Labor Participation Rate Is the Real Story
Saturday, May 05, 2012
The dilemma about QE3 continues, especially with mixed economic data that is hardly an excuse to start the printing presses, and several Federal Reserve officials expressed reluctance to buy more assets to help the economy.
More asset purchases “is something that should be held in reserve for circumstances that I think are a bit different than those we see today,” Atlanta Fed President Dennis Lockhart said in an interview on the CNBC business news cable channel.
The issue here is that the Fed’s balance sheet expansion has not accomplished much, and has turned into a pretend game of academic prowess without measurable results.
U.S. Economics: Personal spending increased 0.3% and personal income grew by 0.4%, both within expectations. Manufacturing expanded at a slightly faster pace in April, according to the ISM index, which climbed to 54.8 last month from 53.4 in March, reducing the odds of further monetary easing. Vehicle sales were flat from last month at 14.4 million units and the question is whether the sector’s growth is sustainable. Adding to the mixed economic picture, factory orders dropped 1.5%, the biggest decline in three years. The Institute for Supply Management said its services sector index in April dropped to 53.5 from 56.0 in March to mark the worst reading since November 2011.
Outlays for construction projects rose a slight 0.1% in March, according to the Commerce Department, and while it was the first increase in construction spending in three months, the gain was well below analysts' expectations of a 0.5% rise. Another sign of weakness was that February construction spending was revised down to show a 1.4% decline from the previous estimate of a 1.1% drop.
U.S. productivity fell 0.5% in the first quarter, which was better than the forecast for a 1.0% drop. The amount of goods and services produced, known as real output, grew at an annual rate of 2.7%, and hours worked rose 3.2%. Hourly compensation, adjusted for inflation fell 0.9%. Unit-labor costs climbed 2.0%, but lower than the previous quarter reading of 2.7%.
The unemployment rate continued to contract, and the descent to the current 8.1% is only possible due to the ever shrinking labor force participation rate which dropped 0.2% to 63.6%, the lowest since December 1981. Beyond that, there’s not much else worth observing unless one is a political operative.
Global Economics: Eurozone’s inflation slowed to 2.6%, and German retail sales saw the first increase in five months growing by 0.8%, but within a weak environment. The Spanish economy contracted 0.3% in the first quarter of 2012, the second straight quarter of economic decline, and officially putting the economy into recession.
The official purchasing managers’ index for manufacturing in China rose to a one-year high of 53.3 in April from 53.1 in March. It was also China’s fifth-straight month above the 50 level, which signals an expansion of activity, although few people are buying it. Australia lowered its official cash rate by 50 basis points to 3.75%, in an effort to support the Australian economy, which the Reserve Bank of Australia said was growing at a slower than expected rate, and contradicting China’s expansion.
The Eurozone’s final manufacturing PMI was 45.9, the lowest reading since August 2009, and German unemployment increased by 19,000, the first increase in seven months. The Eurozone’s unemployment rate rose by 0.1% to 10.9%, an euro era record. The ECB kept interest rates unchanged as expected, but it won’t be long before the sacred 1% barrier will be broken.
Market Trends: By week’s end, the markets turned negative once again, with the long-term picture turning neutral. The dollar bounced and turned positive, aided by the reduced conviction that the Fed’s QE3 will materialize. The euro lost its appeal and turned negative, while the yen’s positive trend continues to defy the BOJ’s preference for a weaker currency. WTI and Brent oil continue to display weakness driven by the lack of economic growth and stronger dollar. Gold and silver continue to trade in a range while the safety appeal continues to erode, posing a real danger that many retail investors will feel duped and start dumping. Copper bounced slightly within a weak trend. The 10-year Treasury offered a lower 1.88% rate as compared to last week’s 1.93%, and U.S. Treasuries continue their price appreciation unabated, even as the the bond bubble continues to capture the imagination of some commentators.