Manufacturing is in contraction

Two important regional manufacturing indices this week reported contractions in manufacturing.
For the first time since November 2010, Empire State Index that was released by the New York Fed fell nearly 20 points in the June reading to minus 7.79 in what the report describes as a "steep" decline. New orders fell nearly 21 points to minus 3.61. Shipments are even worse, down nearly 35 points to minus 8.02.

Philly Fed survey echoed the Empire State survey. Philly Fed general business conditions index came in at minus 7.7 for the first negative reading since September 2010.  New orders are minus 7.6 with unfilled orders at minus 16.3. Shipments and employment both rose in the month but at a slower rate.  Declines in orders are likely to point to slowdowns, if not contractions, in shipment and employment.

Business sentiments deteriorated quickly. The six-month outlook as what were once expectations for very solid growth are now turning into expectations for only marginal growth. Much cited in recent weak economic data reports has been Japanese supply effects. However. transportation equipment, where Japan effects is the most pronounced is not a dominant industry in either the Mid-Atlantic or New York regions. This week's two reports raise the risk of contraction for the ISM's national report on manufacturing to be posted at the beginning of July.  

Another negative is a big decline in the six-month outlook as what were once expectations for very solid growth are now turning into expectations for only marginal growth. Japanese supply effects may be at play to some extent but transportation equipment is not a dominant industry in either the Mid-Atlantic or New York regions. This week's two reports raise the risk of contraction for the ISM's national report on manufacturing to be posted at the beginning of July. 

CPI figures mean no more QE3?

The consumer price index in May grew at a 0.2 percent rate. The core CPI, that excludes energy and food prices, jumped 0.3 percent. Both measures were worse than analysts and expected. Year-on-year, inflation worsened to 3.4 percent (seasonally adjusted) from 3.1 percent in April. The core rate bumped up to 1.5 percent from 1.3 percent in April on a year-ago basis.

Although energy prices came down 1.0 percent, following a string of strong gains including 2.2 percent in April, food prices rose 0.4 percent, matching the boost in April.

There are signs that  inflation in agricultural products and energy may have been passed along to products. Apparel, shelter, new vehicles, and recreation all contributed to the acceleration in the core CPI, rising more in May than in April.

One of the two primary goals of the Federal Reserves is to maintain price stability and full employment. With the year-over-year core CPI so close to the Taylor rule of "2%", does it mean we can pretty much sweep QE3 underneath the rug?

A Dismal Job Report

In the last 2 days, one question that lingered in market participants' minds has been whether the market has priced in a poor job report schedule today following an anemic ADP private payrolls report on Wednesday. The market gave a resounding answer this morning,  "NO. Not this much." The market opened down with triple-digit loss again in the Dow Jones Index with a dismal Employment Situation Report.

Nonfarm payroll employment in May grew a modest 54,000, following a revised 232,000 jump in April and a 194,000 increase in March, far lower than analysts' revised forecast for a 170,000 expansion.  Private nonfarm payrolls advanced 83,000 in May, following a 251,000 increase in April, also far lower than the median forecast of a 180,000.

From Wall Street Journal,

Sluggishness in payroll jobs was broad based...................................

Goods-producing jobs edged up 3,000, following a 38,000 rise in April. Manufacturing jobs dipped 5,000 after a 24,000 advance the month before. However, construction nudged up 2,000 after a 5,000 increase in April. Mining gained 7,000, following an 11,000 boost in April.

Private service-providing jobs slowed to an increase of 80,000 after a 213,000 jump the prior month. There was not much to write home about as the biggest component gain was for professional & business services with a 44,000 increase in May. Health care rose 17,400 for the latest month. On the down side, retail trade fell 8,500 while leisure & hospitality dipped 6,000.

Government jobs contracted 29,000, following a 19,000 dip in April. This latest decrease was largely local government, led down by local government education.

On a positive note, wage growth improved in May as average hourly earnings rose 0.3 percent, following a 0.1 percent uptick in April. May's number topped the median forecast for a 0.2 percent increase. The average workweek for all workers in May held steady at 34.4 hours.

On a year-ago basis, overall payroll jobs in May eased to 0.7 percent, down from a 1.0 percent pace the month before.

Turning to the household survey, the unemployment rate nudged up to 9.1 percent from 9.0 percent in April. Household employment actually rose 105,000 for the month but was outpaced by a 272,000 gain in the labor force.

The big question is whether the May numbers are a temporary soft spot or a new trend.

ISM Data Shows Significant Slowdown

From Wall Street Journal

Monthly growth slowed very significantly in the manufacturing sector during May, according to the Institute For Supply Management whose headline composite dropped 6.9 points to a much lower-than-expected 53.5. Importantly, new orders slowed a very significant 10.7 points to 51.0, still over 50 to indicate growth compared to April but well under April to indicate a much slower rate of growth. Manufacturers drew heavily on backlog orders which fell 10.5 points to 50.5.

Other readings show a significant slowing in production, a moderate slowing in hiring, and decreasing delays in delivery times that are consistent with slowing conditions. Inventories interestingly contracted in the month, suggesting that manufacturers were quick to keep levels down given slowing demand. It also perhaps reflects supply shortages tied to Japan.

The ISM manufacturing index (formerly known as the NAPM Survey) is constructed so that any level at 50 or above signifies growth in the manufacturing sector. A level above 43 or so, but below 50, indicates that the U.S. economy is still growing even though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession.

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ADP Data Confirms a Slowdown?

A 2% loss day of the Dow Jones Index coincided with disappointing ADP and ISM data. ADP estimates private payrolls rose only 38,000 in May which is far below expectations for 210,000. The ADP national employment report is computed from a subset of ADP records that in the last six months of 2008, represented approximately 400,000 U.S. business clients and approximately 24 million U.S. employees working in all private industrial sectors. The data are collected for pay periods that can be interpolated to include the week of the 12th of each month, and processed with statistical methodologies similar to those used by the U.S. Bureau of Labor Statistics (BLS) to compute employment from its monthly survey of establishments. (Definition of Wall Street Journal)

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