Chicago PMI reflects red-hot manufacturing sector

As the recovery begins to broaden, manufacturers, which helped to stabilize and pull the economy out of the worst recession since the 1930s, continue to expand at an ever-quickening pace, at least according to the Chicago Purchasing Managers’ survey.

The Chicago PMI, increased from 68.8 in December to 71.2 in January, the highest reading since July 1988.  A reading of 50 suggests manufacturing is neither expanding nor contracting.



Even better, new orders – a proxy for future activity – edged up from 75.7 to 75.9, the best reading since December 1983!  Meanwhile, production grew by 5.5 points to the torrid pace of 78.2, and employment, which eased from a 27-year high, remained favorable.

However, the fast-paced expansion in manufacturing has not been without some problems, as growth continues to boost prices at the early stages of production and crimp profit margins.

The Chicago PMI, which looks at manufacturing in the Midwest, tends to be a bit more volatile than the closely-followed ISM Manufacturing Index, which measures production on a national level.

Still, a reading of over 70 is loudly suggesting that manufacturing is firing on all cylinders, and components within the index are signaling the all-clear sign in the short term.

Pending home sales slip–weather may have played a role

Those hoping the new year might provide a boost to the fledgling housing market were disappointed by the latest data released by the National Association of Realtors. However, let’s not make too much out of the decline since rough weather in parts of the country may have skewed the data.

The Pending Home Sales Index declined by 2.8% to 88.9 based on contracts signed for existing homes in January from a downwardly revised 91.5 in December.



Lawrence Yun, NAR chief economist, points to the broader trend. “The housing market is healing with sales fluctuating at times, depending on the flow of distressed properties coming on the market,” he said.

“While home buyers over the past two years have been exceptionally successful with historically low default rates, there is still an elevated level of shadow inventory of distressed homes from past lending mistakes that need to go through the system,” Yun said. “We should not expect the recovery to be in a straight upward path – it will zig-zag at times.”

He continued to point to favorable tailwinds for the market, including job growth, the high level of affordability, rising rents and even talk that some buyers may be looking to real estate as a hedge against potential future inflation.

In my view, his comment that the market is starting to heal but the recovery is unlikely to be a straight upward path makes sense.

But I believe he is putting too much stock is job growth, rising rents and inflation talk.

At this point in the housing cycle, the high level of unemployment and uncertainty over prices remains a huge stumbling block to an eventual foundation that’s needed under the market.

And mortgage rates that fell to almost 4% on a 30-year fixed rate did little to support sales amid the uncertainty swirling around housing.

At best, the market has shaken off the downward spiral caused by the expiration of the tax credit. Eliminate the government incentive and the chart above suggests sales have been flat for about two years.

One caveat: As any realtor knows, nasty weather such as snow, blizzards and rain will keep buyers inside, which potentially delayed some signings.

We’ll need to look at February and March to get a clearer pictures of what’s going on.

New home sales meander along the bottom

Weak builder sentiment continues to be reflected in a very poor market for new homes, as evidenced by the release of yesterday’s dismal report.

The U.S. Commerce Department announced that new home sales in January fell a much worse-than-expected 12.6% to a a seasonally adjusted annual rate of 284,000 units. 

That pushed the supply of homes (based on current sales) from 7.0 months to 7.9 months, while the actual number of homes for sales fell by 1,000 to 188,000, the lowest since late 1967. But it's the large decline in sales over the last five or so years that is masking the big slide in the actual number of home for sales; hence, the 7.9 months supply available is actually a bit on the high side even as the number of houses for sale is the lowest in over 40 years.



Since weather did not appear to play much of a role in existing home sales last month, it seems safe to say that the large drop that greeted the new year is probably not weather related, though we’ll need to review the data in February and March to confirm.



Not surprisingly, the huge drop in sales from the 2005 peak (see first chart) has been matched by a stunning drop in inventory of homes available (see second chart). 

Typically, a large reduction in inventory in a manufacturing operation sets the stage for a rebound in production. Housing, however, is different animal for a number of reasons.

