Jobless claims hold in narrow path

Weekly jobless claims fell 1,000 in the latest week to 428,000 and have now held in a very narrow range – 420,000 to 430,000 for six consecutive weeks. As a result, the 4-week moving average barely moved, rising by just 500 to 426,750.



The lack of any significant upward are downward movement in jobless claims, following a brief dip earlier in the year below 400,000, is telling us that the economy continues to slowly improve.

Based on the release as well as recent trends, no new recession is on the horizon but any pick up in economic growth is unlikely, either.

Simply put jobless claims are still elevated, underscoring the uncertainty many of us feel regarding what’s happening in the economy.

Despite the lack of any signs of an acceleration in economic activity, the Chicago Purchasing Managers Index, which looks at manufacturing activity in the Midwest, unexpectedly rose in the latest month.



A possible pick up in auto production tied to an easing of the supply chain disruption from Japan that followed the tragic earthquake that hit the nation earlier in the year might explain the welcome rise in the index.

Both production and new orders surged, while inventories tumbled.  Unfortunately, prices paid eased slightly but remained at a worrisome level, which is somewhat surprising given the recent fall in commodity prices.

Nonetheless, the Chicago PMI tends to be a rather volatile index, and other measures of regional manufacturing have slowed significantly.

We’ll get a better read when the ISM Manufacturing Index is released on Friday.

Slower growth pressures consumer confidence

Sometimes just waiting a day or so to let a particular release marinate allows us to gain a bit of perspective. Fed releases and unemployment data come to mind.

But I wouldn’t preclude a day-late look at the Conference Board’s survey of consumer confidence either.

The Consumer Confidence Index fell 3.2 points in the latest month, which makes the dip in June the third decline in four months. Clearly, not a trend that is welcome by Fed officials and investors.

The economic data are still pointing to a growing economy, but the heightened level of uncertainty that has been clouding the outlook has been taking a toll on sentiment in recent months.

Job creation slowed considerably in May, jobless claims are up, manufacturing activity has moderated, the housing market remains in the doldrums and many refuse to throw caution to the wind whenever they go online or shop at their local retailer.

Of course, gasoline prices are well off the early May highs, but at over $3.50 per gallon in most locales, a fill up still takes a considerable bite out of our wallets.

Until economic activity re-accelerates – and it still appears that the latest economic bump in the road will be short-lived – consumer confidence will probably remain under pressure, and caution will prevail at the nation’s malls.

Consumer spending hits a bump in the road

The government reported this morning that consumer spending was unchanged in May, highlighting the slowdown in job growth and the uncertainty in consumer sentiment.

Personal income managed to rise 0.3% and the savings rate increased a tick to 5.0%.

Removing the impact of inflation, real consumer spending actually declined by 0.1%, the same as April. 

Moving over to inflation, the PCE Price Index was up 0.2% last month, but the core rate, which excludes food and energy, rose by 0.3%, signaling that the steep jump in commodity prices is slowly beginning to leak into goods and services.

Summarizing the data-heavy, number’s-heavy report simply confirms what we’ve already known – growth has slowed but has not stalled.

IEA oil release hammers prices– at least in the short term

The surprise announcement today by the International Energy Agency (IEA) that its member countries – 28 in all – will release 60 million barrels of oil from storage over the next 30 days took a heavy toll on prices, knocking the cost of crude briefly below $90 per barrel.

That’s good news for consumers – at least short term as the IEA’s press release appears to have had its intended effect.

But all is not OK in the world oil markets.

First, the move almost smacks of desperation, as the world economy slows under the pressure of weak U.S. growth, debt worries in Greece and a modest slowdown in China.

An interesting and unsettling side note: stocks did not react favorably to the drop in crude prices, and instead continued to a sell-off that was tied to Bernanke’s sobering economic remarks made yesterday afternoon.

Second, the unrest in Libya has taken about 132 million barrels of light, sweet crude off the market up through the end of May per the IEA.

