Jobless claims drop in latest week

But level still too high

Weekly initial jobless claims fell 24,000 to 456,000 in the latest week, suggesting that increases over the past two reporting periods may have come from difficulties adjusting for the Easter holiday.

Still, the weekly claims are 14,000 above the reading of 442,000 heading into Easter, and as evidenced from the chart below, the downward trend that started early last year has nearly come to a halt over the past four months or so.

It’s difficult to say why, especially given the relatively upbeat data that have been streaming from a number of different sources. Manufacturing is experiencing a V-shaped recovery, consumer spending has started to pick up, and the service sector, which makes up most of the economy, is accelerating.

I suspect that the uneven and shallow recovery, that likely started sometime last summer, is mostly responsible for the still-elevated level of claims.

Companies are still cautious, lending is tight and many firms are not yet seeing the economic recovery reflected in higher sales. Consequently, they appear to be quick to pull the trigger on layoffs.

As the recovery broadens, and that appears to be happening, layoffs should diminish. In the meantime, April’s employment numbers will probably reflect the still high number of job cuts.

IMF lifts forecast but debt worries remain

The International Monetary Fund (IMF) lifted its forecast for the global economy by 0.3 percentage points to 4.2% for 2010, noting that activity so far this year is coming in at a pace that has been better than expected.

Emerging and developing economies are leading the pack, with China expected to see GDP soar by 10.0% this year followed by India at 8.8%. Growth in the U.S. is forecast to be much more modest, at 3.1%, while Europe and Japan lag behind.

The IMF pointed out that "a global depression has been averted," but it warned that the outlook remains "unusually uncertain." The banking system is still fragile, the IMF said, while it aimed its biggest concerns at advanced economies who have taken on large debt in order to bailout large financial institutions and prop up aggregate demand.

The increase in sovereign risk could hit the banking system and the real economy, the IMF warned. And if nervous investors worried about long-run government solvency cause a decline in sovereign (or government) bond prices in the advanced economies, still-recovering banks, which are major investors in government debt, could face new hits to the value of assets on their balance sheets.

There is still time to deal with exploding government debt levels in the U.S. and now is not the time to begin draconian fiscal cutbacks, as the U.S. unemployment rate remains stubbornly high. However, politicians must consider ways to pare back programs, even popular ones, or risk an even bigger meltdown in the future.

Leading Index climbs higher

The Conference Board's Leading Economic Index jumped a strong 1.4% in March, which comes on top of healthy upward revisions to fairly lackluster increases in January and February.

“The U.S. LEI has risen steadily for a year, and its six-month growth rate has remained fairly stable in recent months – led by improvements in financial and labor market indicators.

"Payroll employment made its first substantial contribution to the coincident economic index, suggesting a recovery that is beginning to gain traction, according to Conference Board economist Ataman Ozyildirim.

Ken Goldstein, economist at The Conference Board, added, “The indicators point to a slow recovery that should continue over the next few months. The leading, coincident and lagging series are rising. Strength of demand remains the big question going forward. Improvement in employment and income will be the key factors in whether consumers push the recovery on a stronger path.”

Agreed, in my view. Without gains in employment, income growth will be anemic. And anemic income growth will require consumers to dig into savings (or look to credit) in order to fuel sales among the nation's retailers.

There may be some pent-up demand that could be unleashed, but uncertainty abounds. Without rising employment, growth will likely be modest at best.

What's moving

Manufacturing is experiencing a V-shaped recovery, while housing has stabilized and is starting to perk up due to the expected expiration of the tax credits. And business and consumer spending has improved modestly.

Based on what the Leading Index is telling us, we appear set to see further gains in economic activity and a broadening of the recovery.

Tax credit assisting new home market…finally

Those who want to take advantage of the government’s generosity – $8,000 for first-time home buyers and $6,500 for a repeat buyer – must act quickly to find that perfect house, as a contract must be in place by the end of the month.

Thus far, potential buyers have been reluctant to purchase a home, even with mortgage rates near historically low levels because concerns about the housing market and still-high unemployment have kept many on the sidelines.

But based on the latest data, builders are finally starting to see the benefits of the government’s effort to stimulate a critical sector of the economy.

