Labor market deteriorates
The civilian unemployment rate edged up 0.2 percentage points in April to 4.5 percent. By historical standards, the unemployment rate is still at its lowest level in 30 years. But there is no question that the unemployment rolls are increasing. The unemployment rate bottomed out in September and October last year at 3.9 percent. It has increased steadily ever since. At the same time, the pool of available workers jumped in April and now stands at its highest level in two years. Again, it is well to keep in mind that overall levels are low by historical standards, but it is the direction of change that matters. These both confirm that labor market conditions are quite a bit looser than they were a year ago.

Even as the unemployment rate was increasing, average hourly earnings rose 0.4 percent in April, the same as last month. This kept the yearly rise at 4.3 percent. Notice how earnings have accelerated on a year-over-year basis in tandem with the rising unemployment rate. That seems odd, doesn't it? Actually, the workers who are first let go are generally at the bottom of the wage scale. Since the average hourly earnings figures are not adjusted for experience, the average wage would increase as younger or less experienced (lower paid) workers are no longer counted. Fed policymakers do understand the math of this series. In any case, they are likely to keep a close watch on these figures to ensure that inflationary pressures don't skyrocket and that credit conditions don't become too accommodative.

Nonfarm payroll employment declined 223,000 in April after an upward revised drop of 53,000 in March. The Bureau of Labor Statistics noted that construction employment fell 64,000 during the month because of "wet weather" across much of the country. Certainly such a special factor should be noted. But the total figure would have been negative anyway since factory payrolls fell 104,000 and the temporary workforce was pared by 107,000. The decline in the manufacturing sector is not new, but the fact that this sector continues to bleed workers suggests that the upturn in the industrial economy may take a few more months. It isn't surprising that employers would first lay off temporary help, as they bide time to see if the economy gets worse or better.

The employment situation is made up of many components, which don't frequently move in the same direction. The April employment report showed a deteriorating labor market from all sides: from the anemic trend in nonfarm payrolls to the rising unemployment rate to the increasing level of available workers. Other labor market indicators also confirm these figures. The Challenger job-cut report showed a record number of layoff announcements in April (165,564) and the fifth consecutive month in which announcements were of a similar magnitude. New jobless claims rose to 421,000 in the week ended April 28. This was the second week in a row in which jobless claims exceeded 400,000 - and the highest level since March 1996. The Fed certainly won't ignore this set of data. It is likely that the market consensus on future Fed policy will readjust after today's anemic figures. Since the Fed unexpectedly reduced the funds rate target on April 18, market expectations have called for a 25 basis point cut at the May 15 FOMC meeting. The consensus may now shift to a 50 basis point cut.

Factory orders rise on special factors; manufacturing still in a slump
Factory orders jumped 1.8 percent in March after edging down 0.1 percent in February. It was either defense-related or due to aircraft orders. While these sectors do contribute to production, they fluctuate sharply and don't reflect core spending. The quarterly growth pattern is quite different than the March uptick. New orders were anemic enough in the second half of 2000, but they were clearly recessionary in the first quarter of 2001. This confirms other indicators which also show that the manufacturing sector fell into recession several months ago.

The NAPM manufacturing survey was virtually unchanged in April (43.2 vs. 43.1 in March). Any level below 50 percent means that the manufacturing sector is contracting. This index has been in negative territory since the middle of last year. The slight uptick from the bottom over the past few months only means that manufacturing is declining at a slower rate, a small consolation.

The manufacturing sector accounts for roughly 17 percent of gross domestic product, but the fear has been that the slump in the manufacturing sector will seep through to the rest of the economy. Until recently, most indicators were still showing good growth. In addition to the April employment situation, the non-manufacturing NAPM business activity index fell below the 50 percent mark in April as well. The index was teetering on the brink of the 50 percent mark in 2001 and finally skidded below in April. Even though this is a relatively new index, it has garnered favor among analysts and policymakers since its sister survey in the manufacturing sector has a solid reputation. It won't be ignored by Fed officials. Moreover, the moderating pace of economic activity was also confirmed in anecdotal evidence in the Fed's latest Beige Book report.

Income and spending
Personal income rose 0.5 percent for the second straight month in March while personal consumption expenditures rose 0.2 percent in February and 0.3 percent in March. A drop in nondurable goods weakened February expenditures, but a drop in consumer durables hit March. As a result, the personal savings rate edged up in both months to show a smaller negative pace. Typically, consumers will increase their rate of saving when they become concerned about their financial conditions. We've seen a sharp deterioration in the personal savings rate from 1998 to the present. One would have expected greater improvement in savings during 2000 when stock prices were falling through the roof and consumer wealth declined. Even with the improving stock market over the past couple of months, it will be interesting to see whether consumers pare down spending and save more.

Consumer spending could be anemic again in April. Anecdotal evidence suggests that retail sales were only marginally improved from March. Motor vehicle sales dropped in April. Domestic auto sales were roughly unchanged for the month, but domestic light truck sales plunged 19.4 percent in April.

Federal Reserve officials may actually be relieved that consumer spending has moderated in recent months since debt burdens are high and savings are nil. However, if the consumer stops dead in its tracks, then the U.S. economy will certainly fall into recession as consumer spending accounts for more than two-thirds of GDP. Fed officials have to ease just enough so that consumer spending grows at a moderate pace and not zooms back to the pace seen in the late 1990s.

Sign of strength
Construction expenditures rose 1.3 percent in March after gaining in the four previous months. This indicator is viewed as a lagging indicator, but there is no question that the nonresidential sector has contributed to growth in the past six quarters! Some analysts are beginning to worry about overbuilding of commercial real estate, but bankers believe they won't be caught with excess commercial real estate debt like they were in the overbuilding phase of the 1980s.

In contrast to the past year, the residential market also turned around in the first quarter. Keep in mind that residential construction follows housing starts with a slight lag. Housing starts were up in the first quarter on lower mortgage rates and favorable weather conditions. Mortgage rates were on the upswing again in April despite the Fed's easing mode.