Deller's two cents:  I think the Vanguard folks hit the nail on the head, the economic "hiccup" we are experiencing have three sources: (1) energy (gas) prices have reined in consumer spending, (2) food prices ditto, (3) the Japaneses earthquake has caused negative ripples in our (US) manufacturing.  The latter is a true "hiccup" and will play out shortly, gas and food prices, that one is a whole 'nother issue.

Economic Week in Review: Japan's aftershocks ripple through U.S. economy

June 03, 2011

Consumers and investors looking for good news this week were largely disappointed as the effects of the tragic natural disasters in Japan reverberated through the global economy. The U.S. unemployment rate ticked up, job creation was weak, manufacturing growth slowed, and consumer confidence slid-even before the latest releases. For the week ended June 3, the S&P 500 Index fell 2.3% to 1300 (for a year-to-date total return of about 4.2%). The yield of the 10-year U.S. Treasury note fell 8 basis points to 2.99% (for a year-to-date decrease of 31 basis points).

Unemployment rate creeps up again

The unemployment rate inched up to 9.1% in May from 9.0% in April, after falling below the 9.0% threshold in February and March. Confounding expectations for more significant growth, only 54,000 new nonfarm jobs were created in May. In the private sector, the increase in payrolls was the lowest since June 2010, while public-sector payrolls continued to shrink. As with many of the economic indicators released this week, some of the weakness in job creation likely resulted from the disruption to the manufacturing supply chain caused by the devastating earthquake and tsunami in Japan.

 

The unemployment report was surprisingly weak, even relative to the already marked-down expectations, noted Vanguard senior economist Roger Aliaga-Díaz. In particular, the softness in manufacturing could be troubling, since it has been a key private-sector driver of the U.S. economic recovery so far. Some temporary factors could be behind this weakness, including the delayed effects of higher oil prices, so next month could be better. However, the slowing trend in domestic sales of autos and other big-ticket items plus uncertainty about future global demand are key downside risks to watch for."

Consumer confidence slides

Contrary to expectations, The Conference Board's May index of consumer confidence fell to 60.8 from 66.0 (revised) in April. The index now stands at its lowest level since November. Consumers are considerably more apprehensive about future business and labor market conditions, explained Lynn Franco, director of The Conference Board Consumer Research Center. Consumers' outlook weakened in all three areas that make up the expectations component of the index: business conditions, jobs, and incomes. Inflation expectations also rose, despite the easing in gasoline prices at the pump in late May.

Manufacturing and services still in expansion mode

The manufacturing index reported by the Institute for Supply Management (ISM) fell more than expected in May, to 53.5, its lowest level in almost two years. The slower pace of growth was especially evident in new orders and production, in part related to supply-chain problems originating in Japan. Still, any index reading above 50.0 signals expansion in the manufacturing sector. Many of the purchasing managers surveyed cited rising costs as a factor in their less optimistic outlook.

In the services sector, the ISM nonmanufacturing index registered 54.6, up from 52.8 in April. May's reading marked the 18th consecutive month of growth in this sector. In its release, the ISM noted that respondents indicated that "a continued concern exists over fuel costs and various volatile commodities."

Factory orders weaker than expected

Consistent with the slide in the ISM manufacturing index, new orders for manufactured goods fell 1.2% in April-more than had been expected. Japan-related interruptions to production processes were responsible for much of the slippage. Excluding cars and other transportation vehicles and equipment, orders fell a more modest 0.2%. There has been no consistent trend in orders this year: January and March enjoyed increases of more than 3% but were each followed by a decline. Shipments of manufactured goods were down 0.2%, the first monthly decline this year.

Construction spending rises slightly

Construction spending rose in April for a second straight month, with a modest 0.4% increase. As overall spending has picked up across much of the economy, this has translated into more private construction spending, especially for home improvements. In the cash-strapped public sector, however, construction spending fell. Despite the recent uptick, total construction spending was nearly 10% below a year ago.

Revised first-quarter productivity inches up

The Labor Department's revised first-quarter productivity and unit labor costs data showed modest improvement compared with the preliminary estimate released last month. Nonfarm business productivity-or output per hour worked-increased at a revised rate of 1.8%, up from the first estimate of 1.6%. Unit labor costs rose 0.7% (down from the 1.0% preliminary estimate).

The economic week ahead

A shorter menu of economic reports is set for release beginning on Tuesday with consumer credit, followed by the Federal Reserve's Beige Book nationwide survey of economic activity on Wednesday, and international trade 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
"I started out with nothing and I still have most of it left."
Seasick Steve