2007, leaving some generally small changes in some monthly series.
From the household survey, the unemployment rate unexpectedly continued to decline, slipping to 8.5 percent after dropping to 8.7 percent in November from 8.9 percent in October. The consensus expectation was for an 8.7 percent unemployment rate. For the latest month, the labor force dipped 50,000 but household employment rose 176,000 (after a 317,00 jump in November) while the number of unemployed declined 226,000. Again, the household survey continues to suggest that the labor market is better than reflected in the payroll data. Some economists postulate that a significant number of discouraged workers are going directly to being employed instead of transitioning into the unemployed labor force first.
Looking ahead, we are likely to see notable gains in manufacturing output in the industrial production report and in the private wages & salaries component in the personal income report. Production worker hours in manufacturing posted a 0.5 percent rise in December. Aggregate payroll earnings jumped 0.7 percent for the month.
The December jobs report shows the labor market gradually improving. Although improvement still lacks that of the average recovery, the better numbers indicate improved optimism on the part of businesses about demand.
 Motor vehicle sales slipped incrementally in December but remained at a relatively strong sales level. Combined domestics and imports nudged down 0.5 percent to fractionally above 13.6 million units annualized from fractionally below 13.6 million units the month before. In plain English, sales were essentially unchanged at 13.6 million. Sales were up 8.4 percent on a year-ago basis.
Imports have recovered significantly from shortages of models due to the earthquake and tsunami in Japan this past spring. Total imports rose 0.4 percent in December to 3.3 million units annualized while domestics slipped 0.9 percent to 10.2 million. Imports had hit a recent low of 2.7 million units during June, July and August.
Despite the marginal slippage, the overall sales pace indicates that the consumer sector is holding up relatively well.
 Manufacturing is getting past a recent soft patch, according to the Institute for Supply Management, and is regaining strength. The ISM manufacturing composite index improved to 53.9 from 52.7 in November, moving further into positive territory. Index levels above 50 indicate positive growth with higher levels indicating stronger rates of growth.
The latest gain in the composite was led by increases in the production and employment indexes. Production jumped to 59.9 from 56.6 in November. Employment rose to 55.1 from 51.8. The boost in employment is likely a vote of confidence by manufacturing management for stronger demand in coming months.
This view is corroborated by a rise in the new orders index to 57.6 from 56.7 in November. Rounding out the composite components, the supplier deliveries index was unchanged at 49.9 while the inventories index slipped to 47.1 from 48.3.
Overall, the gains in production, employment, and new orders point to favorable conditions ahead for manufacturing.
 While manufacturing is gaining strength, the non-manufacturing sector may be temporarily stuck in a modest growth mode. The ISM's non-manufacturing composite index edged only six tenths higher to 52.6, indicating only mild month-to-month growth in general business conditions. New orders, at 53.2, were no more than moderate though they are up two tenths from November.
The overall business activity index was a plus, unchanged at a solid 56.2, indicating a moderate growth pace. But part of this activity reflected the working down of backlogs where further draw is likely limited. Employment was slightly below 50 at 49.4 but is up five tenths from November.
The ISM non-manufacturing report has been lagging strength in other indicators and is a reminder that economic growth, though likely picking up steam, is less than robust.
 Not many may have noticed, but overall construction activity has been on a modest uptrend in recent months. The road may be a little bumpy but construction spending continues to head up from low levels of activity. Despite the low baseline, activity is stronger than expected as construction spending in November jumped 1.2 percent after slipping 0.2 percent in October.
 The November increase was led by a 2.0 percent gain in private residential outlays, following a 2.3 percent boost in October. Both the single-family and multifamily subcomponents showed strength. Public outlays rebounded 1.7 percent, following a 1.8 percent decline in October. Private nonresidential construction spending was unchanged in November after decreasing 0.6 percent the prior month.
On a year-ago basis, overall construction outlays improved to up 0.5 percent in November from down 0.6 percent in October. Over the past year, strength has been in private nonresidential and in multifamily residential outlays.
