Consumer sentiment inches up

Consumer sentiment, as measured by the Reuters/University of Michigan survey was unchanged at 73.6 in March, versus February but did improve by 1.1 points from the mid-March, or the preliminary reading.

“Consumers reported gains in the overall economy and expected the economy to continue to improve during the year ahead.

Despite these expected gains in the economy, consumers’ evaluations of their own financial situation have remained grim due to the widespread expectation that improvement in their job and income prospects will be very small during the year ahead,” according to survey results reported on Friday.

Although we haven’t seen any improvement over the past three months, the overall, upward trend that began a year ago remains in play, as the weak economic recovery is slowly lifting confidence.

New jobs and greater job security would go a long way in improving consumer sentiment, which would likely translate into a rise in discretionary spending and a broader-based economic recovery.

Weekly claims appear to be resuming down trend

Weekly jobless claims may finally be headed downward, albeit very slowly, after a three month interruption in the trend that began a year ago. 

Jobless claims fell 14,000 to 442,000 in the latest week, as the Labor Department released annual revisions to the weekly number (revisions are included in the chart below).  The 4-week moving average slipped by 11,000 to 453,750.

Press reports out today mostly suggest that the dip is signaling that the job market is in a weak recovery.  Unfortunately, I have to take exception with the mild optimism.

Companies may be slowly cutting back on the jobs being eliminated, but the small drop, though good news (any dip is at least modestly favorable), doesn’t necessarily signal that hiring is picking up.

The economy has begun to expand. But so far, the recovery is uneven and companies remain reluctant to ramp up hiring.

Jobless claims remain elevated

For about the past three months, we have seen very little improvement in weekly jobless claims, highlighting the unbalanced and fragile economic recovery for much of the nation.

In the latest week, weekly jobless claims fell 5,000 to 457,000, while the 4-week moving average slipped 4,250 to 475,500.  Progress in continuing claims seen in much of last year has also ended, with claims rising 12,000 in the latest week to 4.6 million.

It is important to note that the over 2 million drop in continuing claims from the peak is mostly due to standard benefits running out, as continuing claims do not include those who are on emergency extensions.

As I’ve mentioned in prior posts, weekly jobless claims are a great gauge of economic activity because the release is current and it is a barometer of business confidence.

Falling claims suggest that companies are seeing a pick up in activity and want to hold on, even add, to staff.  Rising claims would signal the opposite.

In addition to the fact that the elevated level of claims is suggesting a lack of job growth in the economy, the stubbornly-high level of jobless claims is a sign that the economic recovery is still fragile and remains uneven.

A look at wholesale inflation

Led by a 2.9% drop in energy prices in February, the Producer Price Index fell 0.6%, the first drop since September.

Year-over-year, producer prices are up 4.4% amid the steep rise in energy prices over the past 12 months; however, if we remove energy, along with food, prices rose just 0.9% from one year ago (March's rise came in at 0.1%).

The Fed has an implied range for consumer prices of between 1-2%, so there are few pressures building in the pipeline at the present time.

We will probably see another rise in the headline rate when March's numbers are released, as oil prices have trended higher once again. But outside energy (and the price at the pump), there just isn't much inflation in the economy.

Aggregate demand remains constrained, which makes in difficult to push up prices, while wage increases (the biggest cost for most businesses) have been small, alleviating much of the need to boost prices. Moreover, recent outsized increases in productivity will support profit margins and cushion the need for any price hikes in the short term.

Consequently, there is little threat of a return to inflation at the current time, allowing the Fed to keep rates near zero in its attempt to boost economic activity and support the sagging labor market.

Foundation not firm under housing

Piggy-backing on yesterday’s report showing a decline in home builder sentiment, housing starts and building permits continue to show that residential construction has stabilized, but home builders aren’t getting a whole lot of traction from the extension and expansion of the home buyers tax credit.

Housing starts in February fell 5.9% to an annual pace of 575,000 units.  Building permits, which are more forward looking, were down 1.6% to 612,000. Consequently, the second monthly decline in permits suggests that traffic among prospective buyers and the sale of new homes is still sluggish.

Looking at the chart above, the new home market has stabilized, but builders still face plenty of competition from foreclosures and short sales.  And until this problem is resolved, it seems unlikely we will see a noticeable acceleration in new home sales.