First, housing starts increased a minor 1.6% to 626,000 annual units in March.  But the latest rise puts starts at 20.6% above last year’s very depressed level.

More importantly, builder permits, which provide a glimpse of what will happen in the near term, increased a solid 7.5% to 685,000 units, suggesting that buyers are finally beginning to take advantage of the funds offered via tax credits.  Permits are now up in five of the past six months.

Additionally, the Housing Market Index, which looks at builder sentiment, increased from 15 in March to 19 in April.  Despite modest gains in confidence from extremely low levels a year ago, the index is still far from 50 – a level which indicates  builders are neither optimistic nor pessimistic.

"Home builders reported some real improvement in current sales activity and traffic of prospective buyers through their model homes over the past month," said National Association of Homebuilder Chairman Bob Jones, a home builder from Bloomfield Hills, Michigan.

"While we remain cautious about what future months will bring, it's great to have this positive momentum at the start of the spring home buying season."

The tax incentives are a big factor is prompting potential buyers to move off the sidelines.   Builders, however, remain cautious, as foreclosures of late-model  homes are still hanging over the market.  And the expiration of the tax credit seems likely to depress demand, at least temporarily.

Manufacturing heats up but jobless claims rise again

Industrial production in March inched up just 0.1%, but mild weather led to a sharp drop in utilities production, masking a 0.9% rise in manufacturing.

Surveys of the goods-producing sector last month reflected an acceleration in production, and data out today suggest further increases are occurring in April.

That’s not very surprising since demand from consumers and businesses is starting to pick up, and companies are scrambling to replenish empty shelves and stock up to meet rising demand.

We saw a solid retail sales number yesterday, see Strong retail sales signal growing confidence, suggesting the the recovery, which so far has been mostly concentrated in manufacturing, is starting to spread to the rest of the economy.

That is why the latest 24,000 jump in weekly jobless claims to 484,000 is a bit discouraging.

The Labor Department blamed factors related to the Easter holiday; however, claims have been stuck at elevated levels since late last year.

In early January, rising jobless claims were blamed on difficulties adjusting for the holidays.  Then the severe winter weather was cited for claims that wouldn’t fall much below 450,000, confounding analysts who had anticipated a dip to 400,000 or below.

Now the two-week jump is being blamed on Easter.  Whatever the reason – and there definitely seems to be a disconnect between claims and recent signs that the economy is coming back to life – companies are not only showing a reluctance to hire, but also seem quick to pull the trigger when it comes to layoffs.

I suspect that continued growth in the economy will eventually put the closely-watched gauge of the job market and economic activity on a downward path, while rising sales should also spark gains in payrolls. 

Disinflation, not inflation, has been the rule

Those who have been betting on much higher inflation received another dose of bad news today after the government reported that inflation continues to recede.

The Consumer Price Index increased just 0.1% in March, and the core rate of inflation, which excludes food and energy, was unchanged.

Year-over-year, the headline rate, which has been influenced by the rise in energy prices, is up 2.3%, while the core rate, which is more closely-followed by the Fed, eased to 1.1%, which is near the bottom of the Fed’s implied comfort zone of 1-2%.

The continued drop in the core rate of inflation isn’t much of a surprise given the severity of the recession, stable labor costs, excess capacity in the economy and still-weak demand.

Moreover, inflation is a lagging indicator and normally slows in the early stages of an economic recovery.

We may see a further easing in core inflation, but as the recovery broadens, we will probably hit bottom over the next few months. Nonetheless, with inflation safely at the bottom of the Fed’s implied range, don’t expect any tightening in the near term, as the focus will remain on the unemployment rate.

Even if oil prices continue to rise , it seems unlikely that higher energy costs will leak into the other areas of the economy anytime soon.

Crude oil prices jump

But U.S. well-supplied with product

The price of oil had jumped from $70 per barrel just a couple of months ago to $85 this week, even as crude oil stocks in the U.S. have been on a steady, upward climb, according to data supplied by the Energy Information Administration.

Gasoline supplies, though off the highs, remain well above the average range for this time of year. Although the economy is still weak, data out recently suggests aggregate demand in the U.S has firmed and the recovery be broadening.

In addition, production has trended higher in the U.S.

 

And imports have perked up recently.

A more in-depth look is available in my article entitled, Crude oil barrels higher but do fundamentals support price?

