Jobless claims at new low

We received another piece of good news about the economy on the final day of the year.  Weekly jobless claims fell 22,000 in the latest week to 432,000, well south of the Bloomberg forecast of 460,000 and the lowest level in almost 18 months.

The 4-week moving average continued in a downward trend, dropping 5,500 to 460,250, and continuing claims slipped 57,000 to 4.98 million.

Recognizing that seasonal adjustments can sometimes be difficult this time of year, the steady decline in weekly jobless claims is impressive and is one of the clearest indications that the economy is on the mend.

The drop in layoffs not only reflects rising optimism among businesses but it also shows that the worst losses in nonfarm payrolls are behind us.  Still, fewer job cutbacks by employers do not necessarily portend a rise in employment, at least at this point in the business cycle. But it is a prerequisite to job creation.

We’ll need to see steady increases in aggregate demand before the economy begins to create new jobs.

Unfortunately, a falling unemployment rate and rising nonfarm payrolls are among the last economic statistics to show improvement after a recession.

Expected end of tax credit wallops new home sales

New home sales fell a steep 11.3% to a seasonally-adjusted annual rate of 355,000 in November, which puts the supply of homes on the market at 7.9 months (up from 7.2 months).

Unlike existing home sales, which are recorded at closing, the sale of a new home is counted when a contract is signed. We did see a jump in new home sales in October as buyers rushed to beat the end of the first time home buyers tax credit, which had originally been set to expire November 30.

The extension and expansion of the tax credit, coupled with the growing economy and still-low mortgage rates, should lend support to the market next year.

Final 3Q GDP indicates economy limped out of recession

Gross Domestic Product - commonly referred to as GDP - is the broadest view of economic activity and is among the more complex pieces of economic data that the government releases each quarter simply because it covers so much territory.

That is the reason we have three separate releases - advance, preliminary, and final - from the government.

The final release for 3Q, which came out today, showed that GDP increased at an annual rate of 2.2%, down from the initial estimate of 3.5, and the downwardly revised gain of 2.8%.

It's a little discouraging to the downward revisions chip away at early gains, but the data are old (4Q ends in about one week) and most economic reports suggest that we'll see the economy continue to expand when the final quarter's advance report is released at the end of January.

Gains in weekly claims stall

But trend intact

Weekly initial jobless claims increased 7,000 to 480,000, while the 4-week moving average dropped 5,250 to 467,500.

Not really much to say.  The sharp improvement witnessed in November has stalled for now, but the general downward trend is still intact. 

Simply put – the chart above is reflecting gradual improvement in the labor market and a gradual improvement in economic activity.

Philly Fed reveals acceleration in manufacturing

Early in the week, the Empire Manufacturing Index showed that activity in New York was little changed from the prior month.  As mentioned in a prior post, the Empire survey tends to be volatile and “sudden shifts have to be taken in context with the overall trend” – see Empire stalls.

The Philly Fed’s Business Activity Index released today showed that manufacturing activity in the mid-Atlantic region accelerated at its fastest pace since April 2005.

The survey released by the Philadelphia Federal Reserve increased from 16.7 in November to 20.4 in December, above the Bloomberg forecast of 16.5 and the fifth-consecutive month the index has been in positive territory. A reading above zero is an indication that manufacturing is expanding in the region.

New orders did slip some but many of the subcomponents suggest continued improvement in the sector heading into 2010. 

Meanwhile, the employment index improved nearly 7 points to 6.3, the best reading in over two years and a sign that companies are finally starting to bring new workers onboard.

Prices paid did jump from 14.9 to 33.8, but prices received was nearly unchanged at –1.8.  Soft demand is keeping price increases in check.

One note of caution, the six-month forecast fell from 36.8 to 24.4, but that’s still well above zero, suggesting a modest degree of optimism remains.

Empire stalls

The Empire Manufacturing Index is a regional survey that looks at manufacturing in New York State and is compiled by the New York Federal Reserve.

In hindsight, the survey did a great job signaling the low point in manufacturing and the recovery that eventually ensued.

Because it is the first look at manufacturing during the current month, the narrow survey does garner some extra attention, but it tends to be volatile and sudden shifts have to be taken in context with the overall trend.

