US Services Sector Maintains Strong Activity for 3rd Straight Month

The services sector expanded at the same brisk pace in May, the same strong growth seen in April and March. The ISM Non-Manufacturing index posted a third straight month with a reading of 55.4, and posted its 5th month of expansion. The ISM non-manufacturing index makes up almost 90% of the economy.

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The pace of expansion is a good sign for steady economic growth and the internals of the report show solid business activity (61.1), new orders (57.1), backlogs (56.0), and employment moved into positive territory (50.4) for the first time during the recovery inching above the 50 level separating expansion from contraction. The US economy has begun to create jobs which will help to add to gains in incomes, leading to higher consumer spending, an important element to the sustainability of the recovery once government stimulus measures wane.

Jobless Claims Fall for Second Week

Speaking of the labor market, we had two reports come out this morning. The number of Americans filing first time claims for jobless benefits fell by 10K to 453K.

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That figure was close to expectations and puts jobless claims in the middle of the range we have seen over the past three months. It was the second week in a row that claims declined. As we have seen the economy adding jobs in the past few months, it seems that this level - around 450K - is consistent with job growth, but is still at an elevated level.

The number of people continuing to claim benefits rose by 31K to 4.67 million. That doesn't include the 5.4 million people receiving extended benefits.

ADP Employment Change Shows Modest Gains

A measure of private sector employment showed a gain of 55K for the month of May, in line with expectations, but a slower pace than the upwardly revised 65K seen in April (originally reported as 32K). It's the 4th consecutive monthly gain, and shows that while jobs are being created the slow pace is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.

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Taking a look at a breakdown of the ADP release we see that the goods-producing sector was down 23K (led by a decline in small companies), while services added 78K private jobs (led by increases in small and medium sized firms). Of the goods producing sector, manufacturing did see an increase of 15K jobs.

Tomorrow's non-farm payroll report is expected to show an increase in jobs of over half a million, though many of those will be temporary government Census jobs. Therefore, the important factor to look out for will be the number of private sector jobs that are created. Still, such a big headline figure will mean extra income in the pockets of households and hopefully - for the sustainability of the recovery - will mean an increase in consumer spending.

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Here's a look at the change in non-farm payrolls over the past two years. As we can see following a long period of decelerating job losses, the past two months have seen the economy adding more than 200K jobs. Tomorrow's figure will reinforce the upward trend.

Labor Productivity for 1st Quarter Revised Lower in Final Version

In a third release from the labor market, we had the final version figures for labor productivity in the 1st quarter. The preliminary estimate of a 3.6% increase in productivity was revised down to a 2.8% increase. The figure suggests that firms may be reaching the limit of how much extra input they can get out of fewer workers, which should lead to more hiring. Labor costs were down 1.3% in the final version, an upward revision from the 1.6% drop originally estimated.

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As we can see from the charts accompanying the release productivity has seen a strong run the past 4 quarters as firms looked to cut costs by cutting staff while trying to squeeze extra output from the remaining workforce. If that trend in productivity is slowing and the economic recovery continues along it would lead to firms hiring more staff.

Factory Orders Miss Forecasts in April, But Still Up 1.2%

Factory orders rose 1.2% in April to $420.1B, which was lower than expectations of a 1.8% increase, and lower than the rise we saw in March of 1.7%.

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Unfilled orders rose increased by $3.4B or 0.4% to $801B. Orders including unfilled orders were up 3.1%, a strong sign for next month. Transportation orders were up 15.8%, and excluding them from the headline figure actually showed sales down 0.5%. Durable goods orders stuck close to the advance estimate of 2.9%, revised down slightly to an increase of 2.8%.

While the headline figure missed expectations, its still a second straight month of rather strong orders, though the transportation sector dominated.

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Looking at the annual change of new orders and shipments we see the V-shaped (or maybe U-shaped) recovery in manufacturing. The manufacturing sector has spearheaded the US recovery as inventory rebuilding boosted output in late 2009. The ISM manufacturing index showed a strong reading for the May period (59.7) implying the momentum in the sector remains.

What does this week's data say for the US recovery?

The data this week has been solid, though the pace of recovery no longer seems to be accelerating. The ISM manufacturing index dipped back below 60, but remained firm at 59.7. Today's services data showed activity steady at a solid 55.4. Yesterday we saw strong car sales and pending home sales. However there was some softness in department store sales.

The labor picture will become more clearer following tomorrow's non-farm payroll release. While jobless claims stay within a range other indicators were positive. Today's services PMI data showed the employment sub-gauge move into expansion for the first time in 28 months. The Challenger Job Cuts index showed firms layoffs were down 65% compared to a year ago. The Monster index, an online employment index, edged up to 134 from 133. The ADP index showed a 4th straight month of modest job gains. Government jobs or not, tomorrow non-farm payroll report will be positive for the US economy, as it is forecast to show a 500K+ gain.

If the problems in financial markets due to the Euro-zone sovereign debt crisis recedes and we begin to look at fundamentals again, it seems clear that the US economic recovery will outpace that of Europe.