The December 13 FOMC meeting was more involved than indicated by the Fed statement. In fact, the Fed is sharply expanding its communications policy and the Fed is boosting its transparency sharply by including additional forecasts in its future Summary of Economic Projections (SEP) released four times a year. FOMC members now will be including their forecasts for the expected path of the fed funds rate and the likely timing of the first increase in the target rate.
“Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions.”
Traders and Fed watchers will get their first taste of the new communications policies with the January 24-25 FOMC meeting and there should be ample discussion during the chairman’s post-statement press conference.
For current policy, some members were not happy about the statement’s reference to mid-2013 for how long the fed funds rate is expected to remain exceptionally low. However, others felt that economic conditions could warrant additional policy accommodation.
Regarding the Fed’s view of the economy, there was no notable news other than it was apparent that the Fed was cautious about adopting the view that economic data were strengthening. Staff economists lowered their December forecast for medium-term GDP growth from November’s. On the positive side, the minutes acknowledged some improvement in labor market conditions although the unemployment rate remained high.
Developments in Europe were discussed substantially as volatility in U.S. and global financial markets were seen largely due to Europe. FOMC participants noted progress by the European authorities to strengthen their commitment to fiscal discipline and to provide greater resources to backstop sovereign debt issuance. But many anticipated that further efforts to implement and perhaps to augment these policies would be necessary to fully resolve the area's fiscal and financial problems.
The minutes reiterated that participants’ overall assessments of the economic outlook had not changed greatly since their previous meeting. Almost all members agreed to maintain the existing stance of monetary policy at this meeting with Chicago Fed’s Charles Evans dissenting and wanting additional ease immediately. In its vote on policy action, the FOMC retained the Fed funds target at a range of zero to 0.25 percent, kept language that this rate would remain exceptionally low until at least mid-2013, and continued the Maturity Extension Program (Operation Twist).
For now, the Fed is on hold with extremely accommodative policy as the economic recovery slowly strengthens. Life will be more interesting for Fed watchers at the end of the January 24-25 meeting when we get a look at Fed forecasts for the fed funds rate and the expected timing of the next rate hike.
The consumer sector is gradually improving, manufacturing is regaining strength, and construction is rising from rock bottom. Nonetheless, the recovery is sub-par and growth is likely to be moderate this year.
The highlights for this coming week will give a checkup on the health of the consumer sector, starting with consumer credit outstanding on Monday. A key reading on holiday sales will be in December's retail sales report on Thursday, followed by Friday’s initial January consumer sentiment. Also getting attention will be the Fed’s Beige Book at mid-week and international trade Friday.
Consumer credit outstanding grew $7.6 billion in October following a $6.9 billion increase in September. The increase once again was centered in nonrevolving credit, which reflected strength in vehicle sales. Nonrevolving credit gained $7.3 billion in October after a $6.5 billion rise the prior month. Looking ahead, unit new motor vehicle sales jumped 2.8 percent in November, suggesting a sizeable gain for nonrevolving credit for the month.
Consumer credit Consensus Forecast for November 11: +$7.6 billion
Range: +$3.5 billion to +$11.6 billion
Wholesale inventories rose a very sizable 1.6 percent in October against a strong but less sizable 0.9 percent rise in wholesale sales, driving up the wholesale stock-to-sales ratio by one tenth to 1.16. Inventories of farm products and energy products both showed sizable increases in the month as did inventories of metals and electrical goods. On the sales side, the month showed strong gains for farm products, autos, and furniture.
Wholesale inventories Consensus Forecast for November 11: +0.5 percent
Range: -0.1 to +1.0 percent
The Beige Book is prepared for the January 24-25 FOMC meeting. The latest FOMC minutes took a relatively cautious view about strengthening in the economy. Analysts will be looking to see if the Beige Book gives the economy an upgrade. Garnering special attention will likely be manufacturing which has had stronger signals in recent weeks.