That said, the Empire Manufacturing Index fell from 23.5 in November to 2.6 in December, well below the  forecast offered by Bloomberg of 25 and a sign that output slowed markedly.  A reading of zero marks the line between contraction and expansion.

New orders and shipments decreased, but prices paid rose from 10.5 to 19.4, signaling rising pricing pressures at the early stages of production, which is likely tied to rising commodity prices.

But prices received fell from –2.6 to –9.2, as manufacturers have little recourse when it comes to passing along increased costs.

The steep drop in the index is disappointing, but as already mentioned, one month does not constitute a trend.  We’ll have to see what happens when the Philly Fed’s Business Activity Index is released later this week. And we’ll have to look at the ISM Manufacturing Index, which is a highly-sought-out survey that encompasses the entire country.

If a pause is detected, it is likely that we’re just looking at a one-month bump, in my view.

Commodities, oil fuel rise in import prices

Much of what makes up the index still contained

Led by a 7.3% rise in fuel costs, the import price index jumped a hefty 1.7% in November.  Ex-fuel, prices increased 0.4%, which comes on top of price increases that have averaged a like amount in the prior three months.

At first glance, the weakening dollar appears to be igniting a broad-based rise in import inflation, which at this early juncture in the business cycle, would be disturbing.

Digging deeper, the rise in core import inflation is directly the result of sharp gains in raw material costs, which can be tied in part to the falling dollar, while China’s strong appetite for commodities is also playing a role.

But outside basic commodities, pricing pressure are well contained.

Consumer goods, which make up one quarter of the index, have barely moved over the last four months.  And capital goods, which account for nearly a quarter of import prices, have averaged gains of less than 0.1% in each of the last four months, according to government data.

Credit the weak US economy and excess global capacity for the inability to boost prices.

Retail sales advance

Retail sales rang up an impressive increase November, bolstering evidence that the consumer may finally be participating in the economic recovery.

Details available at Examiner.com.

Cold weather draws down natural gas supplies

Natural gas prices jumped in trading today after the Energy Information Administration reported a larger-than-expected 64 billion cubic feet (bcf) decline in supplies to 3,773 bcf.

The relatively mild summer and weak industrial demand this year has left ample supplies of the commodity used to heat a majority of homes in the US, as stocks are still 472 bcf higher than last year at this time and 513 bcf above the 5-year average.

Consequently, prices remain low compared to much of the decade.

Rise in weekly jobless claims ends downward streak

Five-consecutive declines in weekly jobless claims came to and end in the latest week, with initial claims rising 17,000 to 474,000.  The 4-week moving average, however, continued its downward trend, dropping 7,750 to 473,750.

The decline shouldn’t be viewed in a negative light, as the favorable trend remains intact.  In addition, the end of the very positive streak, which saw claims decline from 532,000 to 457,000, isn’t surprising since initial claims can be volatile on a week by week basis.

Being more specific, the rise could be termed simply as “noise.”

Meanwhile, a sharp 303,000 decline in continuing claims to 5.16 million is encouraging since it could be signaling that folks in the unemployment line may finally be securing employment. However, the expiration of standard benefits, which typically last six months, are probably playing a role in the downward trend.

For a more detailed explanation of weekly claims, please see Economy 101: What are weekly jobless claims? on Examiner.com.  Additional articles are available on my homepage.

Sovereign debt worries back on the radar

Judging from recent action in the dollar and in the stock market, Dubai's announcement that it will put debt payments on hold reminded all of us that despite recent gains in global economic activity, unexpected surprises in the debt markets still have the potential to rattle investors.

Furthermore, Dubai's problems may be followed by troubles in Greece (see Greek debt threatens euro - Business Week), which is struggling with high debt loads of its own.

However, concerns that defaults in emerging markets might spread to major institutions in Europe and the US appear to be limited at this time given that measures of risk, such as swap spreads or LIBOR, remain at pre-credit crisis levels.

Wholesale inventories finally turn higher

It’s a bit dated because the most recent number is over six weeks old, but the first rise in inventories in over one year suggests that the destocking that occurred in response to the near collapse in demand late last year may finally be running its course.

The government reported this morning that wholesale inventories increased 0.3% in October, even as sales jumped an impressive 1.2%.  That brings the closely-watched inventories-to-sales ratio, or how many months it would take to liquidate stockpiles on hand, to 1.16.

