Labor Market Weakens Across Board

MBA (6/9/2008 ) Velz, Orawin
Nonfarm payrolls dropped by 49,000 in May and job losses were widespread. Goods-producing industries continued to shed payrolls, totaling 57,000 jobs, including 34,000 in construction and 26,000 in manufacturing.
Although service industries added 9,000 jobs, the increase was only in the government sector. Payrolls in private service industries declined by 9,000, reversing the 60,000 gain in April.

The unemployment rate, calculated from a separate survey, jumped to 5.5 percent from 5.0 percent. The surge in teenage labor force participation likely exaggerated the increase in the unemployment rate. It is difficult to accurately account for seasonal adjustment from the flow of young workers into the labor force from April through July. Overall, the report continued to indicate a mild contraction in the labor market. The economy has shed, on average, 65,000 jobs a month since January, compared with an average payroll cut of nearly 200,000 during the 2001 recession.

Other reports last week continued to point to sluggish economic activity that has not meaningfully deteriorated. Manufacturing activity continued to perform better than expected, supported by strong export demand. The Institute for Supply Management’s Manufacturing Index improved in May, hovering at levels showing mildly contracting manufacturing activity. Factory orders increased strongly in May, thanks to the jump in the shipments of nondurable goods. Construction spending fell modestly in May, supported by a robust increase in private nonresidential construction spending—the third consecutive increase and the biggest since September 2007. The ISM nonmanufacturing index edged down in May but has remained in expansionary territory.

Reports on auto sales and mortgage credit quality continued to be downbeat. May auto sales were at the slowest pace in a decade, and mortgage delinquency and foreclosure rates set record highs in the first quarter of this year, according to the Mortgage Bankers Association National Delinquency Survey.

Long-term Treasury yields were volatile last week. On Monday yields dropped in response to financial concerns after Standard & Poor's lowered its debt ratings on Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Morgan Stanley. On Tuesday, yields rose after Fed Chairman Ben Bernanke raised inflation concerns from the decline in the dollar. It’s rare that Federal Reserve officials defend the value of the dollar. In general, the Fed tends to defer to the Treasury on any discussion of the currency. The speech confirmed the view that the Fed is done cutting interest rates as more rate cuts would likely cause the dollar to decline further, creating negative feedback effects to inflation and inflation expectations.

On Wednesday, credit concern caused yields to fall, reversing the previous day’s increase. Moody's Investors Service said it may lower the Aaa insurance ratings for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond guarantors. Better-than-expected news on weekly initial unemployment insurance claims and chained store sales pushed rates up on Thursday. Finally, the big jump in the unemployment rate on Friday and the surge in the price of crude oil futures to nearly $139 a barrel spooked the financial markets. The yield on 10-year Treasury notes fell to 3.93 percent by mid-Friday afternoon, 11 basis points lower than the rate on the previous Friday.

Housing and Mortgage Indicators:
Total construction spending fell 0.4 percent in April. The Department of Commerce revised spending in March upward to a drop of 0.6 percent from the 1.1 percent drop reported earlier. Public construction spending fell 0.3 percent. Private construction spending dropped 0.5 percent, as the 2.3 percent decline in private residential construction spending outweighed the increase in private nonresidential construction spending of 1.6 percent.

Private residential construction spending dropped 3.6 percent, as single-family construction spending fell 4.4 percent while multifamily construction spending rose 0.4 percent. From a year ago, private residential construction spending has declined 21.0 percent. Private nonresidential construction spending was up 15.4 percent from a year ago.

The Mortgage Bankers Association National Delinquency Survey showed that credit quality deteriorated in the first quarter of this year. The seasonally-adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.35 percent of all loans outstanding, up 53 basis points from the fourth quarter of 2007, and up 151 basis points from one year ago. The seasonally-adjusted total delinquency rate is the highest since the inception of the series in 1972; however, the non-seasonally adjusted delinquency rate is not a record.

The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, which was a record high. It increased 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.

The percent of loans on which foreclosure actions began during the quarter was 0.99 percent on a seasonally adjusted basis, also a record high. It was 16 basis points higher than the previous quarter and up 41 basis points from one year ago.

Delinquency rates normally peak at the end of the year and drop to their lowest point for the year at the end of the first quarter. The non-seasonally adjusted rate is down 67 basis points from the fourth quarter but up 131 basis points from the first quarter of last year.

California and Florida are the main drivers of the national trend.