Initial jobless claims dropped 15,000 in the December 31 week to 372,000. The four-week average showed improvement for the fifth week in a row, down 3,250 to a recovery best of 373,250 which was more than 20,000 lower from month-end November. Continuing claims have also been coming down, falling 22,000 in data for the December 24 week to 3.595 million.
Jobless Claims Consensus Forecast for 1/7/12: 375,000
Range: 352,000 to 405,000
Retail sales in November grew 0.2 percent, following a 0.6 percent boost in October and a 1.3 percent spike in September. Excluding autos, retail sales gained 0.2 percent in November after increasing 0.6 percent in October and increasing 0.6 percent in September. Gasoline sales declined marginally in November. Sales excluding autos and gasoline in November rose 0.2 percent, following a healthy 0.7 percent increase in October. Within the core (excluding autos and gasoline), gains were mixed but mostly positive. Looking ahead, unit new motor vehicle sales were unchanged in December, suggesting a sluggish auto component in retail sales for the month. However, price effects and the shares allocated between consumers and businesses can affect the strength of autos in retail sales.
Retail sales Consensus Forecast for December 11: +0.4 percent
Range: -0.2 to +0.9 percent
Retail sales excluding motor vehicles Consensus Forecast for December 11: +0.4 percent
Range: -0.2 to +1.0 percent
Retail sales excluding m.v. & gasoline Consensus Forecast for December 11: +0.4 percent
Range: +0.1 to +0.6 percent
Business inventories rose 0.8 percent in October. Inventories relative to sales were steady, with business sales up 0.7 percent in October to keep the stock-to-sales ratio unchanged at 1.27. Component data were mixed with retail inventories unchanged in October. This offsets builds at the wholesale and factory levels. More recently, factory inventories rose 0.5 percent in November.
Business inventories Consensus Forecast for November 11: +0.5 percent
Range: +0.2 to +0.8 percent
The U.S. Treasury monthly budget report showed a deficit of $150.4 billion for November that reflected a $27 billion calendar timing shift for government payments that held down October at the expense of November. Looking ahead, the month of December typically comes in close to breakeven for the month. Over the past 10 years, the average surplus for the month of December has been $0.1 billion. Over the past 5 years there has been an average deficit of $8.4 billion. The December 2010 deficit came in at $78.1 billion.
Treasury Statement Consensus Forecast for December 11: -$79.0 billion
Range: -$112.0 billion to -$70.0 billion.
The U.S. international trade gap in October shrank as a recently atypical drop in imports outpaced a dip in exports. The trade gap narrowed to $43.5 billion from $44.2 billion in September. Exports slipped 0.8 percent after jumping 1.4 percent in September. Imports declined 1.0 percent in October, following a 0.6 percent gain the month before. The improvement in the trade gap was led by the petroleum gap which narrowed to $24.4 billion from $26.6 billion in September. The nonpetroleum goods worsened to $33.2 billion from $31.8 billion in September. The services surplus in October was little changed at $36.1 billion from $36.0 billion in September.
International trade balance Consensus Forecast for November 11: -$45.0 billion
Range: -$47.6 billion to -$41.8 billion
Import prices increased 0.7 percent in November on a 3.6 percent monthly surge in the price of imported petroleum products. But when excluding petroleum, import prices fell 0.2 percent following a 0.3 percent ex-petroleum decline in the prior month.
Import prices Consensus Forecast for December 11: +0.1 percent
Range: -1.1 to +0.9 percent
Export prices Consensus Forecast for December 11: +0.3 percent
Range: 0.0 to +0.4 percent
The Reuter's/University of Michigan's consumer sentiment index continued to extend its improvement to 69.9 in December final from 64.1 in November and from 67.7 at mid-December. The latest reading implies a very strong 72.1 over the last two weeks which points to momentum for January.
Consumer sentiment Consensus Forecast for preliminary January 12: 71.5
Range: 70.0 to 80.0
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}