And the shadow inventory that exists from late-model homes that are either in foreclosure or near foreclosure is providing stiff competition to builders and is offering skittish buyers that are willing to tiptoe into the market plenty of options. 

Low mortgage rates may be helping at the margin, but the incredible amount of uncertainty in the housing market has prevented cheap financing from having much of a favorable impact.

Until we see a decent jump in job creation, coupled with a turnaround in the already-discussed factors that are hindering the market, sales are likely to mope along the bottom.

Weekly jobless claims back below 400,000

Weekly initial jobless claims fell 21,000 in the latest week to 391,000, and the 4-week moving average, which removes much of the volatility from the seven-day number, dipped 16,500 to 402,000.

With weather receding as a factor that has caused all kinds of distortions with the data, the downward trend is providing a reassuring vote of confidence that the pace of the recovery is quickening.

Existing home sales stabilize

Existing home sales increased 2.7% to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3% above the 5.09 million level in January 2010.

This is the first time in seven months that sales activity was higher than a year earlier, according to data supplied by the National Association of Realtors.

In another sign that the market is beginning to heal, housing inventory fell 5.1% to 3.38 million existing homes available for sale, which represents a 7.6-month supply at the current sales pace, down from an 8.2-month supply in December.

Last year’s peak in inventory occurred in August at a level of 4.1 million units, which represented a supply of 11.7 months.



NAR chief economist Lawrence Yun said the improvement is good but could be better. “The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” Yun said.

“The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

I might add that sluggish job growth and the uncertainty surrounding where home prices are headed are also depressing demand.

Despite indications that sales are slowly improving, the rising number of distressed sales  (37% of the market in January), along with high levels of all-cash purchases (28% last year), continue to depress housing prices, which are down 3.7% from one-year ago to a median price of $158,800, the lowest in nearly nine years.

Meanwhile, indications that sales of existing homes are beginning to stabilize or even slowly improve are being called into question by the NAR’s decision to review data going back to as far as 2007, according to the Wall Street Journal and several other news agencies.

The data are being looked at to determine whether revisions are necessary, with a decision expected by the summer. Economists have raised concerns about the NAR's data, saying sales may be overstated by as much as 20%, the Journal said.

"I don't know what that revision will be," Yun told reporters at a briefing to discuss the January data.

"But most indicators imply that NAR data probably has some upward drift," he said, noting that the last re-benchmarking in 2000 showed that the group's sales estimates were overstated by about 13%.

Though recent trends are more important and paint a picture of what’s happening right now, a downward restatement would show that the housing debacle over the last few years was worse than previously thought and could call into question the reliability of data gathering techniques used by the realtor-based organization.

Consumer confidence at three-year high

In a day where much of the focus has been on the violence in Libya and its impact on oil prices, the Conference Board released its monthly survey and provided another piece of the economic puzzle showing that the rising tide of economic activity is lifting spirits.

The Consumer Confidence Index jumped from 64.8 in January to 70.4 in February, well above the stagnant range its been in since the summer of 2009 and the best reading in three years.



Lynn Franco, Director of The Conference Board Consumer Research Center, cited “growing optimism about the short-term future,” but also cautioned that labor market conditions may have improved moderately, but they "still remain rather weak."

Rising consumer confidence is likely to lend more support to consumer spending, which accounts for 70% of the U.S. economy.  Further gains in spending would fuel additional activity and help to put the recovery on a self-sustaining path.

But meaningful increases in employment are what’s needed in order to get consumer confidence back to pre-recession levels and revive sectors of the economy, such as housing, that continue to lag.

Headline CPI up but core inflation remains muted

The Consumer Price Index rose 0.4% for the second straight month, as higher energy and food prices lifted the headline number. Core inflation, which strips out the more volatile food and energy categories, remained under control, rising 0.2% in January.

Though modest, the rise in the core rate was the fastest increase in 15 months according to data supplied by the BLS.



As expected, energy was among the big gainers, with prices rising 2.1% in January.  Gasoline posted a 3.5% rise.

Food costs, which have remained under control at the retail level, are now beginning to react to the steep rise in agricultural commodities, as prices rose 0.5%.

