By Timothy R. Homan
June 13 (Bloomberg) -- Factories kept churning out more goods last month, while prices and home construction fell, pointing to a manufacturing-led U.S. recovery that is not generating inflation, economists said before reports this week.
“It’s really a sweet spot in terms of continuing growth without inflation,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. “Manufacturing is still in pretty good shape.”
The need to replenish depleted inventories, growing sales overseas and business investment in new equipment are putting American factories at the forefront of the rebound from the worst recession since the 1930s. A lack of inflation means the Fed has scope to keep the target interest rate near zero in coming months to spur growth.
Manufacturers added 29,000 workers to payrolls in May, a fifth consecutive gain, the workweek lengthened and the average amount of overtime climbed to the highest level in two years, pointing to an acceleration on factory floors, data from the Labor Department showed earlier this month.
Factory Gains
Regional reports may show manufacturing kept driving the recovery this month. Factories in the New York Fed district expanded for an 11th month, a June 15 report will show, while data from the Philadelphia Fed two days later will say those in its area grew for a 10th month, according to economists surveyed.
Deere & Co., the world’s largest farm-equipment maker, said on its website last week that sales of utility tractors rose in the “double digits” in May, compared with a 6 percent increase for the industry overall.
Growing global demand for agricultural commodities, housing and infrastructure are driving sales, Samuel Allen, chief executive officer of the Moline, Illinois-based company, said last month in a statement. Deere last month raised earnings and sales forecasts for a second time this year after second-quarter profit top analysts’ estimates.
Manufacturing shares are outperforming the broader market. The Standard & Poor’s Supercomposite Machinery Index, which includes Deere and Peoria, Illinois-based Caterpillar Inc., is up 7 percent so far this year, compared with a 2.1 decline in the S&P 500 Index on growing concern that the European debt crisis will slow global growth.
Less Inflation
Three reports from the Labor Department this week will show the plunge in fuel prices precipitated by the turmoil in financial markets is tamping inflation.
The import-price index, due on June 15, dropped 1.3 percent in May, after an increase of 0.9 percent the prior month. The producer-price index, issued the following day, declined 0.5 percent after a 0.1 percent decrease in April, according to the survey median.
Consumer prices in May are forecast to drop 0.2 percent, after declining 0.1 percent the previous month, the survey median showed. Excluding food and fuel, the so-called core rate rose 0.1 percent after no change the previous month, economists projected.
The lack of inflation validates the Fed’s strategy to maintain the benchmark lending rates on overnight loans between banks near zero to spur growth. Their next decision on interest rates is due June 23.
Home Construction
One area that may not fare well in coming months is housing. Work began on 648,000 houses at an annual pace last month, down from a 672,000 rate in April, according to the median forecast of economists surveyed before Commerce Department figures June 16.
The end of a government tax credit at the end of the month will cool sales and construction in the second half of the year, economists said. The incentive for first-time homebuyers worth as much as $8,000, which was extended in November to include some current owners, required contracts be signed by April 30 and settled by June 30.
Finally, a report from the Conference Board, a New York- based research group, will show growth outlook brightened last month. The group’s index of leading economic indicators, due on June 17, increased 0.4 percent in May, according to economists surveyed. The measure had climbed for 12 consecutive months before declining 0.1 percent in April.
--With assistance from Chris Middleton in Washington and Greg Chang in San Francisco. Editors: Carlos Torres, Vince Golle
To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
(Updates with breakdown of aid request in third paragraph.)
By Roger Runningen
June 13 (Bloomberg) -- President Barack Obama is urging Congress to pass a jobs bill to avoid layoffs of teachers, firefighters and police and maintain the U.S. economic recovery.
“We cannot afford to slide backward,” Obama said in a letter to Congress yesterday. “We must take these emergency measures.”
Obama is supporting a measure pending in the Senate that also would increase taxes on buyout fund managers and take other steps to shore up the economy. He is requesting $23 billion for teachers and other public-service workers and $25 billion for additional federal Medicaid funding for the states, said Ken Baer, a spokesman for the Office of Management and budget.
The president cited strains on state budgets brought on by unemployment, foreclosures and declining revenue. About 84,000 jobs have been lost at state and local levels so far as governments try to balance budgets.
“If additional action is not taken, hundreds of thousands of additional jobs could be lost,” he said in the letter.
Such conditions leave a “mounting employment crisis at the state and local level that could set back the pace of our economic recovery,” Obama said.
The Senate package under consideration calls for trimming a House-passed tax increase on investment fund managers, quintupling a levy on oil companies and sending an additional $24 billion to state governments to help fill holes in their budgets.
Unemployment Benefits
Other provisions would extend unemployment benefits, restore a series of tax cuts, extend municipal bond subsidies and increase Medicare payments to doctors.