New vs. used

New home sales make up less than 10% of overall sales; however, the construction of new homes directly boosts GDP because residential construction is part of the GDP equation.  In addition, new home sales also have an indirect impact on GDP since new models will require lumber, drywall, roofing materials, appliances, etc.

The sale of existing homes, though not included in GDP, has an indirect impact on the economy.  New home owners who buy existing homes are much more likely to replace furniture or take on projects to modernize or add personal touches to the house.

Plus, realtors and mortgage lenders benefit from the purchase and sale of houses via commissions, enabling them to employ a number of processors and assistants.

With interest rates hovering near record lows, a surge in home buying would provide a needed shot in the arm to the economic recovery, adding some depth to what so far has been an uneven, fragile and shallow recovery.

Housing Market Index highlights faltering builder sentiment

Despite a healthy dose of incentives designed to boost the flagging housing market, home builder sentiment remains under pressure amid worried buyers and the numerous opportunities that remain to purchase a late-model home in foreclosure.

The NAHB/Wells Fargo Housing Market Index fell from 17 in February to 15 in March, indicating that home builders still face an uphill climb.  A level of 50 suggests builders are neither optimistic nor pessimistic.

Moreover, the components that make up the index were all in retreat this month, including prospective traffic.

The new home market makes up less than 10% of total housing sales, and existing home sales normally provide a more in-depth look at the housing market.

Still, the extension of the first-time home buyers tax credit and the new credit for existing buyers, coupled with near record low interest rates, should be sparking more interest in new home sales.

The best incentive builders could use would be a much firmer job market. further stabilization in home prices and a solid increase in consumer confidence. 

Until we see a healthy dose of all three ingredients, many potential buyers of new homes may remain on the sidelines or stay focused on bargains offered by abandoned homes still sitting in bank portfolios.

Consumer sentiment flounders in March

Upward trend still intact

The University of Michigan’s survey of consumer sentiment showed the closely-followed index unexpectedly fell from 73.6 in February to 72.5 in mid-March.

Disappointing? Yes.  However, a closer look at the general trend shows that consumer sentiment continues to slowly improve, despite the second-monthly decline.

Moreover, retail sales jumped in February, suggesting that consumers may finally be starting to feel a bit more confident about the prospects for a recovery.

Trade gap narrows

The U.S. trade gap fell from $39.9 billion in December to $37.3 billion in January, as a large drop in imports offset a small decline in  exports.

Not a whole lot to mention in today’s release, as January exports were $0.5 billion less than December exports of $143.2 billion. January imports were $3.1 billion less than December imports of $183.1 billion.

A drop in the nation’s oil bill was the largest contributor on the import side of the equation.  In summary, no major trends.

Weekly jobless claims are stuck at high levels

Weekly initial jobless claims fell a scant 6,000 in the latest week to 462,000, while the 4-week moving average edged up 5,000 to 475,500. Continuing claims increased 37,000 to 4,558,000.

The chart above speaks for itself.  The downward trend in weekly jobless claims has ended for now, and the level remains uncomfortably high.

Although most economic indicators continue to flash cautiously-positive signals, weekly jobless claims highlight that the labor market remains depressed and that we are unlikely to see any job creation in the near term.

The high level is also an indication that the shallow economic recovery remains in a fragile state, and companies are not seeing much in the way of economic growth, as they continue to keep a close eye on payrolls.

Improvement in Job Openings first signal of improving job market

But progress likely to be slow

The job openings and labor turnover report (JOLTs) is one of those second-tier economic reports that tends to get very little attention; however, today's rise is worthy of mention given the mostly bad news we've been hearing on the labor market.

The U.S. Labor Department reported today that the job openings rate increased from 1.9% in December to 2.1% in January , the highest the rate has been since February 2009.

Although well below the 3.2% rate seen when the U.S. economy entered the recession over two years ago, the rate has edged up from the bottom of 1.9%, signaling the employers are cautiously starting to advertise new openings.

But gains may be slow, as the hire rate held steady at 3.1% and has been stuck in a narrow range for over a year.

The labor market is among the last of the economic indicators that turn positive following the end of a recession. The downward trend in weekly jobless claims has stalled, though weather and problems making seasonal adjustments might share some of the blame, while nonfarm payrolls, which have stabilized, have not turned higher in any meaningful way.

However, the increase in job openings may finally be pointing to a slow recovery in the labor market.