Apparel prices also jumped but housing/shelter barely increased.

Year-over-year, the CPI is now up 1.6%, versus 1.5% last month, while the core rate of inflation, which the Fed keeps a closer eye on, rose from 0.8% y/y to 1.0% y/y.

Looking at the chart above, the core rate of inflation has likely bottomed given the continued rise in commodity prices and the broadening economic recovery. But at just 1.0%, it remains well below the comfort level of policymakers at the Fed.

I suspect that in the short-term, the forces keeping a lid on inflation, including the slack in the economy, reasonably-well anchored inflation expectations (that’s a big one) and minor wage increases, will more than counter the significant rise in raw material prices and excess liquidity being pumped into the economy by the Fed.

And the very low level of core inflation makes it much easier for the Fed to maintain its planned purchases of $600 billion in longer-term government securities, especially since growth in nonfarm payrolls has been extremely lackluster.

What the Fed must do is implement an exit strategy that does not wreck the still-delicate but broadening recovery while not waiting too long, which might make it difficult to contain inflation at the retail level.

The Fed has insisted on many occasions that it has the means and ability to remove the excess stimulus without threatening price stability.  However, the Fed has typically remained on the accelerator for too long in past cycles.

A second option – hefty anti-inflation rhetoric at the appropriate time – might also be part of its arsenal of weapons, as it hopes to contain any potential rise in inflation expectations.

One thing appears to be certain, the best news on inflation is very likely behind us, as the core rate appears to have bottomed in October at 0.6% y/y.

Weather continues to skew weekly jobless claims data

Weekly jobless claims jumped 25,000 in the latest week, which follows a 34,000 drop in the prior week, as the major winter storms that have rocked parts of the county continue to play havoc with the report.

The 4-week moving average edged up by 1,750 to 417,750, and continuing claims rose just 1,000 to 3.91 million.



The extreme volatility we are seeing in the weekly data and what I harped on last week (despite comments to the contrary by the Labor Department)is very likely related to the rough winter weather we’ve experienced in parts of the country.

Last week’s big drop likely occurred as some first-time filers were unable to file, pushing them into the latest week and skewing the data upward.

Now that we are seeing the rough winter storms subside, we may now have to take into account President’s Day this Monday. Though the government does adjust for seasonality brought on by holiday weekends, it is sometimes difficult to capture the nuances of individual government holidays, which can make the data somewhat suspect.

Hence, we might be forced to wait until the end of the month or early March, assuming no major weather events, before we get an accurate read on jobless claims.

I am confident, however, that once things shake out, claims should settle below 400,000, adding to the evidence that the recovery is broadening and the labor market is very slowly on the mend.

Producer price inflation heats up in January

One-time factors mostly to blame

The Producer Price Index, which measures inflation at the wholesale level, jumped by 0.8% in January, as energy continued its fourth consecutive double-digit annualized increase, rising 1.8%.  Increases in food prices, however, eased to 0.3%.

The core rate of inflation (minus food and energy), which has been well under control, perked up a bit to start the new year, rising a faster-than-forecast 0.5%, the largest rise in over two years. More on that in a moment.



Year-over-year, the PPI actually eased from 4.1% to 3.7%, while the core rate rose for the second straight month, increasing from 1.4% to 1.6%.  Still, core inflation remains under control, though prices have bottomed.

In the meantime, intermediate goods increased 1.1% and core intermediate goods rose 1.0%. Crude goods, which look at prices at the early stages of production, jumped 3.3%.  Core crude goods were up a more worrisome 4.0%.



Looking at the chart above, price pressures for intermediate goods remain generally modest and stable, arguing against the idea that the wholesale inflation genie is coming out of the bottle.

Somewhat surprisingly, especially given the strong gains in commodity prices and manufacturing surveys that reveal an acceleration in price pressures at the initial stage of production, the rate of increase in crude goods has eased significantly over much of last year (see chart below), which may eventually mute some, but not all, of the pressures that have been growing in the pipeline.



Turning back to the monthly data, forty percent of the 0.5% rise in core inflation can be traced to a 1.4% rise in “pharmaceutical operations,” according the the government’s report.