And despite talk by Saudi Arabia that it would make up the difference, the announcement suggests otherwise.

But the temporary increase in oil production is just that – temporary, and it’s possible that a further downward slide in prices could be met by a quiet cutback in OPEC or Saudi production.

Moreover, the US market is well supplied with crude at the present time, as the chart from the EIA reflects.



Consequently, the pullback in prices may turn into a more temporary phenomenon.

Additional supply disruptions or still weaker economic growth will very likely have more of an impact on prices down the road than today’s news.

New homes for sale at record low

The number of new homes for sale on the market slipped to a record low in the latest month, according to data supplied by the Commerce Department.

The actual number of new homes on the market fell from 172,000 in April to 166,000 in May, the lowest number since the government began tracking new home sales in 1963.



But sales have been in the basement, and 166,000 actual homes for sales represents a 6.2 months supply. That’s well below the January 2009 high of 12.2 months but in line with the average over the past 40+ years of 6.2 months.

Further, the 166,000 figure is not adjusted for the much larger population we have today versus the 1960s!

But it’s clear that all is not sound with the new housing market.  Builder confidence remains very low, explaining the lack of production and apparently tight inventory of new houses.

And competition from distressed sales of late model homes and the shadow inventory that remains over the market are offsetting any tailwinds that might assist new builders.



Still, falling supplies seem likely to set the stage for an eventual recovery in the new home market.

In the meantime, sales of new homes fell 2.1% to an annual pace of 319,000 in May.

Sales aren’t showing any signs of recovering and instead, or holding near the bottom.

Weekly jobless claims camp out on a plateau

Bloomberg News cited “technical issues” that forced the Labor Department to estimate claims in six states as a possible reason  for a troublesome 9,000 increase in weekly initial jobless claims to 429,000 in the latest week.



The 4-week moving average held steady at 426,250, and continuing claims were practically unchanged at 3.7 million.

Nonetheless, weekly jobless claims are holding well above 400,000 following a brief dip below the key psychological level.  And the elevated level highlights the uncertainty in the economy and the reduced pace of the recovery.

Fed cuts forecast on GDP, as Bernanke comments pressure stocks

"You're on your own"

There weren’t any big surprises to come out of the Fed’s press release that followed the conclusion of its two-day meeting.

The FOMC acknowledged the slowdown in the economy, telegraphed that interest rates aren’t going higher anytime soon, will no longer expand its balance sheet and believes the growth will eventually accelerate. A cut and dry look is available at Examiner.


(Source: Fed)

Further, the Fed also cut its forecast on GDP growth for the second time this year.  Unfortunately, the FOMC expects unemployment to remain uncomfortable high through the end of 2013.


(Source: Fed)

What did seem to catch the markets off guard occurred in the press conference that followed the FOMC meeting.

The Fed noted in its press release, “The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.”

'In part' implies there were other factors impacting the economy and an astute reporter quickly picked up on this, asking what else might be responsible for the sluggish recovery.

Bernanke responded that monetary officials don’t have a precise read as to why slower pace is persisting. But some of the headwinds that are of concern included “weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues.”

He added that some of these headwinds may be stronger and more persistent than “we thought.”

Of course, questions about Europe and Greece surfaced and the potential impact on the U.S.

Bernanke said the Fed has been “very assiduous” in examining the exposures financial institutions have countries that have been plagued by debt issues.

U.S. banks are not significantly exposed to those countries, including Greece, as direct exposure is “pretty small.” Exposure is larger in the more stable countries, such as Germany and France.

The same holds true with money market funds. Exposure is minor in peripheral countries but there is substantial exposure in European banks in so-called core countries, Germany, France etc.

Not surprisingly, Bernanke said a disorderly default would “no doubt roil financial markets globally would have a big impact on credit spreads (thus far, its been minor), stock prices and so on. Effects in US would be quite significant.”

It’s the disorderly default the Fed is hoping to prevent.

