Economic Recovery- 'Job' Well Done?

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Economic Recovery- 'Job' Well Done?

The non-farm payrolls report for January came as a further confirmation of the strength that is getting entrenched in the labor market. If job gains are sustained at this pace over the next couple of months, the unemployment rate could spiral downward. The upturn in the labor market has more than one implication. Firstly, it is bestowing upon consumers, whose spending makes up two-thirds of economic activity in the U.S., additional purchasing power to spend on goods and services. This in turn perks up domestic demand and growth.

Additionally, the expansion in payrolls reflects corporate faith in economic growth. That said, most economists do not believe that the new ray of labor market hope will alter Federal Reserve's timeline for a rate increase, although it could keep any further quantitative easing at bay.

Meanwhile, across the Atlantic too, some clarity is emerging despite the region still remaining mired in the debt imbroglio. Business activity indicators in the U.K. and the eurozone released last week were fairly encouraging. With the eurozone seeing a host of positive developments, including the positive reaction to the 3-year LTRO, fiscal reforms being implemented in Spain and Italy and the agreement reached among the European leaders concerning a fiscal compact, Deutsche Bank believes that the Governing Council of the European Central Bank is unlikely to cut interest rates at its meeting this week and also in the next few months.

Last week, the Labor Department said the U.S. economy added 243,000 jobs in January, higher than the average monthly gains of 152,000 for 2011. Private sector payrolls expanded by 257,000. The job gains showed depth, with strength seen across most sectors of the economy. And what's more, the unemployment rate based on the household survey dipped further to a near 3-year low of 8.3 percent.

Earlier last week, the ADP's survey showed that the private sector added jobs at a pace a touch lower than expected in January. The private sector added 170,000 jobs in January, while the previous month's gains were downwardly revised by 33,000 to 292,000.

Manufacturing readings of the week were also fairly robust. The Institute for Supply Management's manufacturing survey showed that its headline manufacturing index rose to 54.1 in January from 53.1 in December. The new orders rose 3 points to 57.6 and the order backlogs index climbed 4.5 points to 52.5. Meanwhile, the employment index eased 0.5 points to 54.3. However, out of 18 industries surveyed only 9 reported expansion.

The results of the ISM-Chicago's manufacturing survey showed that the headline manufacturing index dipped to 60.2 in January from 62.2 in December. The new orders index fell to 63.6 from 67.1, while the order backlogs index retreated into contraction zone, dropping to 48.3. Additionally, the employment index fell 5.4 points to 59.2.

Also, the ISM's service sector survey showed that the service sector expanded at the fastest pace in about a year. The headline index rose 3.8 points to 56.8 and the business activity index climbed 3.6 points to 59.5. The new orders index was up about 5 points to 59.4 and despite rising 4 points, the backlog orders index remained just short of the cut-off mark of '50' that demarcates expansion and contraction. Additionally, the employment index surged up 7.6 points to 57.4.

Construction spending rose 1.5 percent month-over-month in December, marking the fourth increase in a row. Non-residential construction spending climbed 3.3 percent, while non-residential construction spending also increased from the previous month.

Meanwhile, the S&P Case-Shiller home price index fell 0.7 percent month-over-month, declining for the third straight month. Annually, prices were down 3.7 percent.

Additionally, auto sales came in at a healthy pace of 14.2 million vehicles, matching the pace seen since August 2009, when sales benefited from the government's cash for clunkers program.

At the same time, the Conference Board's consumer confidence index fell 3.7 points to 61.1 in January. The present situation index slipped 8.1 points to 38.4 and the expectations index edged down 0.8 points to 76.2.

Fed speeches are sprinkled over the economic calendar of the unfolding week. Other than these, there are very few Main Street events that the markets can look forward to. The Commerce Department's trade balance report for December and the results of the Reuters and the University of Michigan's consumer sentiment survey are among the closely watched reports of the week.

The Federal Reserve's consumer credit report for December, the Commerce Department's wholesale inventories report for December, the Treasury Budget for January and the Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the economic events of the week.

