Why I’m Not Happy The Unemployment Rate Has Fallen

A look through last week's economic data and news

   

It’s Monday and that means it’s time to review last week’s  economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here.

Let’s take a look at last week’s big headlines:

#1—Consumers See The Glass Half Full

In July the Conference Board’s consumer confidence index slid to a reading of 80.3. This came in below the consensus forecast of 81.1. Meanwhile, the June reading was revised upward from 81.4 to 82.1. The dip in July coincided with drop in consumer’s outlook for the economy. The future expectations index fell from 91.1 to 84.7. Meanwhile, the present conditions index climbed from 68.7 to 73.6. Despite the headline drop, the details of this report were quite positive. For one, the present conditions index is now near a five-year high. And more Americans are reporting that jobs are plentiful (the number rose to 12.2%—also a five-year high). More Americans plan to buy homes, cars and appliances, so this bodes well for consumer spending in the long run.

#2—The GDP-Fed Balancing Act Continues

The U.S. economy grew at an annual rate of 1.7% in the second quarter. This outpaced economists’ estimates of 1% GDP growth. This time around, federal spending declined 1.5%, but that was a smaller drop than what we’ve seen in past quarters. U.S. trade also had a positive impact on growth: Exports rebounded 5.4%, a significant comeback from the previous quarter.

Higher inventories, residential investment and personal consumption also made positive contributions to second-quarter GDP. At the same time, the Commerce Department revised its first-quarter estimate down to reflect just 1.1% GDP growth. There’s no doubt that we would have liked to have seen faster growth—after all, it takes a 2% annual rate to make the unemployment rate decline. But the silver lining to this is that the Fed will need to keep its money pump on for the foreseeable future.

#3—Layoff Activity Hits Six-Year Low

Jobless claims fell to 326,000. This was an unexpectedly strong report; economists had expected jobless claims to tick up to 345,000. With this report, the four-week unemployment average fell 4,500 to 341,250. Initial claims for unemployment are now at a six-year low. The number reflects the underlying downward trend that has been building in layoff numbers. Considering that July payrolls ended up being weaker than expected, (more on this later), this is somewhat of a consolation.

#4—Home Builders Take A Breather

In July, construction spending fell 0.6%, more than expected. Economists had expected spending to fall to just 0.3%. What really weighed on spending last month was a 1.5% drop in government spending to an annual rate of $261.1 billion. This is the lowest level of activity in nearly seven years. Meanwhile, nonresidential construction declined 0.9%—this is the first time in four months that spending in this category has fallen. Housing construction remained flat. The headline wasn’t pretty, but after the spike we saw in May, a pullback is somewhat to be expected. Housing construction is still up 18.1% over the past twelve months, and with interest rates and borrowing costs staying low, the residential market should continue to be a bright spot for the economy.

#5—There’s More To 7.4% Unemployment Than Meets The Eye

In July, American businesses added just 162,000 payroll jobs. Analysts had expected 183,000 payroll jobs so this was weaker than expected. Further tainting the payroll report is that May and June payrolls were revised down by 26,000. The average workweek also declined slightly to 34.4 hours. Meanwhile, the workforce participation rate declined to 63.4%; it is now at a 34-year low.

The unemployment rate also declined to 7.4% in July, down from 7.6% in June. While the unemployment rate fell in July, it’s clearly due to the shrinking labor force. While ADP reported that 200,000 payroll jobs were created, the poor payroll report from the Labor Department will likely weigh on the Fed and prompt it to keep its money pump on.

#6—Summertime Factory Activity Heats Up

In June, orders placed at factories jumped 1.5% to $496.7 billion. Economists had forecast a 2.3% gain in orders. This renewed strength is attributable to a 3.9% rise in durable goods orders; demand for machinery, particularly oil and gas drilling equipment, surged last month. Meanwhile, orders for nondurable goods fell 0.6%. May factory orders were revised up to reflect 3.0% growth—up from the earlier estimate of 2.1% growth.

With this latest report, factory goods orders are now at a record high. This is good news for U.S. factories, which have been recovering in fits and starts over the past few years. In a separate release, the Institute for Supply Management also announced that manufacturing activity is now at rising at the fastest pace in two years.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/why-im-not-happy-the-unemployment-rate-has-fallen/.

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