Bernanke to economy: You're on your own
Well, Bernanke didn't utter those words, but one has to ask, "What has the Fed chairman done?"

Bernanke took credit for eliminating the small but growing threat of deflation that was emerging last summer and noted that job creation picked up amid the QE2 bond purchases.

Other than that, the Fed chairman seemed more like a deer in the headlights, conceding that growth is slowing and some of the causes may be more than temporary.

He offered little solace to those of have been heavily impacted by job losses or those who've yet to see stock and retirement portfolios fully recovery from the 2008-09 bear market.

In other words, monetary policy has its limits.

Credit markets seem to yawn amid investor worries about Greece

The recent slide in stocks has been blamed on a slowing economy and fears that Greece will soon default on its debt, potentially causing problems in other wobbly European countries which could quickly spread to the U.S.

Credit default swaps (insurance on debt) on financials have risen (IMF), and the slowing economy and a flight to quality have pushed the yield on the ten-year Treasury below 3% and the yield on the two-year note to its lowest level on record – 38 basis points. 

But a look at measures of risk in the credit markets suggest are painting a different picture – calmer waters and few fears that a jarring default might be around the corner.



The two-year interest rate swap spread on Treasuries soared during the Lehman fiasco, and once again we saw some frayed nerves when problems in Greece first surfaced a year ago.

But the latest flare-up and rating agency downgrades have caused little more than a ripple. Further, the three-month LIBOR rate is currently sitting at 25 basis points, just one tick below a record low.

Both indicators are revealing that there is ample liquidity in the financial system, and banks aren’t hoarding funds the way they did in the fall of 2008.

Existing home sales slip to six-month low

A drop in existing home sales to a six-month low in May is highlighting the recent slowdown in the recovery.

Existing home sales fell 3.8% to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million units in April. That’s 15.3% below a year ago when the home buyer tax credit distorted the market and shifted sales into the spring from the summer.



Additionally, the National Association of Realtors reported that the total supply of houses available based on current sales increased from 9.0 months to 9.3 months.

May’s numbers as well as the recent trend in existing home sales, which make up over 90% of total sales, reveal that there just hasn’t been much good to say about the current state of housing.

Potential buyers either can’t move because their current home has no equity or they are worried about the direction of home prices.  And historically low interest rates have done little to spark any interest.

And as the chart above suggests, the recent rise in inventory could put additional pressure on prices.

Unfortunately, I’ll end this post on a downer: last month’s pending home sales number suggested a big drop in sales is on tap for the current month.

Macro economic events still dominate

Fed on tap

Investors have been reeling from one piece of bad economic news after another. That’s why a couple of releases that didn’t surprise to the downside was enough to capture the attention of the markets, helping the Dow Jones Industrials and the S&P 500 Index, which have been starved for good news, squeak out gains and snap a six-week losing streak.

First, retail sales in May managed to barely exceed reduced expectations, strongly hinting that debt- and recession-weary consumers are not heading back into their post-Lehman Brothers’ caves.

Second, weekly jobless claims remain elevated, but a drop last week is a strong indication that economic activity isn’t grinding to a halt. A rebound in the Leading Index is also suggesting that the slow and uneven expansion is not petering out.

But action across the Atlantic has not gone unnoticed, as another downgrade of Greece by Standard & Poor’s and fears that there will be an eventual default of some kind has had a mixed impact on the credit markets.

The flight to safety continues, with the yield on the ten-year benchmark Treasury back below 3%, while the yield on the two-year note fell under 40 bp, a record low!

The euro has also come under pressure amid fears that the problems in Greece could affect other wobbly nations on the continent. And CDSs (insurance on debt) on financials have risen. Defaults beyond Greece could also do damage to banks and institutions in the USA that hold debt instruments from those countries.

Interestingly, however, measures of risk in the credit markets – three-month LIBOR and the two-year interest rate swap spread – have barely reacted to the latest crisis, seemingly suggesting a “business as usual attitude” among the players in the credit markets.