Economists expect the trade deficit for December to remain unchanged from the previous month, as a rebound in exports is offset by higher import prices of petroleum products. BMO Capital Markets expects trade to support growth slightly in 2012 after slightly deducting from growth in the fourth quarter.

Meanwhile, a consumer sentiment reading of the week is likely to show that confidence among consumers wasn't dented much, as the effect of the recent increase in gasoline prices is mitigated by buoyant financial market performance.

Monday

Dallas Federal Reserve Bank President Richard Fisher is due to speak to the Institute of International Finance in Washington on the "Economic and Monetary Policy Outlook, a Trip Around the World," at 12:15 pm ET. The speech will be followed by a session with the media.

Tuesday

Federal Reserve Chairman Ben Bernanke is scheduled to testify on the economy to the Senate Budget Committee at 10 am ET.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 pm ET. Consumer credit for December is expected to show an increase of $7 billion.

The outstanding consumer credit rose by an annual rate of 9.9 percent to $2.48 trillion, with revolving credit tied to credit cards rising by 8.5 percent, while non-revolving credit tied to autos climbed by 10.7 percent.

Wednesday

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended February 3rd at 10:30 am ET.

Crude oil inventories rose by 4.2 million barrels in the week ended January 27th to 338.9 million barrels, with inventories remaining in the upper limit of the average range. Gasoline stockpiled increased by 3 million barrel and were in the upper limit of the average range.

Meanwhile, distillate stockpiles edged down 0.1 million barrels and remained in the middle of the average range. Refinery capacity utilization averaged 83.3 percent over the four weeks ended January 27th compared to 84.1 percent over the previous four weeks.

San Francisco Federal Reserve Bank President John Williams speaks to the Bishop Ranch Forum on "The Federal Reserve and the Economic Recovery," in San Ramon, California at 10:40 am ET.

Thursday

The Labor Department is due to release its customary jobless claims report for the week ended February 4th at 8:30 am ET. Economists expect claims to edge up to 370,000 from 367,000 in the previous week.

For the week ending January 28, initial claims for unemployment benefits came in at a seasonally adjusted level of 367,000. This marks a decrease of 12,000 from the previous week's revised figure of 379,000 - slightly higher than the 377,000 initially reported.

The Commerce Department is due to release its wholesale inventories report at 10 am ET. Economists expect wholesale inventories at the end of December to show a 0.4 percent increase.

Wholesale inventories at the end of November were up 0.1 percent month-over-month and were 10.5 percent higher than a year-ago. Meanwhile, wholesale sales climbed a steeper 0.6 percent from October and were up 11.3 percent from last year. The inventories to sales ratio came in at 1.15 compared to 1.16 percent in November 2010.

Friday

The trade gap data for December is due out at 8:30 am ET. Economists estimate that the trade gap remained unchanged at $47.8 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

U.S. exports fell by 0.9 percent to a level of $177.8 billion while imports were up 1.3 percent to a level of $225.6 billion. That put the trade deficit at $47.8 billion, a 10.4 percent increase from October's revised level of $43.3 billion - little changed from the $43.5 billion initially reported. Most economists had predicted that October's narrowing of the deficit would be reversed but had generally forecast that the deficit would come in lower, at roughly $45 billion.

The preliminary report of the Reuters/University of Michigan's consumer sentiment survey for February is scheduled to be released at 9.55 am ET. The consumer sentiment index is expected to edge down to 74.3 from January's 75.

Bernanke is due to speak to the 2012 National Association of Homebuilders International Builders' Show on "Housing Markets In Transition" and takes questions from the audience, in Orlando at 12:30 pm ET.

Cleveland Federal Reserve Bank President Sandra Pianalto will speak to the Neighborhood Housing Services of Greater Cleveland Annual Luncheon on "Creating Value in Distressed Neighborhoods at 12:50 pm ET.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government, is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists expect a deficit of $50.1 billion for January compared to a deficit of $86 billion for December.

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