FEDERAL RESERVE
`Jobless recovery’
It’s a commonly held view among the nation’s economists that the Federal Reserve can’t raise interest rates, which are at a 40-year low, until there is significant improvement in the labor market.
So far, the jobs situation remains dicey, with joblessness at its highest level in more than a half-dozen years. Companies are hiring, but at a subdued level.
Last week, a member of the Fed muddied the waters with suggestions that the current situation could point to a “jobless recovery,” prompting gloomsayers to express concerns the economy may slip back toward recession.
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That brings us to Friday’s May employment report. Economist Lynn Reaser is looking for joblessness to remain unchanged, at 6 percent, while payrolls grow by 70,000 positions, after a gain of 43,000 in April.
“This would mark the second month in a row of expanding payrolls, and that is a very important barometer of an economic turning point,” said Reaser, of Banc of America Capital Markets in St. Louis.
She said a few more months of payroll gains will set minds at ease about the durability of the rebound.
“This will not be a jobless recovery and, for corporations, it won’t be a profitless recovery, either,” said Reaser. “The economy isn’t in danger of falling back. On the other hand, because consumers have continued buying, the recovery won’t be spectacular. There simply isn’t as much pent-up demand as in past slowdowns.”
One favorable indicator, according to Reaser: “Productivity by workers is so strong that it suggests a higher growth trajectory for the economy in the months ahead.”
PURCHASERS’ SURVEY
Signs of strength
Those who believe the economy is regaining momentum point to manufacturing, which has been expanding for about four months. Another signpost appears Monday, with the May purchasing managers’ survey from the Institute for Supply Management.
Chicago economist Brian Wesbury expects it to show a jump to around 60, from 53.9 a month earlier. On Friday, a survey of the Chicago chapter of the group showed a leap to 60.8.
“We are seeing an economic recovery that is stronger than expected,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
He said the rapid rebound in manufacturing means that factories have been adding jobs for the first time in 22 months. In addition, Wesbury sees signs that businesses are adding to capital investment for the first time in more than a year.
“Many analysts have been projecting that gross domestic product would be quite weak during the current quarter,” Wesbury said. “But with manufacturing sending a strong signal of economic recovery, it appears that growth this quarter will be at a quite solid rate of 4 percent.”
If so, he said, members of the Fed will be forced to consider boosting rates sooner, not later.
CAR SALES
Slight slowing
Other reports due out include May car and light-truck sales, Monday, the month’s construction spending, also Monday, and April consumer credit, Friday.
Of the trio, watch car sales. Analysts are expecting a slight weakening from the domestic sales rate of 13.8 million units recorded in April. Add another 3 million or more units sold annually by foreign makers, and the auto industry remains on a roll. In fact, it’s still within hailing distance of record territory.
After Detroit went on a financing spree last fall that featured zero-percent loans, analysts were expecting the industry to cough and sputter. Instead, sales have continued to zoom, with no end in sight.
EQUITIES
Confidence gap
The stock market has temporarily lost its nerve, both from worrying about higher rates and a dollar that keeps weakening, causing foreigners to turn elsewhere.
Bannockburn investment manager Henry Van der Eb says investors are also concerned about a mass readjustment of corporate earnings, due in a few days from Standard & Poor’s Corp.
“This move means that S&P will start to recognize only core earnings, which exclude such special factors as profits gained on pension fund holdings,” said Van der Eb, of the Gabelli Mathers Fund. “Until now, these have commonly been included as operating earnings.”
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The net effect, he said, will be to cut corporate profits, as recognized by S&P, by about 36 percent.
“This comes at a time when investors already have become quite skeptical of accountants and lawyers,” Van der Eb said. “For the economy as a whole, consumer confidence is high, but investor confidence remains quite low.”