This past week contained a number of interesting indicators on the state of the economy.
Despite the fact that the average cost of a gallon of gasoline increase by 23 cents to a nominal record high of $3.25 last month, the conference board reported last Tuesday that consumer confidence actually increased in May for the first time in three months! Primarily a reflection of improving business conditions, the rise in confidence points to continued growth in the economy, but not at the pace attained in the 2004-2006 period. The number of those claiming that their economic conditions were “good” was double the number who stated that their conditions were “bad”. Overall, this is a favorable indication that, despite the recent rise in energy prices, the consumer remains confident about the state of the economy.
Next, on Thursday, The Commerce Department reported that GDP increased at an annual rate of just 0.6 percent in the first quarter. This is a deceleration from last month’s advanced report, with estimated that growth was up 1.3 percent. The slowdown from two factors: a spike in imports, mainly from petroleum, and a strong downturn in business inventories.
Imports, whhich are a negative in the GDP, grew at an annual rate of 5.7 percent in the first quarter – this was twice as fast as the 2.3 percent estimated in the advanced report. The reason: domestic supply and refinery problems that caused a 30 percent rise in petroleum imports.
As for the inventory issue, business inventories went through an excessive growth period early in 2006 and have been going through a correction over the past several quarters. Thankfully recent data show that manufacturers are starting to restock inventories – a signal that the excesses have been worked off.
These two negative factors offset modest improvements in consumer spending, business fixed investment, housing and exports, from the advance report.
Finally on Friday, the Labor Department reported today that the economy added 157,000 new jobs in May, sufficient enough to keep the unemployment rate stable at 4.5 percent. While private sector service employment posted its biggest increase so far this year, rising 155,000, the manufacturing sector posted its 11th consecutive monthly employment decline. For the month, manufacturing employment fell by 19,000 in May, similar to the declines of the prior three months.
The silver ring to the dark cloud for manufacturers is that production employment in manufacturing, jobs most-closely tied to output, edged down by just 1,000 last month, the smallest decline so far this year. Of the 21 major manufacturing sectors, eleven actually increased employment collectively by 19,600. Led by fabricated metals, machinery and transportation outside of motor vehicles, this is the highest number of sectors that added production workers so far this year. And of the nine sectors that together lost 20,400 production jobs in May, about half of the drop was concentrated in the motor vehicle sector, which is going through significant restructuring.
While the fact that overall manufacturing employment fell last month is indeed sour news, the fact that production employment appears to be stabilizing is a hopeful sign that manufacturing is emerging from the slowdown in the expansion that began last September. This notion is buttressed by the fact that the Institute for Supply Management’s report on manufacturing, which also came out today, shows that the closely-watched PMI Index increased again in May to thirteen-month high of 55 from 54.7 in April (a level of over 50 indicates growth.) Buoyed by increases in production, new orders, and exports, today’s ISM report signals that demand for manufactured products, both at home and abroad, is improving.