Jobless Claims Hit 7-Year Low, But Manufacturing Data Spooks Market
Markets were handed a plethora of economic data Thursday morning, including that last winter’s exceptionally cold weather had an undeniable impact on first-quarter gross domestic product; consumers stayed home; construction projects were blanketed with snow and ice; and the supply lines of manufacturers were disrupted. Plus, with ongoing increases in mortgage rates hurting the demand for both new and existing homes, the housing sector was a significant drag on the first-quarter.
United States GDP economic growth slowed to just 0.1 percent annual pace from January through March, which was the weakest growth on record since the end of 2012. That anemic rate expansion was seen by some economists as further evidence that the U.S. has entered into a “new normal” period in which average GDP growth remains below 3 percent and unemployment remains problematic. However, other economists claimed that underlying trends in the first-quarter GDP data remained encouraging, and the fact that March’s numbers were relatively stronger generally supported that conclusion.
The Commerce Department’s March personal income and outlays report showed more specifically than Wednesday’s GDP data where consumer spending trends are headed. Strong consumer spending is essential for the recovery of the American economy. Since government and business spending have largely remained remained weak in recent quarters, the economy has been heavily dependent on consumer spending — which accounts for approximately 70 percent of gross domestic product in the United States — to fuel growth. That key measure did slow slightly in the first-quarter, even though it continued to do much of the economic heavy lifting in the first three months of the year. Personal spending edged upward 0.9 percent in the final month of the first-quarter, the greatest increase recorded since August 2009, suggesting that March will be a springboard for faster growth in April through June period.
Therefore, with economists closely watching underlying economic trends, jobs and manufacturing data from both April and May will provide further clues on the strength of U.S. economic growth.
1. Jobless Claims
With the unemployment level now resting at 6.3 percent, it is clear the labor market has taken a great leap forward in the past year. But as numerous economists have argued, that headline figure tells far less than the whole labor market recovery story. While job creation did strengthen in April, a significant portion of the 0.4 percentage point drop in the jobless rate came from a sizable decrease in the labor force, meaning workers are still discouraged and unable to find employment. That aspect of the jobs report was by no means surprising; a disheartened labor force and a record low labor force participation rate has characterized the recovery and is evidence that recovery has not yet reached all Americans.
Since unemployment remains such a pressing issue, jobless claim numbers continue to important data for assessing the ongoing labor market recovery.
The Department of Labor reported Thursday that first time applications for unemployment benefits filed in the week ended May 10 decreased by 24,000 claims to a seasonally adjusted 297,000. The last time initial jobless claims were so low was seven years ago, when 297,000 Americans claimed unemployment benefits. “The way the job market continues to improve, the number of people collecting benefits keeps going down,” Societe General economist Brian Jones told Bloomberg. “The labor market is fine,” he added. For context, economists say any claims figure below 350,000 indicate moderate job creation, while pre-recession claim levels hovered around 300,000 due to the normal churn of the job market.
Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings. After rising for several weeks, the four-week moving average for the week ended May 10 dropped by 2,000 to 323,250 claims. Before the increases recorded in the past several weeks, the moving average stood at its lowest level since October 6, 2007 — when the four-week moving average hit 302,000 claims.
Plus, the number of people continuing to collect benefits decreased by 9,000 to 2.67 million in the week ended May 3, the fewest continuing claims recorded since December 2007.
If initial claims for unemployment benefits — which serve as a proxy for layoffs — defined the whole labor market story, then the narrative of the jobs recovery would be easy to summarize: progress is steady, or at least, the labor market situation is not worsening. Plus, as jobless claims continue to decrease, the labor market will further tighten, meaning employers will theoretically be under more pressure to boost wages. But it is important to remember that while the labor market is indeed resilient, it is nowhere near full, pre-recession health. Payrolls did indeed increase in April, but generally companies are holding off on hiring until consumer spending substantially increases. The problem is that the Department of Commerce’s April retail sales report shows that an important segment of consumer spending slowed to a 0.1 percent pace in the past month.
2. Industrial Production
April’s decline in industrial production was unexpected. Data compiled by the Federal Reserve showed that output at factories, mines, and utilities decreased 0.6 percent — a slowdown from March’s upwardly revised 0.9 percent increase. Part of the decline was thanks to the month’s warmer weather; Americans’ need for heating decreased and so utility use plunged. However, manufacturing — which comprises 75 percent of total production and accounts for approximately 12 percent of GDP — also decreased, falling 0.4 percent.
With industrial output dropping, capacity utilization — a measure of slackness in the economy — dropped to 78.6 percent from the previous month’s 79.3 percent.
Last month’s decline in manufacturing could signal a pause in growth for the industrial sector following what were the biggest back-to-back monthly gains in manufacturing since 2010. After the weather induced slowdown experienced in the first month of the year, industrial production rose sharply in February as factory activity strengthened, increases that suggested the economy was once again finding its stride after a difficult winter. March also saw a similar rebound industrial production. But even though manufacturing was weaker in the past month, economists are far from concerned. “The broad trend is, manufacturing is not booming but fairly solid,” High Frequency Economics economist Jim O’Sullivan told Bloomberg. “April may look weak after a strong March but it’s consistent with fairly strong second-quarter growth in the economy.” Current manufacturing growth is much “more sustainable,” added Pierpont Securities economist Stephen Stanley to Bloomberg Businessweek. “It’ll do OK,” he added. “I don’t see the decline as the start of a new downward trend. The gains in February and March exceeded underlying trends.”
Confirming his theory is the fact that the New York Federal Reserve’s Empire State manufacturing index indicated the economy is on track for faster growth this quarter. After barely expanding in April, the index posted a reading of plus 19 in May, which is the highest level recorded since the middle of 2010. That gauge suggested that the manufacturing sector accelerated this month, while other measures indicate that the weakness of the Federal Reserve’s industrial production measure was not so much a pullback but a recalibration. The Institute for Supply Management’s factory index, a broader look at factory output in the United States, showed strength. ISM’s headline index expanded from March’s reading of 53.7 to 54.9 in April. Plus, 17 of the 18 industries tracked by the firm reported growth in April, which was the highest number recorded in three years. In addition, factory activity in the U.S. mid-Atlantic region expanded in April at a faster pace than expected, according to the Philadelphia Federal Reserve Bank.
Industrial production can be analyzed with respect to two criteria: major market groups and major industry groups.
The Federal Reserve’s index is broken down into three major industry groups: manufacturing, mining, and utilities. Like manufacturing, the most important sector monitored by the central bank, utilities slumped, falling 5.3 percent — the largest decline recorded since January 2006. Comparatively, mining production, which includes oil drilling, increased 1.4 percent.
The market groups category is divided into several subdivisions including consumer goods, business equipment, and construction, which give analysts a better picture on how well each of these specific areas of the economy are performing. Within manufacturing sector, the production of durable consumer goods fell 0.3 percent, but remained 4.3 percent above year-ago levels, with the manufacturing of motor vehicles and parts contributing a meager 0.1 percent. But despite that low growth, car makers were a notable bright spot in the report; the output of construction supplies remained unchanged in April following gains of 0.9 percent and 0.7 percent in February and March, respectively. That decline in construction reflects, in part, the continuing weak demand for new homes. Plus, the production of consumer goods fell 1.3 percent in April — although the production of consumer goods did remain 2.5 percent year-ago levels because of strong growth in the previous two quarters. Meanwhile nondurable manufacturing declined 0.4 percent.
In general, the goods producing sector acts as a bellwether for the broader economy, helping to inform investors about the economic backdrop against which they are making decisions.
Stocks fell after Thursday morning’s mixed readings on the economy.
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