Productivity continues to leap ahead

Productivity is one of those statistics that few really get excited about, unless one is either an economist or someone who has spent plenty of time studying the field of economics.  Despite the apparent lack of interest, let’s take a stab at it.

This morning the government reported that 4Q nonfarm productivity surged at an annual rate of 6.9%, well ahead of the initial estimate of 6.2%.  This came about as output  grew by 7.6% and hours worked rose 0.6%.  A quick review of the math, and some rounding, gives us the 6.9 figure.

Given the huge jump in productivity and the small increases workers are receiving in compensation, it comes as no surprise that unit labor costs plunged 5.9%, faster than the originally-reported drop of 4.4%.

As I’ve already mentioned, few get excited about this release, but changes in productivity and unit labor costs impact all of us.

Typically, productivity surges in the early stages of an economic recovery because companies start to ramp up output without adding staff.  Needless to say, this recovery is no exception!

But as companies start to increase hiring, productivity increases level off.

So why is all of this important? 

Strong gains in productivity over time enable companies to increase wages and benefits without adding to inflation. And rising compensation without an accompanying increase in inflation raises living standards.

However, during the initial phase of an economic recovery, the jump in productivity has its downside – a jobless recovery.

A  second important component of this report is unit labor costs.  Wages and benefits are the largest single cost for most companies.  If higher productivity mitigates increased salary expenses, inflation is much less likely to get entrenched during an economic cycle.

Looking at what is going on today, we are seeing plenty of excess capacity and small increases in overall demand, making it very difficult for businesses to raise prices.  Moreover, unit labor costs are falling, which helps corporate profits and dramatically lessens the need for price hikes.

In this environment, inflation simply is not a threat at the present time, allowing Federal Reserve officials to focus on the dreadful employment picture and not inflation. 

Down the road, the Fed will be faced with the delicate task of raising interest rates and nipping any potential inflation threat in the bud.

ISM pointing to stabilizing job market

The Institute for Supply Management surveys released on Monday and Wednesday for the manufacturing and the non-manufacturing (service) industries, respectively, may shed some light on Friday’s employment report for February.

According to Bloomberg, economists anticipate a 50,000 decline in nonfarm payrolls for February, compared with a 20,000 dip in January, while the unemployment rate is expected to increase from 9.7% to 9.8%. 

And recent data have shown an uptick in weekly jobless claims, suggesting that we may see additional job losses.  Harsh winter weather is the primary reason for the expected weak payroll numbers.

However, the respective employment indexes from the ISM surveys suggest that many analysts may have been a bit too pessimistic when it comes to February’s numbers. 

A reading of 50 marks the line between job destruction and creation.

Trends have definitely improved over the past year, especially in manufacturing, and the extreme layoffs experience in much of 2009 have abated.  Note the rebound reflected in the above chart. 

Though the economy is still months away from creating the number of jobs needed to boost confidence in the recovery, the closely-followed surveys are starting to flash positive signals, especially in manufacturing.

ISM services reading at best level in over two years

The ISM Non-Manufacturing Index, which looks at the broad-based service sector, rose to its best reading since prior to the start of the recession.

At 53.0 – a level above 50 suggests growth while a level below 50 indicates contraction – the survey reveals that the service sector is in an upward trend, alleviating some of the concerns that harsh weather had stymied economic activity in February.

A more detailed look is available at Examiner.com.

Manufacturing remains a bright spot for economy

For the seventh-consecutive month, the closely-watched survey offered up by the Institute for Supply Management (ISM) shows that the manufacturing sector continues to power ahead.

The ISM Manufacturing Index did drop from January’s level of 58.4 to 56.5, just shy of the Bloomberg estimate of 57.5, but the February reading is consistent with a respectable level of growth.  A reading above 50 is expansionary.

In addition, the chart above continues to show that the trend towards increased production remains intact.

So far, the economic recovery has been very sluggish because consumers have been reluctant to spend.  Job insecurities are still high and debt loads are heavy.  And most companies are not adding employees.

However, hiring does appear to be picking up at the nation’s factories, according the the survey, with the employment index rising from 53.3 to 56.1. 

Simply put, consistent increases in demand lead to higher production, and higher production forces factories to add workers in order to meet higher demand.

When we finally begin to see a more broad-based recovery, and many headwinds still remain, we will start to see consistent gains in employment, which will put the shallow and uneven recovery on a firmer footing.