Vital Signs: The Jobs Machine Chugs Along.

Navigation: Main page

Author: Mehring, James

THE WEEK AHEAD

A strong April jobs report could make the Fed uneasy. Also on tap: First-quarter productivity, business activity reports for April, March construction outlays, and more

Federal Reserve chairman Ben Bernanke put the financial markets in a tizzy during his appearance before Congress' Joint Economic Committee on April 27. Bernanke strongly telegraphed to the markets that the Fed was ready to sit on its hands, after an expected quarter-point rate hike on May 10, in order to see how the economy is digesting previous moves.

What's more, the pause could occur even if the Fed believes the risk of higher inflation outweighs the risk that the economy could slow too much. Analysts now expect that after nearly two years of continuous rate hiking, the central bank will now pause at its June 29 meeting, at least for a while.

At the same time, the Fed chairman emphasized that the economy looks quite healthy and that future policy action will be based on "information that affects the Committee's assessment of the medium-term risks to its objectives of price stability and maximum sustainable employment." This week brings a batch of economic data that fits the criteria.

The labor market and industrial sector were specifically cited by Bernanke in demonstrating how slack in the economy has been rapidly absorbed. Another solid employment report is expected on May 5. Hiring is expected to stay around 200,000 in April. Hourly wages are also forecast to keep growing at a solid pace. If the labor market continues to repeat the gains seen in the past couple months, the jobless rate will keep falling. A prolonged string of such employment reports could make policymakers uneasy with leaving rates alone for a prolonged period.

The March figures on factory orders will update the bullish durable goods report from April 26. The figures on new and unfilled orders outside of the ups and downs generated by the civilian aircraft industry are the most important in gauging how busy manufacturers will be in the coming months. The Institute for Supply Management's April factory activity report will provide a short-term perspective of the manufacturing.

When it comes to tracking inflation, the central bank has preferred the measures contained in the personal income report. The latest data has shown that surging energy prices have yet to creep into other sectors of the economy in a significant way. Minus food and energy, the consumption expenditures price index was up just 1.8% in February. The upcoming figures will be closely watched given the latest run-up in energy prices and the scattered anecdotal evidence that pricing power is on the increase.

Chairman Bernanke cited strong productivity growth as a key reason for the benign level of core inflation. The first-quarter figures are due out on May 4 and should show another solid rise. Productivity will play a big role in the Fed's medium-term outlook for inflation. Economists see smaller gains as companies expand payrolls. Economic growth is also seen moderating in the second half of the year. Smaller productivity gains mean greater inflation pressures for a given level of economic growth. That in turn, could effect perceptions of inflation pressures, especially if the economy remains more resilient than expected.

Here's the weekly economic calendar.

MEETING OF NOTE

Monday, May 1, 1 p.m. EDT

Federal Reserve Bank of Atlanta President Jack Guynn discusses the U.S. economic outlook before the Rotary Club in Nashville, Tennessee.

6 p.m. EDT

Federal Reserve Bank of Minneapolis President Gary Stern addresses the Society of American business Writers and Editors in Minneapolis.

PERSONAL INCOME AND CONSUMER SPENDING

Monday, May 1, 8:30 a.m. EDT

Income and spending most likely accelerated in March. Based on the March forecast, personal income probably grew at a solid annualized rate of 6.2% in the first quarter, after a hefty 9.4% rise in the fourth quarter. Taking the January and February average of wages and salaries, first quarter growth is at 5.2%. Growth in dividends and interest income slowed from the fourth quarter.

March consumer spending probably bounced back after cooler weather and strong spending at the end of 2005 caused consumers to take it easy in February. The 0.1% rise in February spending was the result of a 0.9% increase in spending on services and a 3.8% jump increase in outlays for energy goods and services. Purchases of durable goods were off 1.9%, due largely to a 2.1% drop in auto sales, while non-durable good purchases were down 0.6%. Early figures for second-quarter spending look fairly healthy.

The personal consumption expenditures price index was unchanged in February, after popping up 0.5% in January. Excluding food and energy, prices inched up 0.1% in February, on top of a 0.2% rise in January. The latest figures show few signs of mounting inflation pressures. Compared to the same month a year ago, prices climbed 2.9%, off a bit from the 3.1% pace of January. Less food and energy, the price index was up 1.8% for a second straight month.