Progress elusive in jobless claims

Mick Jagger famously said, “I can’t get no satisfaction.”  When it comes to jobless claims reported each Thursday, the familiar tune rings true, as claims unexpectedly jumped 18,000 to 460,000.

And the stubbornly-high level is especially disappointing given signs that economic activity is slowly picking up.

A more in-depth look at jobless claims and a quick peek at upbeat same-store sales numbers is available on Examiner.com.

Fed minutes: rate hike later rather than sooner

Fed officials indicated in the minutes from the last meeting that a rate hike is contingent upon the economic recovery. And in my view, much will depend on how quickly the economy generates new jobs.

The minutes noted that the Fed's current language that interest rates will stay low for an extended period is not designed to box policymakers in by explicitly telegraphing to the financial markets that rates will stay near zero for several more months.

"A number of members noted that the Committee's expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.

"Consequently, such forward guidance would not limit the Committee's ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further."

Still, despite relatively upbeat economic reports that have come out recently, most officials anticipate a modest recovery and some warned against raising rates too soon.

Home sales may be set to move ahead

Early evidence suggests that despite harsh weather winter during February, the extension of the first-time home buyers tax credit and a newly-instituted credit for repeat buyers are finally having the desired effect.

The Pending Home Sales Index released by the National Association of Realtors increased 8.2% to 97.6 in February, suggesting that existing home sales are poised to rise in March and April.  Pending home sales are counted when a contract is signed, which typically takes four to six weeks to close.  At that time, the transaction is counted as an existing home sales.

NAR chief economist Lawrence Yun, said the improvement is another hopeful sign. “The rise in buyer contact activity may signal the early stages of a second surge of home sales this spring. The healthy gain hints home prices are continuing to flatten,” he said. “We need a second surge to meaningfully draw down inventory and definitively stabilize home values.”

Unlike the last expected expiration of the tax credit, which required that the home close by November 30, the current law states that a contract must be signed by April 30.

Given the uptick in February, it seems likely that we will see further gains in March and April, as potential buyers rush to meet the new deadline.  With mortgage rates heading higher, buyers have an added incentive to move off the sidelines and beat the possibility that further increases in mortgage rates are on tap.

Of course, predicting mortgage rates, which are normally tied very closely to the ten-year Treasury yield, over the short-term is haphazard at best.  However, upbeat economic data released over the past week, has nudged rates higher, and home loans have moved along with it.

Though it seems likely that realtors will be in the sweet spot over the next couple of months, the end of the tax credit could bring a new hangover in the real estate market during the summer.

Increased job security, more reasonable lending standards and a solid economic recovery would go a long way in absorbing excess housing inventory and putting the housing market on a much firmer foundation.

ISM survey shows survey sector accelerating

The ISM Non-Manufacturing Index rose  to its highest level in close to four years, indicating that the economic recovery, which had  been mostly confined to manufacturing, is now starting to gain traction in the much broader-based service sector.  And subcomponents within the index suggest that further gains are on tap.

Looking at the chart above, the tepid and uncertain expansion experienced during the fall of 2009 has given way to a more balanced recovery. 

Job growth remains weak and setbacks following the rise in March are likely, but continued economic growth should eventually make a modest dent in the unemployment rate. 

Still , a quick fix to the high level of joblessness is unlikely.

Manufacturing accelerates at fastest clip since 2004

Manufacturing continues to shine in an otherwise cautious outlook, according to the latest data from the Institute for Supply Management.

The ISM Manufacturing Index increased 3.1 points to 59.6, the fastest pace since July 2004, and most indicators point to further gains.

Both new orders, which are more forward looking, and production rose above 60, while employment dipped slightly but remained above 50 for the fourth-straight month.

Manufacturers continue to report that inventories among customers remains too low, which also suggests that production will remain on the upswing in the near term.

In addition, exports jumped 5 points to 61.5, signaling that the overseas economy continues to improve.

About the only dark spot in an otherwise stellar report was the big jump in prices that manufacturers are paying to procure raw materials (up 8 to 75.0). 

However, at this point in the business cycle, commodity inflation – sign of strong demand – is unlikely to seep into the broader price level given that there is plenty of slack in the economy and demand, though rising, is far from robust.