We did finally see a fairly noticeable uptick in the swap spread this week, but we’re far off the post-Lehman levels and well below what we saw last year before the first bailout of Greece (see chart below).



Moreover, the LIBOR is holding just above a record low.

Fed's up
Next week brings us to the latest in existing home sales, but the two-day Fed meeting, which concludes on Wednesday and the second-ever press conference from Fed Chairman Ben Bernanke’s will get heavy play.

It’s always a bit dicey trying to outguess the Fed, but I suspect that policymakers will acknowledge that the recovery has slowed, job growth remains painfully slow, and it will reiterate that the recent uptick in inflation is transitory.

There have been no hints that the Fed will extend QE2. Rates won’t change, and it seems unlikely that the Fed will come close to hinting at any rate hike.

Leading Index signals slow growth through the fall

The Leading Economic Index put together by the Conference Board jumped a surprisingly strong 0.8% in May, following a 0.4% decline in April, and a 0.7% increase in March.

“Modest economic growth is being buffeted by some strong headwinds, including high gas and food prices and a soft housing market. The economy will likely continue to grow through the summer and fall, however it will be choppy, Ken Goldstein,” an economist with the Conference Board said.

Although I’m not in the camp that believes a recession is imminent, May’s upbeat reading must be tempered by some of the components that drove the outsized gain.

The largest contributions came from the interest rate spread, consumer expectations, building permits and real money supply.

Interest rate spreads and money supply are extremely intangible, while consumer expectations in May were mixed and housing continues to struggle.

In the meantime, consumer sentiment, as measured by the University of Michigan’s survey, unexpectedly fell from 74.3 in May to 71.8 for the mid-June reading.  A survey by Bloomberg had called for 74.5.



Consumers sentiment remains in a downward trend amid weak job creation and elevated jobless claims.

Though prices have receded somewhat, the spike in gasoline prices earlier in the year has also been a negative, while uncertainty in housing is likely playing a role in depressing sentiment.

Philly Fed survey reveals additional weakness in manufacturing

Price pressures are moderating

Two relatively good reports today, now for the bad news.

Rounding out a very busy day of economic data (and for that matter, a very busy week and we still haven’t made it to Friday), the Philly Fed’s Index of Business Activity is signaling that the weakness that has cropped up in the once hot manufacturing sector is continuing into June.


Source: Philly Fed

The survey that looks at manufacturing in the mid-Atlantic region fell from 3.9 in May to –7.7 in June, the first negative reading since last September. A level of zero suggests the sector is neither expanding nor contracting.

New orders slipped into negative territory, while the future general activity index decreased 14 points this month and has now dropped 61 points over the last three months.

National manufacturing has been hurt by the supply chain disruptions brought on by the earthquake in Japan.

But autos and auto parts play a very small role in the mid-Atlantic region, as Goldman Sachs calculates the share of auto production in the region covered by the Philly Fed survey is just 1.1% and 1.9% for the Empire State – the New York survey – per MarketWatch.

In a reflection of weaker activity, prices paid fell from 48.3 to 26.8, and prices received, which is an indicator of how well manufacturers are able to pass along higher costs, dropped from 16.8 to 4.4.

Like the Empire survey, the slowdown in the economy is taking the focus away from inflation, especially as firms find it more difficult to boost prices.

And the apparent shift in pricing power away from manufacturers is occurring just as core inflation has begun to heat up.

Yesterday, the CPI increased by a modest 0.2%, but the core rate of inflation rose 0.3%, the first such rise in almost three years, as higher commodity prices begin to work their way into the broader price level.

The Fed believes any inflation will be transitory, as demand has not been robust and wages, the largest expense for most businesses, have been stable.

Housing starts slowly move ahead

Headwinds still strong

Builder confidence remains in the basement, but housing starts inched up by 3.5% in May to a seasonally adjusted annual rate of 560,000.