Economic Indicators:
The Institute for Supply Management (ISM) manufacturing index rose to 49.6 from 48.6 in April. A reading below 50 indicates a contraction in the manufacturing sector. Although this was the fourth consecutive reading below 50 in the past five months, the trend in the index suggested that manufacturing slump was not worsening.

Forward-looking components of the index suggested an improvement in activity in the near term. New orders increased to 49.7 from 46.5, while the production index rose to 51.2 from 49.1. Manufacturers continued to see export orders increase from strong demand for capital goods overseas, which has helped support the overall activity. The export component rose two points to 59.5, the highest reading since May 2004. Employment outlook remained gloomy: the employment component of the index continued to hover at the low level of 45.5. Manufacturers have shed jobs every month since July 2006, and that trend will likely continue.

The component related to prices continued to show a worrisome trend, with the prices that manufacturers are paying for inputs trending up. While the decline in the dollar has helped boost exports of manufacturing goods, it has increased imported input prices. The prices-paid index increased two points to 87.0 and has reached its highest reading since May 2004. Overall, manufacturers are facing rising costs and weakening domestic demand.

Factory orders advanced 1.1 percent in April, following a 1.5 percent increase in March, as a 2.8 percent jump in nondurable goods shipments outweighed a 0.6 percent decline in durable goods orders. The report included a revision of durable goods data released last week and contained new data on nondurable goods manufacturing shipments, inventories and unfilled orders. Revisions to the previously released durable goods data were minor and thus the report did not change the anticipated outlook for business investment following the durable goods orders report.

The jump in new orders was on the strength of nondurable goods shipments. Petroleum shipments led the increase as a result of the increase in crude prices during the month. Food products shipments, petroleum and coal products shipments and chemical products shipments were also up strongly.

Durable goods orders were revised down to show a 0.6 percent decline from the 0.5 percent drop reported earlier. Nondefense capital goods orders excluding aircraft—a proxy for future business investment in equipment and software—were up 4.0 percent, slightly down from a 4.2 percent increase in the earlier report. Shipments for nondefense capital goods excluding aircraft—a component used in the calculation of economic growth in the current quarter—rose by 0.2 percent, compared with 0.5 percent reported earlier.

Nonfarm productivity, a measure of output per hour, increased 2.6 percent (annualized rate) in the first quarter, upwardly revised from an initial report of 2.2 percent. The revision was due to an upward revision to output growth. From a year ago, productivity increased 3.3 percent, the strongest year-over-year growth in nearly four years.

Unit labor costs—a gauge of inflationary pressures from compensation—rose an unrevised 2.2 percent. However, unit labor costs growth in the fourth quarter of 2007 was revised sharply higher to 4.7 percent from 2.8 percent. Over the past year, unit labor costs have increased 0.7 percent in the first quarter, an upward revision from 0.2 percent in the preliminary report. Despite the upward revision, the year-over-year growth was still the slowest pace since the second quarter of 2004. Overall, the report indicated that productivity growth has remained strong with wage pressures remaining under control.

The Institute for Supply Management (ISM) nonmanufacturing index fell to 51.7 in May from 52.0 in April. This was the second consecutive month that the index showed a reading above 50, indicating an expanding service sector. The service sector includes the retail, transportation, health care, finance, real estate and construction industries.

The index of new orders rose to 53.6—the highest this year—from 50.1 in April. This was the third consecutive increase. The employment index dropped to 48.7 from 50.8, suggesting weak employment in the service industries in May. The ISM employment index has shown contraction in four of the past five months.

One area of concern was that an index gauging prices paid by service providers jumped nearly five points to 77.0, the highest since September 2005.

Overall, the report pointed to rising costs and sluggish growth in the service industries. The ISM nonmanufacturing index slipped below 50 in each month of the first quarter but has improved since then.

Nonfarm payrolls fell by 49,000 in May. Revisions for March and April reduced employment by 15,000. Education and health services, leisure and hospitality and government were the only sectors that added jobs. Within the service industries, retail and professional/business services shed 27,000 and 39,000 jobs, respectively.

Mortgage industry employment fell 3,900 from March to 356,800 in April. (The Bureau of Labor Statistics releases some detailed categories of employment with a one-month lag.) Since its peak in February 2006, industry employment has declined about 29 percent, with sharp drops occurring in the two months following the August financial turmoil and modest declines in recent months.

The unemployment rate jumped half a percentage point to 5.5 percent, the biggest one-month jump since February 1986. Average hourly earnings rose 0.3 percent.