This suggests that we may see some moderation in upcoming months since the overall rise was not broad-based.  Additionally, the PPI is subject to greater swings than the retail price data, so a large rise, or for that matter an unexpected drop, shouldn’t be taken out of context.

Consequently, talk today that the seeds of an inflationary trend are beginning to sprout are premature in my opinion.  That rings even louder when what's happening at the earlier stages of production are taken into account.

Furthermore, wage increases, which makes up the bulk of costs for most businesses, are still very mild, and the economy has plenty of excess capacity, making it difficult for businesses to implement all but the smallest price hikes.

Inflation risks are likely to grow, however, if the recovery picks up steam, and the Fed is slow to enact and exit strategy.  With employment gains still weak, don't expect any changes in Fed policy or hints of any changes in the near term.

Multifamily gives burst to new round of housing starts

Single family starts languish

Housing starts jumped an impressive 14.6% in January to a seasonally adjusted annual rate of 596,000. But building permits, which provide a look at future activity, fell 10.4% to an annualized rate of 562,000.



About the only piece of good news in this report report was a surge of nearly 80% in multifamily starts, which does directly support GDP.

However, the jump in that very volatile sector masked what otherwise was a disappointing release. Single family starts, which is a much better indicator of what’s happening in residential construction, declined 1% to 413,000. And single family permits also slipped, suggesting the new year is off to an uncertain start.

Moreover, weakness in single family housing starts over the past couple of months is all the more disappointing following modest gains from depressed levels earlier last fall.



Nasty weather, which seemed to have no effect on the multifamily sector, could have kept some potential homebuyers away, delaying a few starts.

But it appears the pessimism among builders has been well-founded amid competition from late-model foreclosures, tight lending standards and general pessimism about the direction of housing prices.

In summary, we’re not at levels seen two years ago when single family homes hit bottom, but the growth that was tied to the government tax credits is now a distant memory, as builders grapple with poor fundamentals.

Retail sales–steady as she goes

Retail sales are continuing to expand, rising 0.3% in January, which is the seventh straight increase in as many months. But not very impressive since most analyst had anticipated something along the lines of 0.5% or 0.6%.

Sales ex-autos were also up 0.3%, while core sales, which exclude gasoline stations (in order to account for swings in gas prices) and autos, rose just under 0.2%.



Weather may have played a role, while the lack of significant job creation may also be holding back gains.

But sales continue to steadily increase, as the chart above reflects. Still, the rate of acceleration in core sales has been moderating over the last three months.

Though it's worth pointing out, it's not something to be concerned with at this time. Sales are being held back by the lack of employment growth, and we’ve had a rough winter in parts of the country, which has kept some shoppers at home.

I’m confident that when employers finally react to the growing economy by beefing up staff, we’ll see more significant gains in personal income growth, which in turn should translate into renewed sales growth.

Additionally, we are not yet seeing the positive impact from the partial payroll tax holiday, which is putting extra cash into the pockets of consumers.



A more formal look at today’s report is available at Examiner.com.

Housing Market Index unchanged for fourth month

The Housing Market Index, which measures builder confidence, held steady at 16 for the fourth consecutive month.  A reading of 50 suggests builders are neither optimistic nor pessimistic.



Complied by the National Association of Home Builders/Wells Fargo, components that gauge current sales and sales over the next six months did move up slightly from depressed levels, but traffic remained unchanged.

"While builders are starting to see more interest among potential home buyers, we are also dealing with a multitude of challenges, including competition from foreclosure properties and inaccurate appraisals of new homes, which are limiting our ability to sell," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nevada.

"On top of that, an extremely tight lending environment continues to make it almost impossible to obtain credit for viable new and existing projects, and most do not see that situation improving anytime soon."

Tight lending standards have been a problem for many businesses over the past couple of years, while competition from foreclosed properties remains a problem, offsetting any tailwind from tight inventories (see chart below).



The inability of some buyers to sell their current homes is also hurting builder confidence and limiting sales.

Mortgage rates remain near historic lows and affordability is near a record high. But until the economy begins to produce a significant number of new jobs, a strong foundation under the housing market is likely to remain elusive.