Building permits, which is a more forward looking indicator of new construction, rose by a more impressive 8.7% to 612,000 units, the highest in five months. Much of the lift, however, came from multi-family units, but single-family managed a 2.5% gain to 405,000.



On a relative basis, the overall news is encouraging as single-family permits, which offers us an early look at the new home market, has been up for three months in a row.

And despite the overall downward trend over the last year, permits have not returned to the bottom reached in early 2009.



Still, plenty of obstacles remain before a firm foundation is in place under the market.

Competition from distressed sales of late model homes, tight credit standards, difficulty in selling existing homes, fears that housing prices haven’t bottomed, weak job creation and the inability of those who have lost homes to qualify for a new home are all standing in the way of a stronger housing market.

So it shouldn’t come as a surprise that builders have yet to express any degree of optimism on the market.

Weekly jobless claims at four-week low

In what has to be a disappointing report for those who have been very bearish on the economy, first time filers for unemployment claims unexpectedly fell to a four week low.

Weekly jobless claims declined by 16,000 to 414,000, and the 4-week moving average was unchanged at 424,750. Continuing claims dipped 21,000 to 3.68 million.

Weekly jobless claims snuck above 400,000 in early April, was one of the first warning signs the economy was headed for a bump in the road, and has held above the key psychological level ever since.

Yes, we’re still above 400,000, highlighting the fragile and slow recovery from the worst recession in over 70 years.

But the larger-than-expected drop and recent stability in this key measure of activity is among the clearest indicators that the economy is not headed back into another slump.

Impact from commodity prices showing up in the CPI

Job creation has generally been weak and the economic recovery has been slow and uneven, but the latest data on inflation suggest that high raw material prices are showing up at the nation’s retailers.

The Consumer Price Index (CPI) increased 0.2% in May, as a 0.4% rise in food was offset by a 1.0% drop in energy prices. Core inflation, however, exceeded the headline rate for the first time in a year, rising 0.3%, the fastest pace since July 2008.



Year-over-year, the CPI increased from 3.1% in April to 3.6% in May, while core inflation – that is, inflation without food and energy – rose from 1.3% to 1.5%.

At 1.5% core inflation is holding below the Fed’s implied target of near 2.0%, but the y/y rate is not completely capturing the recent though modest burst in inflation.

According to government data, the core CPI is up at a seasonally adjusted annual rate of 2.6% over the last six months and is up a more worrisome 3.0% over the last three months.

That’s well above what the Fed or most economists would consider to be price stability!

Blame the surge in commodity prices, especially in metals, for the jump in core inflation.

Fed Chief Ben Bernanke believes the the spurt in commodity prices will be transitory, and raw materials have leveled out lately.

Further, inflation expectations have diminished, while slack in the economy, muted wage gains, and sluggish demand have helped to counter inflationary trends brought about from surging raw material costs.

But that hasn’t prevented some businesses from taking advantage of nascent pricing power and passing along some of the higher costs to consumers.

Recent economic weakness has taken the focus off inflation, and the latest soft patch, coupled with the end of the Fed’s QE2 program this month, should help to minimize the impact of rising costs in the economy.

A look behind the latest industrial production figures suggests modest growth

Industrial production grew by just 0.1% in May following no gain in April. Capacity utilization held steady at 76.7% – yes, there’s still slack in the economy and that’s helping to minimize the impact higher commodity prices have had on inflation.

But looking behind the latest numbers, the sector is not fairing as poorly as the headline figures might suggest – or how the New York Fed’s survey indicated this morning.

Held down by falling utility production, manufacturing ex-energy grew by a respectable 0.5%, more than erasing April’s drop of 0.4%.

We’re continuing to see the lingering impact from the earthquake in Japan on the auto industry, but if we remove both energy and autos (that leaves us with almost two-thirds remaining) production increased by 0.6%, the best reading since January.

Overall, the data were encouraging.

More bad news on manufacturing

The Empire Manufacturing Index provides an early look at manufacturing during the current month. It’s a sliver of the sector since it deals with New York state only and it can be volatile, but again, it gets attention because it’s first.

