Steady Plodding

The unemployment situation in the US appears to be improving marginally with the latest government release of data. Employers added 192,000 workers in February and the unemployment rate unexpectedly declined to 8.9%, the lowest level since April 2009. During his Congressional testimony this week Fed Chair Ben Bernanke said there were “grounds for optimism” about the labor market in the coming months. 

The weekly report of jobless claims continues to point to improvement. The latest report for the week of February 26th shows that jobless claims fell 20,000 after a 25,000 decline the prior week. The number of claims, at 368,000, is the third sub 400,000 reading in the last four weeks. Continuing claims data are also moving lower. For the week of February 19th, 59,000 fewer workers were on unemployment insurance to 3.774 million, a recovery low according to Bloomberg.

Private employment statistics are also turning more positive. ADP, the nation’s leading payroll services provider estimates that February’s private payrolls increased by 217,000 jobs. That number compares to a revised 189,000 jobs in January. Likewise, the Monster employment index rose seven points to 129 in February. According to Monster, it points to a significant up-tick in online job recruitment.

The Federal Reserve signaled this week that they would be ending their $600 billion Treasury purchases this June rather than gradually pulling back as previously indicated. Several of the Fed governors have indicated that they see no need or advantage in “tapering” their intervention in the bond markets. This change in policy indicates they are confident the economy is strong enough for higher long-term interest rates.

The Wall Street Journal notes the argument of Brian Sack, the New York Fed official in charge of carrying out the bond buying, who says it was more the announced size of the purchases that had more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman. “We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Bernanke told the Senate Banking Committee during his March 1st semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Perhaps the most significant part of the Chairman’s testimony this week concerned the Fed’s view of municipal bonds. That segment of the bond market has been under extreme pressure the last few months. He said that “continued evidence that states and localities are addressing fiscal shortfalls should help calm the municipal bond market. Generally, that market seems to be functioning reasonably well. Around the turn of the year, though, investor concerns about the fiscal situations of many governments, including those of some populous states, resulted in increased yields on municipal bonds relative to Treasury bonds as well as a widening of credit default swap spreads for a number of states. Fortunately, although these measures of risk in the municipal bond market remain elevated, they have been looking somewhat better recently, presumably reflecting expectations of continuing improvement in the finances of states and localities. The Federal Reserve will continue to monitor the municipal bond market closely.”

He added that “state revenues nationwide have been rising recently, and states are generally reporting that collections are running in line with, and, in some cases, a bit ahead of, expectations. Accordingly, considerably fewer states are facing midyear budget gaps that will need to be addressed before the end of the current fiscal year than the 40 or so that reported such gaps in 2009 and 2010.”

The Fed has not always had the dual mandate of keeping inflation and unemployment low and some in Congress want to re-focus the central bank’s mandate on inflation. The current policy of near-zero short rates and buying $600 billion in Treasury bonds through June to keep long-term rates down is aimed at stimulating economic growth and job creation. Very however, there is a razor thin line between sufficient economic stimulus and inflationary pressures. Critics in Congress of the dual mandate, mainly Republicans, warn that the Fed’s approach risks sparking an inflationary spiral. Senator Bob Corker expressed his support for a single mandate in November after the Fed launched its bond-buying program saying that removing the politically charged employment mandate could insulate the Fed at home and abroad from charges that it was trying to drive down the dollar or create advantages for US exports.

The recent rise in oil prices has increased inflation concern. New York Fed Governor William Dudley spoke to those concerns this week by saying that “we may be much closer to establishing a virtuous circle in which rising demand generates more rapid income and employment growth, which in turn bolsters confidence and leads to further increases in spending.” He went on to say that the economy probably has a long way to go before inflation becomes a problem. Even with the mounting evidence that the recovery is gaining speed he said it would take a substantial rise in employment for inflation to become a problem. He estimated that the unemployment rate would have to slip to between 6% and 7% before workers could demand the kind of wage increases that would fuel worrisome rises in prices.

Still, prices are rising in the visible places; at the gas pump and the grocery store and that has people worried. The IMF said this week that worldwide food prices are high and may remain high for years. They cite increasing incomes in developing countries which have boosted demand for meat and dairy, requiring more grain for livestock feed and land for grazing animals as the primary reason. Rising demand for biofuels and adverse weather have also tightened food supplies. Over time, supplies will catch up, but that will take years, not months, they say.

The Fed’s Beige Book report this week indicated that many manufacturers are passing along higher input costs to their customers in a sign that rising prices for wheat, cotton, iron, and other commodities might increasingly reach consumers in coming months. The report is a summary of economic conditions across the central bank’s 12 regional districts. The report said that “retailers in some districts mentioned they had implemented price increases or were anticipating such action in the next few months” as a result of manufacture hikes.

Fortunately, incomes are rising to help. The Commerce Department reported Monday that personal income rose a full 1% in January from December, as the cut in Social Security taxes boosted paychecks. That follows a 0.4% rise in December. Wages and salaries grew a more moderate 0.3%after gaining at the same rate in December.

Retailers for the most part are performing reasonably well as they experiment with price increases. Redbook reported same-store sales strength in the February 26th week, at a plus 3.0% annualized pace vs. the prior week’s pace of plus 2.7%. Month-to-month, Redbook’s showed a 1.6% gain vs. January.

Its auto sales that again take center stage in February. Unit sales of cars and light trucks jumped more than 6% for the month. The total unit annual rate came in at 13.4 million, split evenly between growth for North American-made (10.2 million rate) vehicles and foreign-made (3.2 million rate). Cars outsold trucks by a wide margin as rapidly rising gasoline prices likely took a toll on sales of the gas-guzzlers.

The corporate side of the economy continues firing on all cylinders. The Chicago Purchasing Manager’s Index accelerated strongly this month to 71.2 from January’s hardy 68.8. Production was the highlight, jumping 4-1/2 points to 78.2 to indicate, like the composite, accelerating month-to-month growth from an already very high month-ago base.

The nationally focused ISM manufacturing headline index rose more than a 1/2 point to a 61.4 level which matches the best strength of the expansion. Month-to-month acceleration in both the employment and production components were noteworthy. The employment index, at 64.5 grew nearly three points and stands at its best levels since the early 70s, according to Bloomberg data. Manufacturing employment has been a central strength of the jobs market.

With employment conditions remaining tight, those who are employed, continue to produce more. The government did not revise its earlier report of nonfarm business productivity of 2.6% for the fourth quarter even though it downwardly revised GDP growth in the fourth quarter. Unit labor costs also were unrevised at an annualized 0.6% dip which reinforces the Fed’s view that inflation, which is usually driven by wages, remains tame.

Unfortunately, the week’s parade of good news passed blindly by the housing market. The National Association of Realtors reported that their pending home sales index fell 2.8% in January to 88.9, indicating a month-to-month decline in used-home contracts and weakness for existing home sales in February and March. On an annualized basis, the index is down 1.5%.

Taken as a whole, things pretty look good for the economy. Unrest in the Middle East will likely keep emotional pressures on oil prices for the near future, but so far, supplies appear ample. Food and commodity costs may drive up costs of consumer goods in the coming months, but economic growth and income look sufficient to handle the increases without causing inflation. Strong leadership from the business side of the economy and continued support from US and world consumers should keep the recovery healthy. People and businesses are adjusting expectations toward a more plodding style of recovery, less toward robust recoveries in our modern past. No doubt King Solomon had it right when he said, “steady plodding brings prosperity; hasty speculation brings poverty.” Proverbs 21:5

Have a good weekend.