Consumer sentiment edges up to eight-month high

In the latest sign that the growing economy is having a positive effect on consumer psychology, the Reuters’/University of Michigan’s survey of consumer sentiment rose to its highest level in eight months.

Preliminary data showed that the Consumer Sentiment Index increased from 74.2 in January to a mid-February reading of 75.1. But in an apparent sign that lackluster job growth is hampering the improvement in consumer confidence, the expectations component of the survey slipped.



Nonetheless, the best level since June 2010 shouldn't be taken lightly, as it suggests consumers are feeling slightly more comfortable with their present job situation.  And the hard evidence that many are feeling less queasy about the economy can be seen in the burst in consumer spending at the end of last year that provided a big boost to Q4 GDP.

In the meantime, inflation expectations were unchanged, despite rising gasoline and food prices.

Reasonably-anchored short-term inflation expectations plays well for Fed Chairman Ben Bernanke, who has publicly stated that the Fed has the tools to implement an exit strategy and keep inflation under wraps.

Wholesale inventories, sales rise

The government reported this morning that wholesale inventories increased by a solid 1.0% in December amid growth in both durable and non-durables inventories.  Non-durables, which include farm products, appears to have been less affected last month by commodity inflation.

In the meantime, sales grew by a modest 0.4% following a large 1.9% rise in November. That took the inventories-to-sales ratio – how many months it would take to liquidate all goods on hand – to a still healthy 1.16 in December from 1.15 in November.



The rise in stockpiles on hand is probably the result of expectations of further gains in demand.  But current inventories remain well under control, so additional increases in demand are likely to fuel production and lend support to economic activity.

Weekly jobless claims back below 400,000

Weekly initial jobless claims fell for the second month in a row, declining a steep 36,000 to 383,000 in the latest week,  well below the consensus forecast, the lowest reading in over two years, and nearly 100,000 below where it stood just two weeks ago.

The 4-week moving average dropped 16,000 to 415,500, and continuing claims slipped 47,000 to 3.89 million.



The sharp drop in weekly claims over the past two weeks would normally be viewed as excellent news and a strong signal the economy continues to accelerate.

But abnormally harsh winter weather has played a huge part in the volatile claims data, rendering the numbers practically useless in determining recent trends.

Bloomberg News noted, “The Labor Department said weather effects, which delay the filing and processing of claims, are unwinding in a comment that suggests the latest level may be free of distortion.”

If this is the case, the data are signaling further economic strength.  But a snowstorm and bitterly cold temperatures that affected a large portion of the country last week temporarily closed some unemployment offices and may have hindered others from filing.

Having the luxury of playing Monday morning quarterback in regards to the recent volatility, it’s probably a good idea to wait on filings over the next week or two in order to determine whether this week’s strong showing is legitimate or partly weather related.

Nonetheless, I remain optimistic that the economic picture is improving and expect claims to settle below 400,000. But as already mentioned, the weather is playing havoc with this key piece of data.

Dallas Fed’s Fisher, Richmond Fed’s Lacker cautious on QE2

On Tuesday, a couple of heavy hitters from the Fed weighed in on the current round of Treasury purchases commonly known as QE2. Though known for their relatively hawkish views, it shouldn’t come as a surprise that both the Dallas Fed President Richard Fisher and Richmond Fed Chief Jeffrey Lacker urged caution.

First, let’s look at the always colorful Richard Fisher. Worried about what he sees as reckless fiscal policies put in place by the legislative branch, Fisher said in prepared remarks, “We have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise.

"There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: 'Monetary policy responsibility cannot substitute for government irresponsibility.' ”

He went on to  say that “the entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases.

“I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation.
 
“And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream.”

Taking a shot at the last one-term Democratic president, Fisher added, “I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

In the meantime, Lacker seemed just as aggressive in his speech, as he implied that the complete plan to buy $600 billion in longer-term Treasuries could be cut short. The FOMC has “committed to regularly review the pace and overall size of the asset-purchase program in light of incoming information and adjust the program as needed," he said.

“The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously. That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend."