Unfortunately, the sector received some bad news as the Empire survey showed the industry contracted for the first time since November 2010, falling from 11.9 in May to –7.8 in June.

Empire Manufacturing Index

Source: NY Fed

More bad news: new orders and shipments both fell sharply and both fell into negative territory.





About the only good news, which in essence is a reflection of weaker conditions, showed up in the prices portion of the report.


Source: NY Fed

Slower growth is relieving some of the upward pressure on commodities, and manufacturers are finding it increasingly difficult to pass along higher costs because of slower demand.

The ISM Manufacturing Index for May confirmed the sluggishness in the once hot sector and early signs from the current survey suggest continued weakness.

But this is a narrow look at goods producers, and we’ll get a better picture tomorrow when the Philly Fed survey is released.

Housing Market Index points to weaker conditions

Problems in the new home market turned a bit darker during June according to the latest survey of builder sentiment.

The Housing Market Index, which measures the confidence (or lack of) among new home builders, fell from 16 in May, where is has held for six of seven months, to 13 in June. A reading of 50 suggests builders are neither optimistic nor pessimistic; hence, the extremely low reading highlights the difficult environment builders are struggling with.



Adding to the woes for builders, the survey also picked up a drop in traffic – 14 to 12 – as potential buyers remain extremely cautious.

NAHB Chairman Bob Nielsen commented that builders are still be squeezed by “continuing weakness in existing-home prices – against which they must compete.”

It’s not only distressed sales that are depressing prices and stiffening the competition builders are facing, tough lending standards, difficulty in selling existing homes and uncertainty in the economy are all playing a part in keeping up the pressure on the market.

Mortgage rates remain near historically low levels, but low-cost financing appears to have done little to entice reluctant buyers.

A self-sustaining recovery, stronger job creation and stability in housing prices would go a long way in establishing a firm foundation under the market.

Stocks soar on crummy retail report

A market starved for good news will celebrate even if it receives a few crumbs thrown from the master’s table.

That’s exactly what happened today when the Dow Jones Industrials reclaimed the 12,000 level, and the broader market registered a strong advance.

Stocks have been down for six-straight weeks – the worst losing streak in almost 10 years, according to MarketWatch.

The culprit – a slowing economy and fears that the second soft patch in as many years might morph into something worse.

Much of the economic data is not pointing to a new economic slump but you wouldn’t know that based on the weak performance in stocks over the last month and the surprisingly strong Treasury market.

But when government data delivered a May report on retail sales that met reduced expectations and failed to disappoint on the downside, the bulls quickly tripped up the bears and an oversold market rebounded nicely.

Short covering probably played a role in today’s rally, but a sizable hit to bonds does suggest money came out of safe assets and found their way into riskier securities.

Producer price inflation moderates

The Producer Price Index increased by 0.2% in May, slightly ahead of the Bloomberg forecast of 0.1%, as a 1.5% jump in energy prices was offset by a 1.4% decline in food costs. The modest rise in May was the smallest increase since last July.

The core rate of inflation, which minuses out food and energy, rose by 0.2%, in line with forecasts.



Year-over-year, the headline rate of inflation at the wholesales level rose from 6.6% to 7.0%, the fastest increase since July 2008. Removing food and energy, the y/y rate held steady at a more modest 2.1%.



Taking a look at the second and third charts, we’re still seeing price pressures at the early stages of production.

However, the recent slowdown in the economy is going to make it difficult for most producers to fully pass along higher costs. Not that some won’t attempt price hikes, but attention has now shifted away from inflation to the recent weakness in the economy and the sharp slowdown in job creation.



Oil has fallen from its recent peak and gasoline prices are down about 25 cents per gallon, according the latest EIA survey.

If commodity price remain well behaved in the coming months, pricing pressure at the early stages of production should begin to subside.

