Vanguard Economic Week in Review July2, 2010
Deller's two cents: WOW, talk about a week of bad economic news. Only higher income data is positive, all else is negative. It seems like there are two things going on: people are not spending and are paying down debt and/or increasing savings and banks continue to be tight on loosening up credit. For individuals increased savings and/or paying down debt makes perfect sense, but with most people doing that they are not spending which is a huge drag on the economy. Banks are still in a wait and see mode (what are the new financial reforms and what do they mean? and is the economy really in recovery?) and until banks feel more confident they will keep credit tight.
Economic Week in Review: Negative news hints at slower recovery July 02, 2010
If the recent reports are any indication, the economy has developed a limp in its stride in its jog toward a slow recovery. The number of employed workers fell for the first time this year despite a small drop in the unemployment rate. Also in a reversal of recent trends, consumer confidence, manufacturing growth, construction spending, and factory orders were all down. The news wasn't all bad, as personal income, saving, and spending rose. It was an even more dismal week for the financial markets. For the week, the S&P 500 Index fell 5.0% to 1,023 (for a year-to-date total return-including price change plus dividends-of about -7.4%). The yield of the 10-year U.S. Treasury note declined 12 basis points to 3.00% (for a year-to-date decrease of 85 basis points).
Labor market remains bleak
For the first time this year, total payrolls decreased. While the national unemployment rate also declined slightly in June to 9.5% from 9.7% in May, the fall reflects fewer people seeking work rather than job creation. Nonfarm payrolls dropped by 125,000 as government jobs ended for 225,000 temporary census workers. Private-sector companies hired 83,000 employees, slightly fewer than anticipated. Hourly and weekly earnings dropped a bit, along with the length of the average workweek.
"As expected, it's a weak payroll number," Vanguard economist Roger Aliaga-Díaz noted. "However, on the positive side, the labor market continues to slowly move in the right direction in terms of private jobs creation. A cause of concern is the trend in labor force participation that continues to show discouraged job seekers dropping out of the labor force. As these workers resume their search for jobs later this year, they could overwhelm the capacity of the private sector to absorb them into new jobs, and this could result in the unemployment rate inching higher."
Consumer confidence sinks
The Conference Board's index of consumer confidence tumbled to 52.9 in June from 62.7 in May. Economists had forecast a small gain. It was the first decline after three straight months of growth, and the index is now only slightly higher than March's reading. While the drop was
mostly due to the expectations component, the present-day component also fell. The poor outlook for the labor market and business conditions weighed most heavily on the index. Expectations for the stock market and plans to buy homes and big-ticket items were also down.
Income rises faster than spending
Personal income grew 0.4% in May while personal spending rose 0.2%. The result was a savings rate increase of 0.2% to 4.0%, the highest level in eight months. Income growth was triggered by increases in dividends and rental income, while the second straight monthly rise of 0.5% for wage income also contributed. Durable goods and services-those lasting for longer periods of time-accounted for the spending growth and offset a decrease in nondurable goods spending. Prices rose 1.9% compared to a year ago, and inflation appeared to be in check.
Breather for manufacturing sector
The manufacturing sector continued its decline from April's strong expansion as The Institute for Supply Management's manufacturing index fell in June to 56.2 from 59.7 in May. A modest deceleration in growth had been projected. Despite the moderation, the report noted that the
manufacturing sector's economic activity expanded for the 11th straight month and that the overall economy grew for the 14th month in a row. While the index is at its lowest point since December, it is still higher than its "expansionary threshold" of 50. Production, new orders, supplier deliveries, and employment were off May's pace, while inventories increased slightly.
Construction spending declines
Construction spending fell 0.2% in May, less than economists projected but still the first drop in three months and 8% lower than May 2009. April's increase of 2.7% was also revised down to 2.3%. The expiration of the government tax credit for home buyers contributed to May's decline. While private residential and nonresidential construction both dropped, the negative numbers were partly offset by a rise in public construction spending, boosted by highway and street development.
Factory orders fall
Factory orders dropped 1.4% in May, the first decline in nine months and a larger decrease than expected. New orders fell 0.6%, excluding transportation. Shipments declined 1.3%, the first drop in three months, and unfilled orders rose 0.2%, the fourth increase in five months. Inventories were down 0.4%, the first decrease in five months. For manufactured durable goods, inventories rose 0.9%, the fifth straight gain. Manufactured nondurable goods inventories retreated 2.1% after
seven straight increases.
The economic week ahead
Little economic news is on tap for next week. The only scheduled reports are the ISM's nonmanufacturing index on Tuesday and consumer credit on Thursday.
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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
For more info: http://www.routledge.com/9780415775915