CONSTRUCTION SPENDING

Monday, May 1, 10 a.m. EDT

Construction outlays growth is forecast to have cooled a little in March. The February rise was centered in the private sector, as government outlays fell 0.5%. Private residential construction spending rose 1.3% and grew 0.8% in nonresidential areas. Compared to the same month a year ago, nonresidential construction spending was 9.6%, the strongest performance since January of 2001. Nonresidential construction outlays should remain strong as the national vacancy rate in commercial real estate fell further, to 13.6%, in the first quarter of 2006, according to CB Richard Ellis Group. The vacancy rate for industrial space edged up to 9.9%, from 9.7% in the first quarter. However, the rise was attributable in part to an increase in new space available.

ISM SURVEY

Monday, May 1, 10 a.m. EDT

The Institute for Supply Management's factory activity index continues to show a healthy manufacturing sector. The forecast easing for April has the index residing at the long-term average level of 55%, which corresponds to a solid pace of economic growth. The March level, according to the ISM, has corresponded to economic growth at an annualized pace of 4.7%.

The key components have eased a little but are also still at healthy levels. The new orders index cooled to 58.4% in March, after a surprising jump to 61.9% in February. The exports orders index is also quite strong, coming in at 57.3% in March. The index of unfilled orders indicates that manufacturers have a rising backlog of orders. That is a good sign for future production activity.

VEHICLE SALES

Tuesday, May 2

March vehicle sales probably improved marginally. According to WardsAuto.com, sales during April probably edged up to an annualized rate of 16.7 million units. Light vehicle held at an annualized rate of 16.5 million in March.

Sales are expected to pick up over the remainder of the second quarter, with the quarterly sales average coming in at 16.9 million vehicles. ICSC-UBS STORE SALES

Tuesday, May 2, 7:45 a.m. EDT This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the period ending April 29. Sales slipped a little in the latest period ended April 22. The dip was partially attributed to heavy rain through a large swath of the country. Compared to a year ago, however, sales growth inched up to 4.1%.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, May 2, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the fourth and final fiscal week of April, ended April 29. For the entire month of March store sales were down 3.2% compared to February. The weekly chain store sales figures in March and April have been affected by this year's Easter holiday in mid-April, after falling in March last year.

MEETING OF NOTE

Wednesday, May 3

U.S. President George W. Bush hosts Germany's Chancellor Angela Merkal at the White House in Washington, D.C.

8:30 a.m. EDT

Federal Reserve Bank of Chicago President Michael Moskow addresses the Rotary Club of Wilmette at its fifth annual financial breakfast forum in Northbrook, Illinois.

MORTGAGE APPLICATIONS

Wednesday, May 3, 7 a.m. EDT

The Mortgage Bankers Association releases its numbers on mortgage application volume for both home buying and refinancing for the week ending April 28. The latest reading of 389.4 for the week ended April 21 was the lowest since November of 2003, and off 19.2% from the same week a year ago. The four-week moving average for the purchase index fell to 413.2, from 416.9 in the week ended April 14.

The average rate on a conventional 30-year fixed mortgage turned higher according to HSH Associates. For the week ended April 21, the rate moved higher again, to 6.65%, from 6.62% for the week ended April 14.

The MBA's refi index retreated for a third straight week. The four-week moving average fell for a third consecutive period as well. For the week ended April 21, the average was 1547.2, from 1564.4 for the period ended April 14.

MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS

Wednesday, May 3, 10 a.m. EST

The forecast for factory orders have a distinct upside risk after the robust results for durable goods order. In March, new durable goods orders jumped 6.1%. When excluding civilian aircraft orders, which soared 71.1%, overall order figures were still up 2.8%. Orders for machinery, computers, and motor vehicles increased smartly in March. The durable goods report showed a 2.8% increase in unfilled orders as well.

ISM NON-MANUFACTURING SURVEY

Wednesday, May 3, 10 a.m. EDT

The Institute for Supply Management issues its April index of business activity for non-manufacturing sector, which is comprised of mostly service industries. The March figures continued to show brisk activity. Out of 17 sectors, 13 reported increased business activity, while only two said conditions had worsened. More respondents say an increase in new orders at home and from abroad while fewer thought their inventory levels were too high. At the same time there was an easing in the employment and unfilled orders indexes, although both stayed above the 50% level. Readings over 50% mean more respondents than not were adding workers and reporting increases in unfilled backlogs. The April report should show that activity in the second quarter is holding up quite well so far despite higher energy prices.

