Why The Unemployment Rate Report Was So Shocking

It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines:

Construction Spending Tops 5-Year High

In April, total spending on construction projects climbed 0.2% to $953.5 billion thanks to increased home building and government construction. This came below economists’ estimates of a 0.6% gain. Meanwhile, March construction spending was revised higher to reflect a 0.6% jump, up from the previously reported 0.2% rise. Total construction is currently 8.6% higher than it was a year ago, with housing construction up 17.2% over last year. While the April increase was modest, the revision to March construction spending was significant. Now that we’ve seen three consecutive months of improvement, construction spending is officially at the highest level in five years. This is a great start to the construction peak season.

Auto Demand Boosts Factory Orders

In April, orders for durable and nondurable goods advanced 0.7%, above economists’ projections for a 0.6% gain. Some of the increase originated from higher demand for auto parts, but even excluding the volatile transportation category, factory goods orders still increased 0.5%. Meanwhile, factory inventories gained 0.4% as businesses restocked their shelves after a lean winter. March factory goods orders were also revised higher from 1.1% to 1.5%. This is the third month in a row that factory goods orders have risen (for both total factory goods and factory goods ex-transportation). It’s likely that the rebound in inventories will add to second-quarter GDP growth.

Trade Gap Widens to 2-Year High

In April, the trade deficit surged 6.9% to $47.2 billion. Additionally, the March trade deficit was revised up to $44.2 billion, up from the initial estimate of $40.4 billion. The catalyst behind April’s rising trade deficit was that U.S. imports rose 1.2% to a record $240.6 billion, while the value of U.S. exports dropped 0.2% to $193.3 billion. Interestingly, vehicle sales remain robust and more imported vehicles are one reason that imports are rising. The U.S. trade gap is now the widest it has been in two years. Unless the trade deficit declines in May and June, second-quarter GDP growth will likely be revised down from economists’ robust consensus estimate of 3.9% annual GDP. So the widening trade gap somewhat counterbalances inventory growth.

Layoff Activity Falls to 7-Year Low

For the week ending May 31, initial claims for unemployment climbed 8,000 to a 312,000 annual rate. While claims did rise, the increase wasn’t as dramatic as the 20,000 gain forecast by economists. Meanwhile, the prior week’s jobless claims were revised slightly higher from 300,000 to 304,000. With the latest results in, the four-week moving average dipped 2,250 to 310,250. This report was significant because the moving average for layoff activity is now at a seven-year low. This was somewhat of a consolation after Friday’s uneventful unemployment report.

Payroll Report Underwelms

For the month of May, 217,000 payroll jobs were created, slightly better than economists’ consensus estimate of 210,000 new jobs. April’s more impressive payroll growth was revised down slightly to 282,000, compared with the initial estimate of 288,000. The average workweek in May remained unchanged at 34.5 hours and wage growth only rose 0.2%. Labor force participation remains at a 36-year low of 62.8% and the unemployment rate remains unchanged at 6.3%. Overall, the May payroll report didn’t bring any significant change in key details. While there was modest job growth, several other important factors aren’t improving. The other news on the payroll front was that ADP on Wednesday reported that the private sector added only 179,000 jobs in May, which was the slowest job creation pace in six months. Despite the May job creation slowdown, the Labor Department’s payroll report is showing more job creation in recent months, so Wall Street seems to be largely ignoring the ADP report.

Have a great weekend,

Sincerely,

signed: Louis Navellier

Louis Navellier

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