For those who see an impending wave of inflation hitting the shores of the U.S. economy compliments of an extraordinarily loose monetary policy, which is being supplemented by a powerful fiscal policy, will be disappointed if the Fed doesn’t halt QE2.

Growth is accelerating, and the economy is beginning to enter a more self-sustaining phase.  I believe we will see a more aggressive approach by the nation’s leading companies when it comes to hiring.

But it hasn’t happened yet, and with only 36,000 jobs created in January, Fed Chairman Bernanke won’t budge from the current path.

Employment dependent upon strength of recovery

The economic recovery that officially started back in the summer of 2009 exited a deep and nasty recession with a whimper.

Shell-shocked and recession-weary consumers remained in hibernation for quite a long time while a slow and uneven recovery was fueled by manufacturers who were re-stocking shelves left bare by deep cuts in production and growth in China and emerging markets.

For an economy that is neither manufacturing nor export dependent, it was no surprise that the recovery appeared to be non-existent to the casual observer.



The tide now appears to be shifting in favor of a more robust expansion thanks to an improvement in consumer spending – 70% of GDP – and an acceleration in activity in the broad-based service sector.

Whether its pent up demand from purchases that were put off during the height of the recession and the early stages of the recovery, a gradual improvement in job security or a combination of both, the economic recovery that began in manufacturing is spreading.

From double-dip to rising momentum
Following a lull over the summer, growth resumed in the fall and Q4 data showed a rather impressive jump in activity, as real final sales that were buried in the advanced GDP data grew at the fastest pace since 1984!

And 2011 is off to a fast start as evidenced by strong showings in both manufacturing and service-sector surveys.  With the recovery sending out clear signals that it is broadening, growth is no longer dependent on the whims of the narrow and volatile manufacturing sector, which is greatly increasing the odds that the economy is on a firmer footing and is entering a more self-sustaining phase.

Of course, there are still headwinds to the expansion – one only has to look at the somber tone of the housing market, the lingering debt crisis in Europe and tight credit standards.  Banks, however, are beginning to loosen up a bit, as evidenced by recent data from the Fed showing that businesses loans are starting to percolate.

Job growth – close but yet so far
We’ve already seen some evidence that ADP is detecting action in the labor market, and the employment sub-components of the ISM surveys are revealing a renewed interest in hiring. Moreover, weekly jobless claims are in a downward trend, though the winter weather is playing havoc with near-term releases rendering them nearly useless at the present time.

The cautiously upbeat outlook in the job market shouldn’t come as a surprise since the historical record over the last 30 years (see chart above) shows that there is a clear link between economic growth and job growth.

The difficulty comes in pinpointing when the government’s nonfarm payroll data will begin to reflect the pick up in the economy, as January's 36,000 rise in payrolls was a major disappointment.

Though some made a gallant attempt to put lipstick on that pig, no matter how you try to spin it, 36,000 is still 36,000.

Though we have a long way to go before the economy makes a sizable dent in the unemployment rate, I'm in the camp that believes meaningful job creation is on the horizon. And when it happens, it will catch most analysts by surprise.

Employment–the long road to recovery

The economic recovery officially began in June 2009.  Manufacturing, which was pummeled during the recession, has experienced a strong recovery, and firms involved in the output of goods have added to payrolls.

The 49,000 rise in manufacturing employment in January speaks favorably to the argument that faster growth can and will create jobs.  But manufacturing, which tends to exaggerate upward as well as downward trends in the economy, makes up only a small portion of economic output in the U.S.

The service sector, which makes up a majority of economic activity, has experienced a much slower and uneven expansion, and the fruit of such a recovery has been lackluster job growth.


Note: the fast turnaround seen after month 9 came amid the temporary jobs added for the 2010 census; weakness following week 13 came as the temporary census positions came to an end. Additionally, all annual revisions released in today’s data have been incorporated.

The chart above highlights the uncertainty we’ve been seeing in the labor market, as companies continued to shed workers for nine months after the recession ended. Only in recent months has the sluggish pace of employment growth exceeded the weakness seen following the end of the mild recession of 2001.

