The economy remains in focus following FOMC rate cut announcement Wednesday. The Fed decided to cut rates by 50-basis points at their meeting yesterday, adding to the 75-basis point cut the prior week. The Fed is worried about the slowing in the economy, especially in the housing market and jobs market. Of course, pricing pressures continue, but the Fed feels the greater risk is on the side of economic growth.
The jobs market is a focus today with several second tier reports on tap a day ahead of the January employment report. Jobless claims soared this past week, up by 69,000 to a level of 375,000. This pushed the four-week moving average up by more than 10,000 to a level of 325,750. Economists had been pointing to jobless claims as a sign that the labor market was not in major trouble. Today’s data changes this view slightly and is contrary to yesterday’s ADP report that showed a solid gain in private sector payrolls. On top of this news, the Monster Employment Index declined further in January, down nine points to 160. This is the third straight month that the index has declined.
In other employment related news, data on employment costs showed a 0.8 percent rise compared with the third quarter. This matched expectations and put the year on year rate at 3.3 percent. Employment costs have been able to stay controlled due to gains in productivity. However, as the economy slows, productivity could also ease, leaving employment costs a worry going forward.
A recession results when growth turns negative for the economy. The biggest piece of the economic pie comes from consumer spending, so the attitude of the consumer is crucial. This is why Congress is looking to provide a stimulus package and one reason why the Fed is being aggressive with rate cuts. Personal spending in December was a tenth higher than expected, but still soft at growth of 0.2 percent. At the same time, personal incomes were solid at growth of 0.5 percent.
In the past year, personal incomes are up 5.8 percent, though this is down from 6.1 percent in November. Consumer spending is up about 2.25 percent in the past year, down from 3.75 percent in the prior month. This report also included data on pricing pressures with the PCE price index up 0.2 percent with the core PCE index also rising 0.2 percent. During the past year, the headline figure is up 3.5 percent with the core up 2.2 percent. Both of these figures are above the Fed comfort level, but the outlook is for pricing pressures to ease going forward.
A big part of the problem with inflation has to do with energy prices. Crude is off nearly two dollars Thursday, trading at about $90.50 a barrel. This is still a very high price for crude, although down from highs near $100 less than a month ago. Oil prices have come down some on the view demand will ease due to economic slowing.
The manufacturing sector has been a concern as the economy has slowed with the ISM Index falling into contraction territory of late. The most recent ISM will be released tomorrow, but traders got the Chicago PMI today to digest. This index came in at 51.5, slightly below estimates for a reading of 52.0 and down five points from December’s reading. Though still in expansion territory, this report confirms the view that manufacturing activity is weakening.
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