Over the past week, a number of indicators gave some conflicting looks on the state of the economy. First last Monday, the Census Bureau provided a look at manufacturing, with April Orders. New orders for manufactured goods in April, up five of the last six months, increased $1.3 billion or 0.3 percent to $418.0 billion. The increase was concentrated in durable goods, which rose by 0.8 percent. Fabricated and primary metals shows impressive gains, electrical equipment. This is an positive sign that the recent upturn in busines structures investment, which started last year, continues. This is a good sign for the expansion, since residential investment has continued to show no signs of picking up.
Then on Wednesday, the Labor Department reported that labor productivity increased an anemic 1 percent annual rate in the first quarter. At the same time unit labor costs increased by 1.8 percent in the first quarter. More ominous is the fact that over the past year, while productivity has edged up just 1 percent, unit labor costs increase by 2.2 percent. This has been a developing concern on the inflation front. Productivity has slowed, and unit labor costs have accelerated. While some believe a structural shift toward slower producitivity growth is occurring, I think this conclusion is premature.
The economy has slowed rather rapidly over the past year, due to the housing slump, and this slowdown in output has the effect of slowing down productivity in a cyclical sense, since output falls faster than employers can adjust labor. By bet is that when the economy picks up in the second half of the year, productivity will also accelerate.
The good news is that manufacturing producutivity continues to be strong, rising by 3.5 percent over the past year, while unit labor costs have fallen 0.4 percent, showing that core inflation within the manufacturing sector continues to be restrained.
Finally last Friday, the Commerce Department reported on U.S. International Trade in April. The Commerce Department reported that the nation’s trade deficit improved from $62.4 billion in March to $58.5 billion in April. Marking a $3.9 billion improvement in April, this was the largest reduction in our nation’s trade deficit in six months. While this is welcomed news, the trade deficit did not improve because of rising exports, which were essentially unchanged in April, but rather from a $3.6 billion drop in imports.
The driving force behind drop in imports in April was a correction in pharmaceutical preparations from a surge in March. After increasing 1.6 billion in March, the largest monthly increase in more than four years, imports of pharmaceuticals dropped by $1.2 billion in April, accounting for a third of the overall decline in imports for the month. Elsewhere, declining imports of other consumer products as well as automotive products signal that the recent rise in gasoline prices, caused by domestic supply disruptions, is having a dampening effect on consumer spending.
The good news in the report is that a more-realistic value of the dollar is making U.S. products more competitive. Over the past 12 months, goods exports have increased by 7 percent in real, inflation adjusted, terms. This is more than 3-times faster than 1.9 percent rise in goods imports. Through the first four month of 2007, the trade deficit with the European Union has shrunk an incredible 20 percent compared to the first four month of 2006. This validates the NAM’s long-held position that currency rates matter, and that a more realistic value of the dollar would pay dividends for U.S. manufacturers.