Senate Republican Leader Mitch McConnell of Kentucky, one of the recipients of Obama’s letter, issued a statement last night saying the president is failing to address the need to bring federal spending under control.
“We have a debt crisis, a jobs crisis, a housing crisis, a financial crisis, and an oil spill that the American people clearly don’t believe government is effectively responding to,” McConnell said. “So you can understand the American people’s skepticism when they’re told that simply adding more government is the solution to government’s previous failures.”
House Majority Leader Steny Hoyer, a Maryland Democrat, said there is “spending fatigue” in Congress, though he also said money is available from the $862 billion stimulus program passed by Congress last year.
‘Deep Ditch’
“You cannot not continue to stimulate an economy that is still struggling to get out of the deep ditch that we found it in about 18 months ago,” Hoyer said today on ABC’s “This Week” program. “Nobody wants to see 300,000 teachers or fire or police laid off.”
Representative John Boehner of Ohio, the Republican leader in the House, said the money shouldn’t be approved without cuts elsewhere in the budget.
“The spending spree in Washington is continuing to run unabated,” Boehner said on ABC. “To move this without finding other offsets in spending, I think, is irresponsible. It’s just putting more debt on the backs of our kids and our grandkids.”
--With assistance from Brian Faler, Ryan Donmoyer and Susan Decker in Washington. Editors: Mark Rohner, Laurie Asseo.
To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net
To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net
From trainloads of trash to diesel fill-ups by truckers, lesser-known economic data could be pointing to a stronger-than-expected recovery
U.S. economists and markets are almost hard-wired to respond in knee-jerk fashion to the latest numbers issuing forth from the U.S. Commerce Dept., the Bureau of Labor Statistics, and other government agencies, as well as established industry organizations such as the Institute for Supply Management. By recent measures, the U.S. economy isn't rebounding as quickly as some had hoped. But there's a wealth of lesser-known metrics that offer a more nuanced view of the economy—and in some cases, these hidden indicators reflect greater confidence that the recovery is on track and sustainable in the long run.
One of the more intriguing shadow metrics is the Pulse of Commerce Index, or PCI, a joint project of Ceridian Corp., a consumer services outfit, and the Anderson School of Management at the University of California at Los Angeles. The index climbed 3.1 percent in May from April, the largest monthly increase since February 1999. The PCI uses a very specific industrial measure to represent the overall strength of the broader U.S. economy: diesel fuel sales at roughly 7,000 truck stops across the country. If you think of the interstate highways crisscrossing the country as the arteries of the U.S. manufacturing economy, "the goods flowing in those arteries are the lifeblood of the system," says Ed Leamer, chief economist for the Ceridian-UCLA PCI. "This is the supply chain in operation."
And unlike lagging government data, the PCI reflects real-time info recorded instantaneously by sensors at each of those 7,000 truck stops. The pop in the May PCI calls for a big boost in industrial production, and given the historic relationship between the PCI and real growth in gross domestic product, the May PCI implies GDP will grow 3 percent to 5 percent in the second quarter, ahead of the normal 3 percent pace, according to the June 10 PCI report.
Real-time or not, the PCI is just as subject to uneven movements as any other economic indicator.
Leamer says the June PCI will almost certainly be below the May level since inventory restocking by manufacturers, which has had a major influence on PCI, can't continue to contribute to economic growth to the extent it has over the past three quarters.
Service-Sector Measures
Train shipments of waste and scrap materials have been increasing at the fastest pace in 16 years and have a higher correlation with economic growth than coal or copper, data compiled by Bloomberg News show.
Most economic measures tracked by investors—both mainstream and of the shadow variety—tend to focus more on the manufacturing sector, whose importance has been eclipsed by a growing, and now dominant, service economy over the past decades. The Institute for Supply Management's nonmanufacturing index is a notable exception. The component indexes within the NMI offer some telling clues about the broader economy. The data in the employment component of the survey "really do tell us where employment is going," says Richard DeKaser, president of Woodley Park Research in Washington, D.C., and chair of the National Association of Business Economics' Outlook Survey Committee. Nonmanufacturing employment has been rising fairly steadily since January while prices and new orders for nonmanufacturing were down in May from April, according to the ISM release on June 3.
DeKaser sees a strong correlation between electricity usage and the service economy. The commercial segment of the electric output data that the Edison Electric Institute releases weekly represents certain aspects of the service sector, such as office and retail space, he says. "When you're filling up office buildings, and office buildings are working overtime—and the same for retail stores—that's a good proxy for those sectors." Total electric output for the week ended June 5 was up 10.8 percent from the same week in 2009 and was basically unchanged from the prior week but up nearly 12 percent from two weeks earlier.