Any lessening of commodity inflation would give the Fed more leeway to maintain interest rates at rock bottom levels, but as Fed Chief Ben Bernanke said last week, monetary policy alone is not enough to get the recovery back on track.

Ten month winning streak for retail sales comes to an end

But underlying upward trend still intact

Retail sales fell 0.2% in May, the first decline since June 2010 and roughly in line with expectations, according to a survey by Bloomberg.

On the surface, the drop isn’t surprising given the recent slowdown in economic activity but if we dig into the numbers, consumers are not signaling a summer of gloom for the economy. Discontent, maybe but not gloom.



Ex-autos, sales grew by a modest 0.3%, almost matching expectations given a small downward revision in April.

And removing a 0.3% rise in gasoline stations sales, so-called core-sales, which helps to eliminate the swings in gas prices and the volatile auto sector, also increased 0.3%.



Overall, May came in mostly in line with expectations, but more importantly, there were not any downward surprises that would indicated economic activity was about to stall or contract. And that has stocks up sharply in early trading!

Given the latest upward move in the ISM Service Index and the relatively stable level of jobless claims – elevated, but stable – the economy continues to plod ahead.

The latest report should diminish the recent chatter that we're headed into a new recession.

Slowing economy takes toll on nonfarm payroll growth

The economy managed to create just 54,000 nonfarm payrolls in May, less than half of the scaled-back expectations following Wednesday’s disappointing release by ADP .

The government also reported that the private sector managed to add 83,000 new jobs last month.



The lack of a significant number of new jobs, following over 200,000 private-sector additions in February, March and April, is a reflection of the slowdown in an already fragile and uneven economic recovery.

As I’ve repeated often in my commentaries, weekly jobless claims have jumped and have been holding well above 400,000, and the much slower pace of new jobs should not come as a surprise.



As the chart above reveals, the nasty recession has created a gaping hole in the labor force that is far more severe than we saw in the tough recessions that marked the mid 1970s and early 1980s.

And the shallow and uneven recovery has left many wandering in the unemployment line.



Charts 3 highlights the pace of job creation that followed the end of each of the major recessions over the last five years.



Chart 4 compares job creation during the current economic recovery with those that followed the relatively mild contractions during 1991 and 2001.

Although there has been rising chatter that the current soft patch may turn into something more ominous, the latest look at the service sector by the Institute for Supply Management out today suggests that a new recession is not imminent.

Relatively stable jobless claims, though elevated, are not signaling a new contraction either.

Inflation expectations have been subsiding

Inflation expectations have fallen considerably, as evidenced by the steep drop in the ten-year break-even rate of inflation over the past couple of months.

Taken from the difference between the yield on the ten-year Treasury and the yield on ten-year TIPs, the break-even rate of inflation offers us a rough look at what type of annual price increases investors are expecting over the next ten years because the smaller yield on TIPs indicates how much Treasury buyers are willing to give up in order to get inflation protection.



The chart above shows the recent rollover in inflation expectations, with the rate falling from an already modest 2.64% seven weeks ago to 2.22% on Wednesday.

Blame the recent slowdown in the economy for much of the drop in yields.

Jobless claims remain elevated, housing prices are still falling, both manufacturing and service sector growth has slowed and ADP reported a much smaller-than-expected rise in May payrolls on Wednesday.

Further, the renewed interest in longer-term Treasuries comes amid the impending end of QE2 in about four weeks, as well as the looming default deadline in early August.

Clearly, investors don’t seem to be worried about a default and believe Congress and the president will reach an agreement at the eleventh hour.

Moreover, nagging fears that the USA may eventually lose its coveted AAA rating doesn’t seem to be diminishing the appetite for low-yielding US debt.

Commodity prices have surged, and core inflation has starting ticking higher. We’ve also heard plenty of anecdotal stories of companies starting to pass along higher costs.

Still, demand in general has been subdued, making it difficult to boost prices at a more robust pace.



Additionally, unit labor costs – the largest expense for most businesses – remains under control, which is also leading to increased confidence we won’t be seeing any burst of inflation in the near term.

