Trade gap narrows

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

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

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

Weekly jobless claims are stuck at high levels

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

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

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

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

Improvement in Job Openings first signal of improving job market

But progress likely to be slow

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

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

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

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

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

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

Productivity continues to leap ahead

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

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

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

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

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

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

So why is all of this important? 

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

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

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

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

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

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

ISM pointing to stabilizing job market

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

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

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

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

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

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

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

ISM services reading at best level in over two years

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

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

A more detailed look is available at Examiner.com.

Manufacturing remains a bright spot for economy

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

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

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

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

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

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

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