Week In Review: Jobless Numbers Are Mildly Encouraging

Vanguard January 11, 2011

The overall trend in employment continues to be somewhat positive. The U.S. unemployment rate fell from 9.8% to 9.4%. But the government’s monthly jobs report included a mixed bag of other data indicating the economy’s job creation engine is still not operating at full throttle. Construction spending and factory orders rose a bit more than expected, and manufacturing and service activity continued to expand at a healthy clip. For the week ended January 7, the S&P 500 Index rose 1.1%, to 1,272. The yield of the 10-year U.S. Treasury note ended the week up 4 basis points at 3.34%.

The U.S. jobless rate fell more than expected, from 9.8% in November to 9.4% in December, according to the U.S. Department of Labor. Payrolls grew by 103,000 for the month. This figure was below expectations, which had risen earlier in the week after the widely followed report from payroll services firm ADP indicated private employers added nearly 300,000 jobs, a number far higher than expected. On a positive note, the unexpectedly low payroll number from November’s Labor Department report was revised upward to 71,000, from 39,000.

Looking back over 2010, the employment trend has been mildly positive. For 2010, the economy created an average of 94,000 jobs each month overall, 112,000 per month in the private sector. The fourth-quarter average was 92,000 total and 135,000 private per month—numbers that are still below what is needed to keep pace with the growing population and also absorb unemployed workers.

"On the one hand, the drop in the unemployment rate is probably overstated because about half of the decline is simply because of people leaving the workforce," said Vanguard economist Roger Aliaga-Díaz. "On the other hand, in spite of the still-weak reading for monthly payroll growth in December, there's a clear positive trend in the more reliable three-month trailing average. In fact, our own analysis is showing that, for the first time since the beginning of the recession, there’s a significant tilt in our projections toward faster-than-expected job growth—specifically 200,000 jobs or more created per month—for the second half of the year."

Construction spending rose 0.4% in November, better than expected, but still 6% below the November 2009 level. The 12-month decline was driven by a fall in private construction spending during the period. Public construction, which has staged a modest recovery since the start of last year, recorded a 0.7% uptick in November. Private residential construction (+0.7%) posted a moderate gain for November, but private nonresidential construction spending recorded a slight decrease. Private nonresidential construction has remained level over three months, indicating a possible bottoming.

U.S. manufacturing continued to expand, as the Institute for Supply Management (ISM) manufacturing index registered 57.0 for December, up from 56.6 in November and its highest level since May. (Numbers over 50 indicate expansion of activity.) New orders rose by 4.3 points to 60.9, according to the ISM survey. There was one noticeable disappointment: The employment index fell from 57.5 in November to 55.7 in December.

Meanwhile, the ISM nonmanufacturing index, which measures activity in the services sector, showed growing momentum. The December reading of 57.1 was higher than expected, up from November’s 55. The number marks the fourth consecutive gain and puts the index at its highest level since mid-2006. But as with the manufacturing data, the employment index went in the opposite direction, falling from 52.7 in November to 50.5 for December.

Overall, the two surveys indicate the economy is regaining the momentum it lost in the summer.

After dipping in October, factory orders rebounded 0.7% in November, more than double the expected 0.3% rise. The dip in October was also revised upward. The data in the report indicates the manufacturing recovery remains solidly in place. Perhaps most noticeable was the figure for durable-goods orders, which was revised upward to –0.3% from the –1.3% figure announced several weeks ago. Excluding transportation, in which civilian and defense aircraft numbers were down, orders were up 2.4% for November.

Consumer borrowing rose $1.3 billion in November, according to the Federal Reserve. The increase, representing an annualized rise of 0.7%, was only the second uptick in total credit for 2010. Revisions shifted all of September's gains to October. Nonrevolving credit, such as car loans and student loans, rose $5.6 billion. On the other side of the scale and continuing a trend that dates back to autumn 2008, revolving credit card debt declined $4.2 billion in November, an annualized rate of –6.1%, the mildest decline since June. The consumer credit report is considered a gauge of consumer activity even though it doesn't include real estate-secured loans such as home mortgages.

Next week will feature the Federal Reserve's Beige Book report on Wednesday, followed on Thursday with the Producer Price Index and a trade deficit reading. A busy Friday brings updates on the Consumer Price Index, industrial production, retail sales, business inventories, and consumer sentiment.

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5% to 5.5%, the increase is 50 basis points.

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Week In Review: Jobless Numbers Are Mildly Encouraging

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