Early data show May swoon didn't persist into June
Early data show May swoon didn't persist into June
Philly Fed, Empire state, jobless claims point to vigorous economy
By
Rex Nutting, MarketWatch
Last Update: 2:59 PM ET Jun 15, 2006
WASHINGTON (MarketWatch) -- Both the labor market and the factory sector picked up steam in mid-June after swooning in May, data released on Thursday indicate.
The surprising strength in jobless claims, the New York Fed's Empire State index and the Philly Fed index increase the risk that the economy is still barreling along at above-trend speed, economists said.
And that increases the risk that the Federal Reserve will be forced to raise rates more than expected to rein in inflation.
"The data re-open the question of whether growth is slowing significantly," said Sam Coffin, an economist for UBS. "The debate shifts back to whether slowing in housing has spilled into the rest of the economy, and whether the Fed will be forced to push the funds rate beyond the 5.25% peak we forecast for the June meeting."
Or as Wachovia economist Jason Schenker put it more simply:
"Growth is a go; inflation remains the hobgoblin."
After a weak payroll report for May, many economists concluded that the U.S. economy was finally beginning to slow some signs of fatigue. Weak retail sales, slumping housing markets and a decline in industrial output added to the evidence of a slowing economy in May.
A slower economy would fit into the Fed's forecast of a somewhat slower economy in the second-half of the year, which in turn would help restrain inflationary pressures.
But now there are tentative signs that the weakness in May didn't continue into June.
Thursday's data showed that jobless claims have fallen back in the first two weeks of June to 295,000, the lowest level in five months.
See full story.
Meanwhile, two forward-looking gauges of factory sentiment showed surprising strength in June.
The only release that was weak was the May report on industrial production, which showed a 0.1% decline in output, led by autos, mining and business equipment.
See full story.
Given the strength in the Philly and Empire indexes in June, most economists were willing to dismiss the shortfall in May industrial output as a one-time event, especially given the improvement in jobless claims.
"While today's report is soft, we think it merely reflects a pause in what has been robust activity in the factory sector in recent months," said Stu Hoffman, chief economist for PNC.
"We expect to see a rebound in the June data, supported by solid growth in business capital spending continued steady growth in the global economy, and we still look for healthy growth in the business sector to help offset a slowing pace of consumer spending and housing market activity," said Hoffman.
Use the data carefully
The June data now available is fraught with dangers, not the least of which is the inability of any of the early numbers to accurately forecast growth or hiring. It must be handled with care, but it's the only data we have.
"Looking ahead, we see factory output trending up at about a 4.0% pace in the near to medium term, which is quite healthy," said Josh Shapiro, chief economist for MFR. "This reflects solid domestic final demand, inventory accumulation, and strengthening export demand."
The Philly Fed index fell to 13.1 in June from 14.4 in May, but the details of the report showed activity strengthened. The new orders index improved to 17.7 from 2.7. Shipments rose to 17.7 from 11.7. The employment index rose to 9.8 from 1.1.
Economists were expecting a slightly larger decline, to about 11.8, according to a survey of economists conducted by MarketWatch.
See Economic Calendar.
Inflationary pressures were mixed. The prices paid index fell to 48.7 from 55.3, but the prices received index rose to 14.0 from 10.3, indicating slightly elevated pass-through of higher costs.
Philly-region manufacturers were less confident in the near term outlook. The expectations index fell to 6.8 from 22.5.
The Empire state index rose to 29.0 from 12.9, well ahead of expectations of a decline to 12.5.
See full story.
In New York, new orders jumped to 25.8 points in June from 16.2 in May.
Inflation indexes strengthened in the Empire index. The prices-paid index rose to 52.9 points in June from 43.1 in May.
In both the Philly Fed and the Empire State, readings over zero indicate growth in the factory sector in the region.
Rex Nutting is Washington bureau chief of MarketWatch.