At 1.16, the ratio is slightly below where it stood through much of  the expansion that occurred during the decade, and further gains in sales are likely to encourage firms to re-open idle plants and ramp up production.

Based on recent increases in industrial production and positive readings on surveys that measure manufacturing – the ISM and Philly come to mind – that is exactly what has been happening.

Still, let’s temper some of our/my enthusiasm given that gains have been modest, and the hole we must dig ourselves out of is wide and deep.

An uptick in hiring?

Definitely good news on the employment front;  however, companies have become very adept at managing the supply chain and keeping inventories lean, and it seems very unlikely that we will see a sharp upturn in the ratio that measures sales and inventories.

Disconnect between ISM services and jobless claims, nonfarm payrolls

Yesterday’s report that the ISM Non-Manufacturing Index – a measure of the broad-service sector – fell back to a level that suggested the sector was contracting again, seemingly at odds with the continued drop in jobless claims and today’s much better-than-expected nonfarm payroll numbers (see charts below).

Additionally, the sharp upward revision to October and November nonfarm payrolls suggests the economic recovery may not be as fragile as originally envisioned by many analysts – including myself, though I have been arguing against a double-dip recession.

So what gives?  A key measure of services has declined over the past two months and the employment subcomponent barely moved, rising from 41.1 to 41.6 (50 is the level at which jobs are neither being created nor destroyed). Yet, the government reported 58,000 new jobs among service industries.

The ISM’s new order subcomponent did remain firm in November, but other than that, it simply appears that the highly regarded survey, at worst, is not capturing the nascent optimism among some businesses.  At  best, it is highlighting how weak the recovery may be.  I tend to lean to the former.

Jobless claims, in my view, are an excellent barometer of economic health because falling claims indicate the economic activity is improving as companies become  more reluctant to release workers.

November’s 11,000 drop in nonfarm payrolls is the best reading in two years. 

But nonfarm payrolls are a lagging indicator in economic recoveries because businesses do not want to quickly rehire workers and be forced to lay them off if improving economic condition are temporary. 

Furthermore, firms continue to keep a sharp eye on expenses, and hiring budgets remain under the microscope.

Yes, we have a long way to go before the economy is consistently producing the level of employment needed to take a large bite out of the unemployment rate.  And the risk of a jobless recovery over the next year remains large, especially if economic gains remain modest.

But the nearly unchanged level of employment last month and the favorable trend over much of the year are a clear reflection of falling jobless claims and a signal that further gains in the economy are probably forthcoming.

Rising U.S. refinery capacity

Much has been made over the fact that a major refinery has not been built in the U.S. since the 1970.  Rising oil prices over much of the decade and gasoline prices north of $3 per gallon created cries by many that the country was in desperate need of new capacity.

Recently, the Energy Information released data that showed total U.S. refining capacity increased by 14% between 1997 and 2009, with the average annual capacity increase of about 185 thousand barrels per day (Mbbl/d) over this period, equivalent to adding one and a half average-sized refineries each year.

How?  Refiners can increase capacity at existing sites by modifying equipment to increase product flow and by adding new distillation units, according to the EIA.

Net refining margins and return on investment reached historic high levels from 2004 to 2007, encouraging several companies to announce expansion plans, per EIA data.

But at times rising demand for gasoline taxed the nation’s refineries, especially after Hurricane Katrina and Hurricane Rita did plenty of damage to facilities along the Gulf Coast.

Over the past several quarters, however, refining margins have declined sharply, and petroleum product demand has declined in response to weak economic activity.

A look at the latest inventory of gasoline and distillates, which includes heating oil and diesel fuel, shows ample supplies are available.

Service sector contracting again

But drop in jobless claims is encouraging

Following two months above 50 – the level that marks the line between contraction and expansion, the ISM Non-Manufacturing Index showed that the broad-based service sector contracted last month.

The closely-followed survey fell from 50.6 in October to 48.7 in November, below the Bloomberg forecast of 52.0.  The economic recovery has been modest thus far, and some analysts expected a double-dip recession. 

Weakness in the service sector last month, which accounts for most of the country’s GDP, bolstered their case, as the index has slipped for two consecutive months.