JOBLESS CLAIMS

Thursday, May 4, 8:30 a.m. EDT

Jobless claims increased to 315,000 in the week ended April 22. The four-week moving for the period ended April 22 moved up to 308,500. Continuing jobless claims for the week ended April 15 edged up to 2.45 million, from 2.44 million in the prior week.

PRODUCTIVITY AND COSTS

Thursday, May 4, 8:30 a.m. EDT

Nonfarm productivity growth probably accelerated in the first quarter as the economy expanded at a solid clip. Nonetheless, productivity growth is anticipated to moderate during the remainder of the year as companies expand payrolls and economic growth is expected to cool over the second half of the year. Productivity growth for the full year of 2005 was 2.9%, the slowest annual increase since 2001.

Quarterly unit labor costs are will garner a lot of attention. A tightening labor market is expected to exert pressure on unit labor costs this year. Labor costs grew 2.6% in 2005, the biggest increase since a 4.2% pace in 2000.

There are broad implications from a shift in productivity growth and unit labor costs. If productivity growth does indeed taper off to a more average pace and unit labor costs pick up, companies will experience more pressure on profit margins. Productivity is closely watched by the Federal Reserve. Historically strong productivity growth has been credited with allowing the economy to grow above its long-term trend without stoking inflation.

EMPLOYMENT REPORT

Friday, May 5, 8:30 a.m. EDT

Payrolls are expected to keep expanding at a solid pace in April. Hiring in the first quarter of 2006 totaled 590,000 the best quarterly performance since an increase of 631,000 jobs in the final quarter of 2004. As a result, the unemployment rate is at its lowest level since July of 2001.

In the manufacturing sector, payrolls are still looking softer than the economy at large. However, hiring of durable-goods production workers is brisk. Over the past twelve months, durable-goods manufacturers have added 147,000 production workers while overall factory payrolls have slipped by 56,000. The strength of business investment in the U.S. and abroad should keep boosting demand for durable goods and put pressure on manufacturers to add more production workers.

Average hourly pay most is expected to grow at a decent pace. Compared to the same month a year ago, hourly wages stood at 3.4% in March, from 3.5% in February. Hourly wages have been steadily increasing over the past couple years. The February yearly gain was the strongest since September of 2001.

CONSUMER INSTALLMENT CREDIT

Friday, May 5, 3 p.m. EDT

Consumer debt probably posted a modest gain in March. Accumulation of consumer debt has slowed down lately. In February, total consumer credit increased $53.9 billion from a year ago. That February increase was just 2.6%, the slowest growth rate in consumer credit since March 1993. A part of the slowdown in accumulation of consumer credit is that households have been tapping into home equity to fund spending as well as pay off other debt. If this is the case, rising interest rates may lead to a pick up in consumer installment credit growth if household spending remains resilient.

COROPRATE EARNINGS REPORTS

Monday

Chesapeake Energy, Fisher Scientific International, Humana, Principal Financial Group, PSEG, SYSCO, Tyson Foods, and more.

Tuesday

Archer Daniels Midland, Caremark Rx, Electronic Data Systems, Emerson Electric, Entergy, Equity Office Properties Trust, FPL Group, Hilton Hotels, Lincoln National, Loews, Masco, Molson Coors Brewing, RR Donnelley, Safeco, St. Paul Travelers, Symbol Technologies, TXU, Verizon, Vornado Realty Trust, and more.

Wednesday

Allergan, Alltel, CIGNA, Cincinnati Financial, Citizens Communications, Clear Channel Communications, Clorox, CMS Energy, Consolidated Edison, Cooper Tire & Rubber, Devon Energy, Dominion Resources, Equity Residential, JDSU, Marsh & McLennan, NiSource, Peoples Energy, PG&E, Procter & Gamble, Prudential Financial, QLogic, Qwest Communications, Starbucks, Sunoco, Time Warner, UnumProvident, Whole Foods Market, and more.

Thursday

Ameren Corporation, Apartment Investment & Management, Barr Pharmaceuticals, CenterPoint Energy, CVS, Eastman Kodak, Estee Lauder, International Paper, Kerr-McGee, KeySpan, McKesson, PPL, Sabre Holdings, Transocean, Univision Communications, Williams Companies, and more.

Friday

El Paso, EOG Resources, Medco Health Solutions, and more.

~~~~~~~~

By James Mehring