Recent developments have highlighted why some expect the road to recovery to be a bumpy and tough slog. During the month of May, equities plunged nearly 10 percent, the 10-year treasury yield fell 41 basis points, and oil prices tumbled down $12 to roughly $74 per barrel. Many of the fluctuations have been linked in the press to euro-zone-debt strife and worries over the strength of the global recovery.
Domestically, there have been some downside surprises as well. Notably, while headline nonfarm payrolls jumped up 431,000 in May, that was almost entirely on a 411,000 boost from temporary Census employment. Private payrolls inched up just 41,000 in May, compared to an average gain of 146,000 over the prior three months. Also, while the much watched unemployment rate edged down from 9.9 percent to 9.7 percent, a less noisy barometer of labor market conditions—the employment-to-population ratio—retrenched in May, slipping back 0.2 percentage point to 58.7 percent. Also to the downside, first-quarter real GDP was revised down by 0.2 percentage point to an annualized gain of 3.0 percent, surprising expectations of an upward adjustment. Real consumption expenditures, which increased at an annualized rate of 3.5 percent in the first quarter, started off the second quarter flat.
This is not to say that all indicators are pointing toward a bleaker future. Total construction spending surged in April, rising 2.7 percent, its largest monthly gain since August 2000. Manufacturing output has been increasing rapidly, jumping up 1.0 percent in three of the last four months, pushing up its 12-month growth rate to 6.0 percent (its highest level since April 2000). Also, all the major housing series have posted sizeable gains lately, though it is unclear whether that trend will continue after the first-time home-buyer tax credit has expired.
Measures of retail prices are still pointing toward a disinflationary process, as the core CPI (excluding food and energy) is up just 0.9 percent over the past 12 months, its slowest growth rate since the early 1960’s. Moreover, measures of underlying inflation trends produced by the Federal Reserve Bank of Cleveland, the median CPI and 16 percent trimmed-mean CPI—at a 12-month growth rate of 0.5 percent and 0.9 percent, respectively—are at series lows. Looking forward, high unemployment rates and plummeting unit labor costs (down 4.2 percent on a year-over-year basis) are suggestive of a continued “subdued” inflation trend.
All told, the data still point toward a burgeoning recovery, though that path may be full of dips and potholes.

  [2010-06-04]  

A more pessimistic tone was apparent in the most recent FOMC statement. The statement noted weakness in nonresidential construction investment, payrolls, and housing starts, while conditions in Europe have deteriorated noticeably. Bank lending has also continued to decline, and inflation and inflation expectations have trended downward. Unsurprisingly, the target fed funds rate range remained at the zero bound. On June 14, the first Term Deposit Facility auction was met with great demand, drawing a bid-to-cover ratio of over 6. These small-scale operations will continue through the summer. The balance sheet has crested, and more of the nontraditional lending facilities have expired. Most of the outstanding balances for the lending facilities have fallen to zero, with the majority of the outstanding lending attributable to the Term Asset-Backed Securities Loan Facility (TALF). Central bank liquidity swap lines have been used lightly since their reinstatement, and currently only a little more than $1 billion is outstanding. A large part of that balance has been received by the European Central Bank.   [2010-06-29]  

The yield curve has become less steep in the month of May as long-term Treasury rates dip. Some of this drop in rates can be attributed to investor concerns about euro-zone growth and credit risk, which has led to a flight from euro-denominated assets into dollar-denominated assets. Wariness about Europe is also manifesting itself in rising LIBOR-OIS spreads, which measure the perceived riskiness of interbank loans. Mortgage rates have fallen this month, but first-quarter data on mortgage origination shows that mortgage loans themselves may show volume decreases going forward, possibly due to the waning effects of fiscal and monetary stimulus on this particular market. Bank lending has been roughly flat, and FDIC data shows that banks earned roughly $9 billion more in net interest income in the first quarter than in the fourth quarter. The volume of net charge-offs also fell for the first time since the first quarter of 2007.  [2010-06-01]  

According to the second estimate, GDP grew at a 3 percent annualized rate in the first quarter of 2010. This is substantially lower than the 5.6 percent rate recorded in the fourth quarter of 2009. The main reason behind this drop is the inventory cycle: The contribution of inventories was 1.65 percentage points, much smaller than the 3.8 percentage point contribution in the fourth quarter of 2009. When inventories are taken out of the mix, final sales of gross domestic product rose at a 1.4 percent annualized growth rate, only slightly less than the 1.7 percent rate posted in the fourth quarter of 2009.
Within final sales, GDP received a large boost from consumption, which contributed 2.4 percentage points. The contributions of the other components of GDP were smaller, with nonresidential investment contributing positively, and residential investment, government expenditures, and net exports all contributing negatively. On the income side, the annualized growth rates of compensation of employees, proprietors’ income and corporate profits were 3.6, 2.3, and 24 percentage points, respectively—corporate profits posted their fifth consecutive quarterly increase. Industrial production jumped up at an annualized rate of 10.0 percent in April. Single-family housing starts rose by 10.2 percent in April— increases were seen in all regions of the U.S. except for the West. While permits for single-family housing starts dropped 10.7 percent in April, they are still up 22 percent year-over-year.

  [2010-06-04]  

After a brief period of resurgence, the housing market showed signs of weakening once again. Existing single-family home sales fell by 1.6 percent in May. New single-family home sales were down an alarming 32.7 percent, and single-family housing starts were down 17.2 percent. The expiration of the home buyer’s tax credit is likely responsible for the reversal in the housing market.
Retail sales fell by 1.7 percent. However, when price effects are mitigated by removing autos, building supplies, and gasoline, the remaining “core” series was roughly flat.
Finally, the news media have picked up more on the budget crises faced by many state and local governments. Over the past year, the number of state and local government employees has been shrinking. The 1 percent contraction in that number is the largest decline within a two-year period since 1980–82. Continued decline seems likely, as state and local budgets begin to really feel the pinch in the next year. State and local government capital investment has also fallen sharply recently. Taken as a whole, the state and local government sector could be a drag on the recovery.  [2010-06-24]  

Labor market recovery in May continued to be subdued and modest, lagging the healing pace in other areas of the economy. While it’s been almost a year since many economic indicators flipped course from contraction to growth, the job market has been comparatively slow to respond. The most recent report on the employment situation showed that payrolls expanded by a less-than-expected 431,000 in May, due almost entirely to temporary Census hiring. Total private payrolls increased only a negligible 41,000, compared to gains averaging 146,000 over the prior three months.
Though the unemployment rate managed to edge down 0.2 percentage point to 9.7 percent, this occurred as 322,000 people left the labor force. The number of unemployed “re-entrants” to the labor force—previously regarded as a source of optimism in April’s report in terms of unemployment rate forecasting—reversed its gains in May as re-entrants declined by 286,000. Typically as a job market improves following a recession, it is taken as a positive sign when people perceive improving job prospects and re-enter the labor force. But labor force participation took a step backward in May, sagging from 65.2 to 65.0 percent, as did the employment-to-population ratio, which slipped to 58.7 percent. The number of long-term unemployed (those unemployed 27 weeks or more) was essentially unchanged at 6.8 million, still comprising a record 46 percent of those unemployed.
So far in this recovery, one factor likely holding job growth down has been soaring productivity, which has allowed employers to expand and increase profitability without hiring additional workers. However, annualized productivity growth in the first quarter slowed steeply from 6.3 percent to a more “normal” growth rate of 2.8 percent. This could prove a positive indicator for hiring in coming months, as employers reach the limits of how much they can expand without adding jobs.   [2010-06-07]