Deller's two cents:  Sorry for the delay, on the road.  Are we on the verge of a "double dip" or W recession?  Too soon to tell.  The talk of the double deep is spurred by weakness in the stock market.  This weakness is do to three things: (1) did the market run up too fast and need to be corrected down? (2) Europe debt crisis...has that been avoided and if note will it spill into the US? (3) the recovery is frustratingly slow.

Economic Week in Review: Reading the labor market tea leaves

June 04, 2010

The highly anticipated release of May's employment data was disappointing-even though the unemployment rate did fall. But optimists found encouraging signs for the labor market as manufacturing expanded, albeit at a slower pace, and productivity gains suggested that businesses will need to hire more workers. The service sector employment index crossed over into growth territory for the first time in more than two years. On Friday, investors became more anxious about fiscal problems in Europe and their implications for global growth. For the week ended June 4, the S&P 500 Index fell 2.3% to 1,065 (for a year-to-date total return-including price change plus dividends-of about -3.7%). The yield of the 10-year U.S. Treasury note fell 11 basis points to 3.20% (for a year-to-date decrease of 65 basis points).

Lower unemployment rate brings little cheer

The Labor Department reported a slight improvement in the national unemployment rate, which returned to 9.7% in May-the same as the first-quarter average-after edging up to 9.9% in April. However, job creation in the private sector was weaker than anticipated, with only 41,000 payroll jobs added in May. Total nonfarm employment was up by 431,000, but this included 411,000 temporary census workers. Improvement in the unemployment rate itself came from workers leaving the labor market.

Vanguard economist Roger Aliaga-Díaz observed, "We're still seeing discouraged workers giving up on their job searches and leaving the labor force, despite an extension of unemployment benefits that would normally be an incentive to keep them actively looking for jobs. The likely explanation for this, so late in the game, is the worsening long-term unemployment problem. The average period of unemployment now exceeds 34 weeks, the highest of any recession since World War II."

Growth in manufacturing and services

The economy's manufacturing engine may have lost a little steam in May, but it performed better than expected and is still driving the recovery. The Institute for Supply Management's (ISM) manufacturing index registered 59.7 in May, beating expectations. An index value above 50 for this survey of purchasing managers indicates that the manufacturing sector is generally expanding. May's level was close behind April's 60.4 and in line with the levels for February and March.

Most indicators were positive. New orders, at 65.7, were just below January's near-term peak and inventories fell to 45.6 from 49.4; the widening gap between new orders and inventories may point to increased future output. The employment index improved to 59.8, suggesting more hiring to keep pace with product demand. And, so far, the relative strength of the U.S. dollar and weakness in European economies has not been reflected in the export index. Mr. Aliaga-Díaz noted, "Exports to

Europe represent only a very small percentage of the U.S. economy, and demand from European importers is not likely to be cut back completely. In addition, the relative weakness of the euro may help to sustain levels of economic activity in Europe."

The ISM index of service sector activity in May remained at 55.4 for the third consecutive month. A result above 50 indicates expansion, as it does for the counterpart manufacturing index. The service sector's somewhat lower level, compared with that of the manufacturing index, is

consistent with the fact that consumers have not been leading the current recovery. After 28 consecutive months in the "contraction" zone, the employment index climbed to 50.4, signaling growth.

Factory orders mixed

Overall, new orders for manufactured goods reported by the Commerce Department were consistent with the ISM's on-the-ground survey of purchasing managers. April orders rose 1.2%, compared with 1.7% in March. However, excluding transportation, total orders slipped 0.5%. Orders for commercial aircraft, a sizable component of the transport sector, can be quite volatile: As noted in last week's durable goods report, new orders for commercial planes soared 228% in April after falling 71% in March. This week's factory orders report encompasses all manufactured goods, not just long-lived durable items. Although nondurables' orders slipped 0.1%, analysts were not concerned because the decrease largely reflected lower crude oil prices.

Downward revision to productivity, but still strong

The Labor Department's second take on nonfarm business productivity in the first quarter yielded a larger-than-expected revision from the 3.6% growth reported last month: Output per hour grew at an annual rate of 2.8%. Compared with the first quarter of 2009, productivity increased 6.1%, the largest year-over-year increase since 2002. Productivity often improves as recessions end. To meet rising demand, firms are able to increase output faster than they increase the workforce, but

productivity growth tends to slow as the number of hours worked also increases (because productivity is the ratio of output divided by hours worked). Eventually, more workers need to be hired, a hopeful sign for the labor market.

Unit labor costs in the first quarter fell 1.3%, reflecting ongoing softness and suggesting that inflation is not a concern.

Building pace quickens

Construction spending rose 2.7% in April, the highest monthly percentage jump in almost a decade. However, at an annual rate of $869 billion, spending is still almost 11% below year-ago levels. All three major spending components advanced for the month, led by a 4.4% increase in private residential construction-in part supported by federal homebuyer tax credits. (To be eligible, prospective purchasers needed to enter into a binding contract by April 30.) Private nonresidential

construction increased 1.7%. Federal stimulus funds helped pave the way for a 2.4% increase in overall public spending, boosted by a 3.6% increase in highway and street construction, the largest component.

The economic week ahead

Economic reports on tap for next week begin with consumer credit on Monday, the Federal Reserve's Beige Book report on economic conditions across the United States on Wednesday, international trade on Thursday, and retail sales and business inventories on Friday.

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Steven C. Deller

Professor and Community Development Economist

Department of Agricultural and Applied Economics

515 Taylor Hall --- 427 Lorch Street

University of Wisconsin-Madison/Extension

Madison, WI 53706

608-263-6251

"Conformity can be costly in a world of uncertainty"

Nobel winning economist Douglass North

Recently published: Targeting Regional Economic Development