A sigh of relief following weekly jobless claims

Yesterday’s one-two punch from an anemic job’s report and a sharper-than-forecast slowdown in manufacturing sent stocks tumbling and investors fleeing into the safety of Treasuries, but today’s release of weekly jobless claims is soothing fears in some corners that the economic slowdown isn’t turning into something worse.

Weekly initial jobless claims fell 6,000 in the latest week to 422,000, and the 4-week moving average declined 14,000 to 425,500. Continuing claims were nearly unchanged at 3.71 million.



Attention now shifts to tomorrow’s all-important labor report from the government. But before we talk about non-farm payrolls and the release of the unemployment rate, it’s important to spend a moment on the weekly claims number.

Jobless claims jumped above 400,000 in early April and offered up the first evidence that the recovery was beginning to slow.

Subsequent data have showed we’re in another economic soft patch, but yesterday’s talk from some analysts that we’re headed into a new recession is premature in my view.

As I’ve repeated in the past, weekly jobless claims are an excellent barometer of economic health, and claims, though elevated, seem to have plateaued in recent weeks.

Keep an eye on this report for an early warning sign of further economic weakening, but at this point, slow growth is probably the most likely path.

Upcoming labor report
Tomorrow’s report from the government is expected to show 190,000 new jobs, including 210,000 generated from the private-sector, according to Bloomberg.  The unemployment rate is forecast to fall from 9.0% to 8.9%.

Note: latest survey by Bloomberg reflects reduced expectations as analysts incorporate slower growth and weak ADP number in forecasts. Nonfarm payrolls up by 170,000 (even worse, a MarketWatch survey sees 125,000) and private sector up by 180,000.

Anything near 180,000 would alleviate some of the concern swirling around the recovery, but we’re likely to get a one-time boost from McDonald’s, which reportedly added between 50,000 – 60,000 new jobs in late April and early May.

That would put private-sector job creation at about 130,000. Not very impressive but not as jarring as yesterday’s figure from ADP.

ISM Manufacturing Index falls to lowest level in almost two years

Blame supply issues caused by the earthquake in Japan or the overall slowing in the U.S. recovery, but the closely-followed ISM Manufacturing Index fell a much larger-than forecast 6.9 points to 53.5, the lowest reading since September 2009 and confirming recent sluggishness in regional surveys.

A level above 50 suggests that manufacturing is expanding.



New orders, production and exports slowed significantly, signaling that further cooling is likely in the short-term, but the survey revealed that most manufacturers still believe that customer inventories are too low, mitigating some of the negativity from the report.

Prices paid did ease some, falling from 85.5 to a still-high 76.5.

Nonetheless, the larger-than-forecast slowdown in manufacturing is the latest piece of data to signal a continuation in the recent softness in economic activity.

Weekly jobless claims have been above 400,000 since early April, GDP growth in Q1 slowed to 1.8%, housing has been muddling along, and ADP said this morning that the economy created only 38,000 jobs in the private sector.

Now, manufacturing, which has been the lone bright spot in an otherwise dull economic outlook, is cooling, as Japanese supply-chain issues ripple across the Pacific. Wish there was better news to report this morning, but problems in Japan are likely to be temporary as rebuilding efforts gather steam later in the year.

Slowing economy slows employment per ADP

It shouldn’t come as too much of a surprise given the recent slowdown in economic activity, as the ADP Employment report revealed that the private-sector added just 38,000 jobs last month – see details at Examiner.



May’s rise was the smallest number since last July when ADP reported the private-sector created 31,000 new jobs.

Treasuries are up, with the yield on the benchmark ten-year bond dipping below 3.0% for the first time in nearly six months, and stocks are reacting accordingly.

Economic data have been weak lately, indicating that the economy has hit a soft spot.

But Friday’s labor report will garner the lion’s share of attention, as it is generally considered the gold standard when it comes measuring the temperature and barometric pressure of the labor market.