Adding to the misery facing many of the unemployed, the level of employment is still not back to where it was when the recession ended let alone anywhere near its former peak!



For comparison purposes, the second chart highlights the much more robust recoveries that followed the steep recessions of 1974-75 and 1981-82 and the subsequent job growth.


Moving back to the present, much of the recent data is suggesting that an acceleration in economic activity that began late last year is continuing into 2011.  And continued growth will eventually encourage employment growth.

The big question is when, and I’m still optimistic that this will occur sooner rather than later.  A look at the latest ISM employment indices reveals that most firms are beginning to create new jobs.



One thing that is certain, the latest employment data will do nothing to discourage the Fed from bumping up interest rates nor encourage the Fed to rein in its plan to buy $600 billion in longer-term Treasuries.

And don’t expect fears of inflation that have been emanating from some corners to take center stage at the central bank.

Commodity prices are at elevated levels, which the Fed acknowledged in its latest statement, but with core inflation below 1% and job growth mostly lackluster, don’t expect any additional warnings on prices, which would likely be interpreted as a signal of an impending shift in policy.

ISM employment indices signaling gains

Consumer spending is up, real final sales in the advance Q4 GDP report jumped at its fastest pace since 1984 and the reports out this week on manufacturing and services by the Institute for Supply Management (ISM) show that the economic recovery may finally be kicking into high hear.

I don't want to get swept up in unbridled optimism, as headwinds to growth remain, including the weakness in housing and lingering worries about sovereign debt. But the recent improvement in economic activity suggests that, if history is any guide, a hiring binge by employers may be just around the corner.


(a reading of 50 suggests firms are neither adding to or detracting from staff)

First, a quick disclaimer: monthly correlations between the government’s nonfarm payroll numbers and the ISM Manufacturing Employment and Non-Manufacturing (services) Indices can be somewhat suspect. Still, the trends are favorable and worth highlighting.

Manufacturing has been the unsung hero of what has been mostly a tepid and uneven economic recovery since the summer of 2009 amid the re-stocking of inventories and growth overseas.  And the government’s own data, as well as the ISM survey, reflects an improvement in job opportunities for those looking to produce goods.

But we are not a nation that produces things, as the lion’s share of economic activity in the U.S. occurs in the service sector.  And activity among service providers has been much slower to recover, negating much of the need to boost employment.



Based on recent data from the ISM (see Strong service sector indicates economy is heating up), that is changing.  Further, the closely-followed survey is beginning to detect a pick up employment.

In January, the employment subcomponent, which has been above 50 for six of the last seven months, increased from 52.6 in December to 54.5 in January, the best reading since May 2006!

Because the government and the ISM use different methodologies to calculate changes in the labor force, making a forecast based solely on the ISM’s data is difficult. Still, momentum from the improvement in the economy does appear to be spilling over into the hiring process, suggesting that a significant rise in job growth may be near.

Strong service sector indicates economy is heating up

Up, up and away?

The ISM Non-Manufacturing Index, which gauges activity in the service sector, rose from 57.1 in December to an impressive 59.4 in January, easily topping the consensus forecast offered by Bloomberg of 57.0 and adding to the pile of evidence that the new year is beginning on a very strong note.

A reading of 50 suggests that the service sector, which accounts for most economic activity, is neither expanding nor contracting.



Adding to the positive tone of the report, new orders, which are a signal of future activity, rose 3.5 points to a robust 64.9, while production gained 1.7 points to 64.6.

More impressively, the survey may finally be detecting an increase in hiring, as employment increased 1.9 points to 54.5.

However, price pressures in the early stages of production are rising amid the pick up in the economy, as prices paid rose from 69.5 in December to an uncomfortable 72.1 in January.  Currently, there is little or no retail inflation amid weak wage gains, productivity growth and slack in the economy, but the Fed must stay vigilant as the economy continues to improve.

Strong gains on the horizon?
With Tuesday’s ISM Manufacturing Index popping above 60, coupled with five consecutive increases in service sector activity, it finally appears that the slow and uneven recovery that has done little to dent the unemployment rate over the last 18 months may finally be morphing into much stronger growth.



