Job gains exceed expectations
Employment outlook improves – A strong jobs report, expansion in the manufacturing and service sectors, and gains in construction spending and exports point to a rebound in the second quarter. For the week ended July 3, 2014, the S&P 500 Index was up 1.2% to 1,985 (for a year-to-date total return—including price change plus dividends—of about 8%). The yield on the 10-year U.S. Treasury note was up 11 basis points for the week to 2.65%, for a year-to-date decrease of 39 basis points).
The U.S. economy added 288,000 jobs in June, ahead of consensus estimates of 210,000 new jobs. At the same time, employment gains in April and May were revised upward by about 29,000. The unemployment rate declined from 6.3% to 6.1% in June, a new post-recession low. The number of unemployed decreased by 325,000 to 9.5 million. Compared with a year ago, the unemployment rate was down from 7.5% and the number of unemployed declined by 2.3 million.
Job gains were widespread across economic sectors, led by professional and business services (67,000), retail trade (40,000), food services and drinking places (33,000), and health care (21,000). In June, the average hourly earnings climbed six cents to $24.45. Over the past year, hourly wages have risen by 2.0%.
The labor force participation rate was 62.8% for the third consecutive month. There were 676,000 discouraged workers: unemployed people who have stopped looking for a job because they don’t think they can find one. The number of discouraged workers fell by 21,000 from May and is down by 351,000 from a year earlier.
“As the strengthening of the labor market continues with a strong June jobs report as well as positive upward revisions for May and April, new job creation is averaging 231,000 per month this year—the highest since the recovery began,” said Vanguard economic analyst Vytas Maciulis. “However, wage growth remains lackluster despite the increased hiring. The Fed will be monitoring changes in wage growth while making decisions on monetary policy.”
U.S. unemployment
Construction spending increases slightly
Spending on construction projects increased 0.1% in May, lower than expected, following an upwardly revised increase of 0.8% in April. State and local government and private nonresidential construction projects contributed most to the gain, as more highways and power and utility structures were built. Private residential construction (–1.5%) dragged down the overall result as spending on both single-family and multifamily homes declined. Consumers also spent less on home improvements. Still, construction activity is slowly recovering from the harsh winter, which stunted many projects across the country. Year-over-year, construction outlays jumped 6.6% from May 2013.
Manufacturing, service sectors expand, but below expectations
The Institute for Supply Management’s manufacturing index slid 0.1 percentage point to 55.3 in June. Although the index fell short of consensus estimates, it remained above 50, which indicates an expansion. The new orders index rose 2% to 58.9, its highest level this year. The production index fell slightly but remained strong at 60.0. Trade figures were a bit weaker as imports rose and exports declined. Employment and inventory levels were flat. Analysts’ outlook for manufacturing is improving as they are seeing an uptick in business investments and production levels remain elevated.
The ISM nonmanufacturing index, a gauge of service-sector trends, slipped from 56.3 to 56 in June. Despite the index’s weaker-than-expected result, analysts view the service sector reading as solid because it remained above the expansionary threshold of 50. The new orders index climbed 0.7 percentage points higher to 61.2% in May. The employment index also gained 2 percentage points to 54.4%, consistent with the job gains reported in the monthly employment data. Of the 18 industries included in this report, 14 reported expansions in June, a sign that business and economic conditions are improving.
Factory orders slip
After three months of gains, factory orders fell unexpectedly by 0.5% to $497.7 billion in May. The decline was primarily driven by the volatile defense sector, which dropped 30.8% last month, after rising 38.3% in April. Despite the weakness in factory orders, analysts were encouraged by the 0.2% increase in nondefense orders in May. Orders for long-lasting manufactured goods fell 0.9%, but shipments of these durable goods increased 0.3% in May for the fourth consecutive month. Overall, factory orders are up 2.5% from a year ago.
U.S. trade deficit narrows
The U.S. trade deficit shrank 5.6% to $44.4 billion in May from a revised $47.0 billion in April. Exports rose 1% to $195.5 billion in May, the highest level on record. The jump in exports reflected more sales of autos and other consumer goods. Imports decreased 0.3% to $239.8 billion during the month largely because of lower consumer demand for petroleum products. Excluding petroleum, imports increased to a record level as the United States purchased more cars, industrial machines, and drilling equipment. In general, the narrowing of the trade deficit is expected to help the U.S. economy following its contraction in the first quarter of 2014.
The economic week ahead
Next week’s economic reports include consumer credit on Tuesday and the Federal Open Market Committee’s June meeting minutes released on Wednesday.
Source: The Vanguard Group Inc.