Signs of a slow but steady recovery

From Vanguard.com

June 5, 2009

Economic Week in Review: Signs of a slow but steady recovery

"Several recent reports provided hope that the economy may indeed be in the beginning stages of recuperating. The number of jobs lost in May was far fewer than expected. Demand for durable goods seemed to be on the rise again, and construction spending picked up. Personal income increased significantly in April, while consumer spending declined slightly. The U.S. savings rate reached a 14-year high. For the week ended June 5, the S&P 500 Index rose 2.3% to 940.1 (for a year-to-date total return of about 5.4%). The yield of the 10-year U.S. Treasury note increased 37 basis points to 3.84% (for a year-to-date increase of 1.59 percentage points).

Job losses fall significantly

According to the government's latest employment report, 345,000 jobs were cut during the month of May—the smallest number since Lehman Brothers collapsed last September. This number was significantly lower than the 520,000 expected by analysts. Several industries added jobs during the month, including education, leisure and hospitality, and health services. Fewer cuts in other areas, such as construction and business services, also contributed to the improvement. Despite the slowdown in job cuts, the nation's unemployment rate rose 0.5% for the month, to 9.4%, reaching a 26-year high. Still, the sharp decrease in losses may indicate that the job market is slowly improving.

Saving trend continues

Personal income saw its largest increase in 11 months, jumping 0.5% in April. Despite a rise in income, personal spending fell 0.1% as consumers continued to forego discretionary spending, preferring to hang on to their extra dollars. The savings rate—measured as a percentage of disposable income—rose 5.7% for the month, marking its highest level since February 1995.

Manufacturing outlook brightens

The Institute for Supply Management's (ISM) manufacturing index was up for the fifth consecutive month in May. The index, which measures the activity of our nation's factories, reached 42.8 for the month, 2.7 points higher than April. Although a reading of less than 50 indicates economic contraction, the fact that the index is steadily rising is a good sign.

The ISM's index of nonmanufacturing goods—a measure of the U.S. services industry, including banks, restaurants, and hotels—was also up in May. However, despite an increase in the overall number, drops in both new orders and business activity were less encouraging.

Construction spending on the rise

Construction spending gained ground for the second consecutive month in April. The 0.8% increase surprised analysts, who had expected a decline of about 1.3%. Spending in the private sector jumped 1.4% for the month, with increases in both residential and nonresidential construction. Public construction spending fell slightly, indicating that state governments are still cutting back. Still, the rise in overall spending is a good sign for the economy.

Increased demand for durable goods

Factory orders in April were up less than expected; however, the 0.7% jump was a big improvement from March's decline of 1.9%. Orders for durable goods—which include big-ticket items that are intended to last at least three years, such as cars and appliances—increased 1.7% for the month, their biggest gain since the start of the recession in December 2007. Nondurable goods orders fell 0.1% for the month.

Productivity higher than expected

Growth in U.S. nonfarm business productivity—which is defined as output per work hour—was revised upward to 1.6% for the first quarter, a significant jump from the Labor Department's original estimate of 0.8%. Output declined less than originally anticipated, which led to the revision. Labor costs, a key indicator of inflationary pressures, were also adjusted, sliding from 3.3% to 3.0%.

Consumer debt falls farther than expected

Consumer credit declined by $15.7 billion in April, more than the $6.0 billion that analysts had expected. Revolving credit led the decline, down 8.6% for the month; however, nonrevolving credit also fell 7.1%. These numbers are a reflection of tightened lending standards and weakened consumer demand.

The economic week ahead

Next week will be somewhat light in terms of economic news. On Wednesday, the Federal Reserve will release its latest Beige Book, which provides a summary of current economic conditions in each of the 12 Federal Reserve regional districts. The latest report on international trade will also be released on Wednesday, while updates on retail sales and business inventories will be provided on Thursday. "