Initial jobless claims dropped last week by a modest 6,000 to a seasonally adjusted total of 422,000. That’s a sign that the labor market isn’t poised to deteriorate further, but the still-elevated pace of new applications for unemployment benefits also suggests that job growth is still struggling. In one respect, we dodged a bullet--for now. But let's be clear: nothing less than robust job growth will suffice to offset what looks to be a new summer slowdown in the offing. It's still too early to talk about a new recession, but the risk is inching higher. That threat remains small, but the change in trend isn't encouraging.
The recently stalled decline in new jobless claims is particularly worrisome in the wake of yesterday’s news from 1) ADP on the sharp slowdown in job creation last month and 2) the downshift in manufacturing activity for May. That leaves us waiting for confirmation or rejection of ADP’s estimate with tomorrow’s update on May nonfarm payrolls from the Labor Department. The consensus forecast among economists expects a sharply lower number vs. April’s 268,000 gain in private jobs, according to Briefing.com, but nothing quite so steep as the ADP reversal that was reported yesterday.
Meanwhile, Ed Yardeni of Yardeni Research writes in a note to clients today that he’s not all that surprised by the latest batch of soft economic reports. What's more, he suggests that once the statistical dust clears, the forces of growth will retain the upper hand. As he explains:
When initial unemployment claims rebounded back over 400,000 during the week of April 9, we suspected that the shortage of Japanese car parts might be a bigger problem for manufacturers, especially in the auto industry, than was widely recognized. By May 2, we were convinced. That’s when we lowered our estimates for real GDP growth to 2% for both the second and third quarters.
And on his blog Yardeni advises:
A shortage of parts made in Japan is temporarily disrupting global manufacturing, in general, and the auto industry, in particular. In the US, the purchasing managers index (PMI) for manufacturing declined from 60.4 during April to 53.5 in May. It was led by sharp drops in the New Orders Index (from 61.7 to 51.0) and in the Production Index (from 63.8 to 54.0). Interestingly, the Employment Index dropped by less (from 62.7 to 58.2), and it remained above 50. The Inventory Index dropped below 50 (from 53.6 to 48.7). That’s consistent with the view that manufacturers are drawing down their parts inventories while they wait for more supplies from Japan.
Given Japan’s crucial role in supply parts to auto manufacturers around the globe, “the soft patch has gone global,” Yardeni concedes. But he stresses that a soft patch isn’t the same thing as a new recession. He notes that severa manufacturers'l purchasing managers indices (PMIs) around the world, while falling lately, are still above 50, indicating growth. “Please notice that there is no great tragedy in any of these PMI indicators.”
In short, a bit of optimism from one analyst in a world that’s suddenly knee-deep in pessimism. Tomorrow may shed new light on whether Yardeni’s optimism is warranted.