Jobless rate up; payroll gain slight
The civilian unemployment rate increased 0.3 percentage points to 6.0 percent, its highest level since August 1994. Economists correctly predicted that the unemployment rate would rise in the first half of 2002 at the same time that economic growth would improve, a result of the nature of the jobs market. The jobless rate generally rises in the early stages of recovery because unemployed workers, who weren't even in the labor force or looking for a job because they thought they couldn't find one, begin to believe that their chances have improved. If often takes a bit of time for these workers who are re-entering the labor force to actually find a job. That means that labor force growth outpaces employment growth. Consequently, the unemployment rate rises even though the economy is starting to improve. Because of atypical behavior in January and February, the jobless rate declined. This caused market players to think that the standard rules of thumb would not apply this time and that the economy was ready for lift-off. In fact, current behavior is more typical for the early stages of recovery.

The rising unemployment rate might not have been so bad if it weren't for the meager rise of 43,000 in nonfarm payrolls for the month of April. Furthermore, March payrolls were revised down so that they now show a drop of 21,000 for the month rather than an increase of 58,000. All in all, the payroll figures are pretty lousy. The only positive factor is that the payroll figures are at least showing signs of improvement. Even when looking at a three-month moving average, which smoothes special factors, it does appear that the worst is behind us and labor market conditions should improve from here on out. Even the manufacturing sector is on the mend. Granted, factory payrolls declined 19,000 in April, but it was the smallest decline in more than a year. Coupled with rising orders and increasing industrial production, it is likely that factories may actually add to payrolls in coming months.

Equity market players have gone back and forth on the benefits of improving economic activity. At times they worry that strong economic figures will cause the Fed to raise the federal funds rate target - which could eventually stall the recovery. At other times, they worry that the recovery is sluggish and will not generate corporate profits. In any case, the employment report suggests that the Fed won't be in any hurry to raise its funds target. In addition to the sluggish payroll figures, average hourly earnings rose only 0.1 percent. This led to a 3.4 percent yearly gain, the smallest since August 1999. At least wage inflation is not on the horizon. This will allow the Fed to remain on hold for a while.

Factory orders struggle to get over the hump
Factory orders edged up 0.4 percent in March after recording meager gains in January and February. These modest gains were insufficient to offset the decline in the fourth quarter, as orders were still lower than the October-to-December period. Nondefense capital goods orders improved somewhat, but the first quarter rise wasn't large enough to offset the fourth quarter drop. While there is no question that factory orders are on the mend after posting declines since the third quarter of 2000, the improvement seems meager. This is one of the reasons causing economists and Fed officials to predict a very soft recovery, and a delayed recovery for capital spending until the second half of the year. The ISM manufacturing index managed to remain above the 50 percent mark in April for the third straight month, but the level was lower than in March. Manufacturing activity is making only a modest recovery these days.

Confidence stalls, but spending doesn't
The Conference Board's consumer confidence index declined to 108.8 in April from a level of 110.7 in March. At the same time, motor vehicle sales continued to climb in April, reaching their highest levels since November. The chart shows how out-of-whack the level of sales was in October, the first month that automakers introduced zero-percent financing incentives. Everyone believed that the fourth-quarter's sales would take a chunk out of the first-quarter's selling pace. But in fact, consumers continued to buy cars and trucks even as financing incentives were winding down. That's why it is usually a better idea to gauge consumer confidence not by surveys but by actual purchases of large-ticket items such as auto and truck sales.

Mixed bag on construction
Total construction expenditures fell 0.9 percent in March because spending in the public sector dropped 5.6 percent during the month. Residential construction spending continued to post moderate gains, although non-residential expenditures continued to post losses. The chart below (depicting quarterly changes) shows the sharp discrepancy between the residential and nonresidential sector. Notice that the two sectors are often at odds. Spending on residential structures will be rising when spending on nonresidential structures will be falling, and vice versa. It is a rare quarter when both are rising. The healthy gains in residential construction expenditures should help fuel retail sales on furniture, appliances and home furnishings.