Economy Still Strong / Yields Rise
A: A bit of a macro economic update for you here. The US economy, while showing signs of a slowdown in consumer spending, for the most part is still strong! The service sector expanded at a faster than expected pace in April which represents the 49th consecutive month of expansion in the non-manufacturing industries. At the same time, US business productivity also grew at a faster than expected pace and jobless claims came in lower than expected. All signs that the US economy continues to chug along. The only dataset of concern is the consumer and whether the sluggish spending report continues.
Lets get right to the economic reports.
ISM Service Sector Growth Exceeds Forecast -
The U.S. service sector expanded at a faster rate in April after hitting a four-year low in March, a trade group said Thursday, with concerns about energy costs persisting.Productivity Jumps in First Quarter -The index was above Wall Street's expectation of 54, according to Briefing.com, and April represents the 49th consecutive month of growth in the non-manufacturing industries.
Indeed, a wide range of commodities increased in price, including airfare, aluminum, diesel fuel, gasoline, and hotel costs, the report said. The prices paid index, a potential inflation indicator, increased in April to 63.5, up from March's 63.3. The index jumped almost ten points in March.
U.S. business productivity grew a greater-than-expected 1.7 percent in the first three months of 2007, but labor costs rose far less than forecast, a Labor Department report showed Thursday. Analysts expected business productivity, a measure of how much any given worker can produce in an hour, to rise 1 percent in the first quarter.Jobless Claims Post Surprise Drop -Federal Reserve officials have been concerned slowing productivity could push up wage inflation amid tight labor markets. But they also have said the slowdown in productivity is likely to be temporary rather than a sign that U.S. workers have lost their competitive edge.
The number of U.S. workers filing new claims for jobless benefits fell unexpectedly by 21,000 to the lowest level of claims since January, a Labor Department report showed on Thursday.In short, the economy seems strong which is not surprising given the stock market hitting new record highs with corporate profits coming in at or above wall street estimates!Analysts polled by Reuters were expecting a 4,000 rise in claims from the previously reported level of 321,000 in the week ending April 21.
Forget a rate cut in the near future as there is no way the fed will ease with the US economy producing these types of numbers and stocks at record highs. The fed eases in the face of an economic slowdown and the only sign of slowing right now is from the consumer in spending. The last report on consumer spending showed that growth in spending was the slowest in 6 months; most likely a result from higher gas prices and the national housing slump. Whether or not that becomes a trend affecting the overall economy is still yet to be seen.
What you need to know is that lending rates will stay where they are or likely trickle a tad higher
with the latest signs of strength in the US economy. The 10YR yield already popped a bit to 4.68% and as you know, lending rates tend to follow the yield on the 10YR for those interested in the short term movements of mortgage rates.
Those planning on lower rates in the near future because of a fed ease might have to hold out a bit longer, unless future economic data reverses course and shows a sharp turnaround towards slowing growth on multiple levels. This has not happened yet. While inflation is moderating, it is still a threat to future growth and that puts the fed on hold for now until more trends can be seen.
Some fundamentals that are keeping the US economy and corporate profits at these levels include:
WILD CARD - Jobs! While the labor market is still strong I still wonder if it will be sustained throughout the year. As long as the jobs market is strong, the economy should keep chugging along. I worry that a slowdown in the jobs market might be the third leg in the housing slump heading into 2008.
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