Jobless claims point to further economic gains

However, today’s report on jobless claims paint a different picture.  Weekly initial jobless claims remain in a downward trend, falling another 5,000 to 457,000, the lowest reading since September 2008.

The 4-week moving average dropped 14,250 to 481,250, but continuing claims increased 28,000 to 5,465,000.

The labor market has taken a  beating in the recession, and the unemployment rate now stands above 10%. Moreover, companies have shed over 7 million jobs since the recession began, according to data published by the government.

But the improvement in jobless claims is a clear indicator that companies are growing more optimistic about the recovery, and we may see further gains tomorrow when the government provides the latest on the labor market.

A reversal in the positive trend for weekly jobless claims would be disconcerting, signaling a worsening in the employment situation and a return to a contracting economy, but in my view, that is unlikely to happen.

Fed's Beige Book suggests recovery gaining traction

The Fed's Beige Book, which is a compilation of anecdotal reports from the twelve Federal Reserve districts, indicated that economic conditions have "improved modestly" since the last report.

Consumer spending has picked up modestly, according to the report, while manufacturing was "said to be, on balance, steady to moderately improving across most of the country, while conditions in the nonfinancial service sector generally strengthened somewhat."

Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. However, the level of new residential construction activity was generally characterized as weak.

No big surprise - commercial real estate conditions were widely characterized as weak and, in many cases, deteriorating further. Market conditions were reported to have weakened in virtually all districts, with rising vacancy rates, downward pressure on rents, and little, if any, new development.

The Achilles heel at this point is commercial real estate, which could put added pressures on some banks, but the recovery, for now, is moving ahead at a modest pace. An improvement in the labor market would go along way in putting the recovery on self-sustaining pace.

Pending homes sales climb again

Expectations that the first time home buyers tax credit was set to expire at the end of November helped to fuel the ninth consecutive monthly gain in the Pending Home Sales Index.

The index designed to forecast existing home sales now stands at the highest levels since March 2006.

BoJ to take new steps to aid economy, fight deflation

The Bank of Japan (BoJ) decided to take new steps at an unscheduled meeting after the country's prime minister had warned that deflation and a surging yen threatened to erase nascent gains in economic activity.

The BoJ will not return to its full-blown policy of quantitative easing - pumping excess reserves into the financial system, over and above what is needed to keep rates at near zero - that was used to fight deflation earlier in the decade.

But it does plan to supply additional funds to the economy, which the bank "characterized as quantitative easing in the broad sense of the term, as it is aimed at creating an environment with ample liquidity," according to a leading Japanese financial daily.

The bursting of the Japanese stock and real estate bubbles in the early 1990s led to a stagnant economy that has lasted almost 20 years. A strong yen and feeble domestic demand helped produce a deflationary environment in the early part of the decade, which encouraged policymakers in the US to take much more aggressive action during the current economic debacle that unfolded last year.

Now is not the time to be tepid.

The BoJ voted to hold its overnight lending rate at 0.1% and avoided any direct comments on the strong yen.

Manufacturing growth slows

Manufacturers sharply curtailed production late last year and early this year, helping them get a handle on excess inventories that sprung from a near collapse in demand following the credit crisis in late 2008.

With the worst of the contraction behind us, manufacturers put the brakes on production cuts in 2Q and output began to stabilize by summer. Subsequent gains, however, have been modest and there has been little in the way of an acceleration over the past four months (see chart).

Taking a look at the latest on the manufacturing front, the ISM Manufacturing Index fell from 55.7 in October to 53.6 in November, below the forecast of 55.0 offered by Bloomberg. A reading of 50 marks the line between expansion and contraction.

Four straight months of increased production is good news following extreme weakness earlier in the year, and it underscores that the economy has begun to rebound. But the modest gains also signal that the rebound in activity has been gradual.

Prices paid slipped from 65.0 to 55.0, indicating a lessening of inflationary pressures at the early stages of production. And exports inched up to 56.0, the fifth consecutive monthly gain amid a continued improvement in the global economy. But the employment subcomponent fell back from 53.1 to 50.8 – not so good news.

Modest increases in aggregate demand and the need to restock depleted inventories should continue to support production in the coming months.