Anyone who has been searching for work can attest to the fact that companies are still reluctant bring on new staff.  And the uncertainty created by Washington in the form of new regulations, along with delays in extending the Bush-era tax cuts, also played a role last year, according to comments from Fed officials.

But the economy began to show new signs of life late last year, and new fiscal stimulus is in the pipeline, while the Fed shows no signs of adjusting is loose monetary policy in the near term.

With the closely-followed ISM surveys showing that activity in both the manufacturing and service economies are accelerating, a significant jump in employment growth may soon be at hand.

Weather and jobless claims

If there was any  confusion that nasty weather and snow can impact those who need to file for unemployment compensation, a quick look at the chart below should dispel any doubts.

In the latest week, jobless claims fell 42,000 to 415,000, which comes on the heels of a 54,000 rise in the previous week.



On top of that, the country is experiencing a significant blast of cold weather and snow, which seems very likely to distort claims in the coming weeks.  Until nasty weather conditions ease, the data are likely to be of very little value in gauging economic and labor conditions.

For more information on today’s report, please see Weather still a factor in weekly jobless claims at Examiner.com.

Stabilization in commercial and industrial loans signals improving economy

Growth in commercial and industrial loans, which took a huge hit during the recession amid falling demand for such borrowings as well as tighter credit standards, has stabilized and is beginning to edge higher.



In fact, the latest Federal Reserve data showed that commercial and industrial loans grew at a seasonally adjusted annual rate of 7.6% in December, following a 0.2% annualized increase in November, the first rise since the recession ended over 18 months ago.



However, excess reserves (defined as funds that are over and above what banks are required to hold for emergency needs) once again surpassed $1 trillion according to the latest data, indicating that banks remain cautious.

In order to promote growth and encourage hiring, the Federal Reserve recently embarked on a second round of quantitative easing (QE2) and plans to purchase an additional $600 billion in longer-term Treasury securities.



Some of the extra cash may find its way into booming emerging markets and commodities, while some funds are ending up in stocks. And a portion of the proceeds appear to be ending up at the banks themselves.

But banks are flush with extra cash, and it seems that most would rather hold the excess dollars at the Fed, earning a paltry 0.25%, rather than take a chance on a riskier business loan.

Nonetheless, the frozen tundra that marked the credit markets during the worst of the recession is beginning to thaw, while sentiment is shifting, commercial loans are inching higher, and banks, if they choose, have plenty of funds on hand to fuel lending and the expansion.  

Construction spending fails to participate in economic rebound

Consumer spending is up and output at the nation’s factories continues to expand, but so far, the broadening recovery has not spilled over to housing and construction.

Construction spending in December fell 2.5% to $787.9 billion.  Residential construction, which the charts below focus on, dropped 4.1% to $226.4 billion.   Private nonresidential construction dipped 0.5% to $260.5 billion.

With a backlog of foreclosures threatening to boost inventory, coupled with a cautious home buyer, the slump in spending that began in early 2006 seems likely to continue into its fifth year, lending little support to GDP.

If there is a silver lining to what’s going on in housing, residential real estate makes up a much small percentage of GDP than it did in early 2006 when the slump in spending began.

ISM reveals that manufacturing is leading the way

The ISM Manufacturing Index rose 2.3 points in January to 60.8, the best reading since May 2004.

I provide details in my report on Examiner.com and just wanted to offer a few insights here.



Output at the nation's factories are improving at a significant rate, according to the data released in the closely-followed survey.

Following the unusually upbeat internals in the advance 4Q GDP report, a strong finish to 2010 in consumer spending and a reading by the ISM in excess of 60, it becomes very difficult to argue that the economy is not entering into a more robust recovery.

There are still uncertainties that exist, including weakness in housing, debt worries overseas (and of course, fears those worries could wash up on our shores), and a reluctance among banks to lend.

But the growing economy seems likely to spark a rise in hiring, which should put the recovery on a self-sustaining path.  The $64,000 question: when will this occur.  We’ve seen strong gains in the ADP Employment Report over the past couple of months, but government data have yet to confirm such a surge.