Bloomberg | Jul 1, 2010
Reports on U.S. manufacturing, employment and home sales pointed to slower growth in the second half of the year; just as government spending to stimulate the economy begins to wane. The Institute for Supply Management’s manufacturing gauge fell more than forecast to 56.2 last month from 59.7 in May. A reading, greater than 50, points to expansion. Other data showed contracts to buy existing homes fell 30 percent in May, and claims for jobless benefits unexpectedly rose last week. Stocks and commodities slumped and Treasuries rose on signs the global economy is cooling after manufacturing weakened in Europe and China. The data underscore concerns of Federal Reserve policy makers that financial-market turmoil sparked by Europe’s debt crisis threatens to inhibit a self-sustaining recovery in the U.S. “The U.S. recovery is set to have a bad start to the second half” of 2010, said David Semmens, an economist at Standard Chartered Bank in New York. The pace of growth “definitely poses concerns” and won’t improve “until the labor market picks up.” Economists at JPMorgan Chase & Co. today lowered forecasts for second- and third-quarter growth, reflecting the influence of the European debt crisis on stocks, confidence and exports. The economy grew at a 3.2 percent annual rate from April through June and will expand at a 3 percent pace the following three months, down from a prior estimate of 4 percent, Michael Feroli, JPMorgan’s chief U.S. economist in New York, said in a note to clients.
The Standard & Poor’s 500 Index fell to a nine-month low, losing 0.3 percent to close at 1,027.37 in New York. The 10-year Treasury yield rose 2 basis points to 2.95 percent. Manufacturing in the U.S. expanded in June at the slowest pace this year as factories received fewer orders and demand from abroad cooled, the report from the Tempe, Arizona-based ISM showed. The median forecast of economists surveyed by Bloomberg News was for a reading of 59. General Motors Co., the largest U.S. automaker, said U.S. sales in June rose 11 percent from last year, trailing the median forecast of a 16 percent gain. GM’s results show the car market may be cooling as employment is slow to improve.
First-time filings for jobless benefits rose 13,000 last week to 472,000, the Labor Department said today. The number of people receiving unemployment insurance rose, while those getting emergency benefits dropped after Congress failed to act on extending the legislation. The number of contracts to purchase previously owned houses plunged 30 percent in May, more than twice as much as forecast, after a homebuyer tax credit expired, the National Association of Realtors said today. A separate report from the Commerce Department showed construction spending fell 0.2 percent in May the first decline in three months, as homebuilders cut back and work on factories and transportation structures decreased. In China, manufacturing growth slowed more than economists forecast, and a gauge of factory output in the 16-member euro region weakened for a second month, two surveys showed today.
Fed policy makers last week repeated a pledge to keep their benchmark interest rate low for “an extended period” after saying the situation in Europe represented a risk to the U.S. recovery. The Fed has left the overnight interbank lending rate target at a record low of zero to 0.25 percent since December 2008. “The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth,” Dennis Lockhart, president of the Fed bank of Atlanta, said yesterday in a speech in Baton Rouge, Louisiana. “Recent developments make me even more convinced that current policy is appropriate.” Central bankers are concerned that persistent unemployment may reduce the pace of recovery. The Labor Department will report tomorrow that unemployment rose to 9.8 percent in June from 9.7 percent in May, according to the median forecast of economists in a Bloomberg survey. The U.S. lost 125,000 jobs last month, reflecting a reduction in the number of temporary federal workers helping conduct the decennial census. Excluding government, private employers probably added 110,000 jobs.
Recession and Jobs
The economy has lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-World War II era. From January through May, company payrolls grew by 495,000 workers. Manufacturing has led the recovery as companies rebuild inventories and invest in new equipment. Factories have added 126,000 workers during the first five months of this year, matching the most successive gains since 2006, according to the Labor Department. “This economic recovery is very uneven, with manufacturing expanding but housing weaker than just about anybody thought,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The labor market is so far behind the curve that it’s going to limit the expansion.”
Global sales may cool as the European debt crisis reduces demand and a stronger dollar makes U.S. goods more expensive abroad. Further manufacturing gains also depend on sustained domestic demand fueled by improvement in employment and incomes. Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in an interview June 23 in a reference to the Moline, Illinois-based manufacturer’s agricultural business. “We do believe the recovery is under way,” Allen said. “We do believe it is moving slowly. We do believe it is on stable ground at this time.”