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The first major employment report for the year suggested that
businesses may be willing to hire at greater levels than expected.
While the unemployment rate remains historically high and risks
abound, there are more signs that the economic recovery is
strengthening. Manufacturing activity continues to grow,
construction spending is improving, and consumers' expectations
for the near term are somewhat positive. For the week ended
February 3, the S&P 500 Index rose 2.2% to 1,345 (for a
year-to-date total return—including price change plus
dividends—of about +7.1%). The yield on the 10-year U.S.
Treasury note rose 4 basis points to 1.97% (for a year-to-date
increase of 8 basis points).
Job growth better than expected
The U.S. economy added 243,000 jobs in January, the most since
April 2010, thanks largely to an increase in hiring by the private
sector. The U.S. jobless rate, which is based on a separate
household survey, fell to 8.3%, its lowest level since February
2009. The job gains were widespread, coming from a variety of
sectors including professional and business services (+70,000),
manufacturing (+50,000), and leisure and hospitality (+44,000).
Government employment remained an area of weakness; public
payrolls shrank by 14,000 in January.
"The improvements in the latest employment figures and
other economic indicators can help build economic momentum and
reignite business confidence, which can lead to even more
hiring," said Roger Aliaga-Díaz, Vanguard senior economist.
"Of course, we remain cautious given the headwinds from the
U.S. housing sector and the European debt crisis."
Consumers earn more but spend less
Personal income rose 0.5% in December—its biggest increase
since March—as consumers benefited from increased wages,
dividend income, and rental income. Yet consumer spending remained
unchanged. An increase in personal taxes limited disposable income
to a 0.4% gain. The savings rate increased to 4.0% in December, up
from 3.5% in November.
Labor costs rise slightly
The Employment Cost Index, a broad measure of employers' labor
costs including wages and benefits, ticked up 0.4% in the fourth
quarter of 2011. The wages-and-salaries component of the index
rose 0.4%, while the cost of benefits grew 0.6%. Year-over-year
growth in total compensation held steady at about 2%.
Consumers less confident, but not pessimistic
The Conference Board's Consumer Confidence Index slid to 61.1
in January, much lower than analysts expected. The decline was
largely driven by consumers' lackluster assessment of their
present situation. Many found business conditions less favorable
and jobs harder to find. Their expectations for the near term were
more mixed.
"Regarding the short-term outlook, consumers are more
upbeat about employment, but less optimistic about business
conditions and their income prospects," said Lynn Franco,
director of The Conference Board Consumer Research Center.
Construction spending picking up
Construction spending grew 1.5% in December, more than double
the rate expected by analysts, thanks to large gains in private
nonresidential construction (+3.3%). Increased spending on power
and utility structures and manufacturing projects helped lift the
category. Although the construction industry remains weak overall,
there are signs that spending is picking up across the board.
Spending on both private residential and public sector projects
rose slightly in December. Construction spending for the month was
4.3% above its level in December 2010; however, for the full year,
construction spending in 2011 was 2.0% below its 2010 level.
Business activity gauges stronger
The ISM Manufacturing Index, which measures U.S. manufacturing
activity, climbed to 54.1 in January, its third consecutive
increase. (An index measure above 50 indicates expansion.) There
were gains in new factory orders and exports. Employment levels
remained fairly steady, while growth in production slowed. And
backlogged orders rose for the first time in eight months,
suggesting the potential need to increase production and possibly
employment to meet future demand.
The ISM nonmanufacturing index had even stronger results for
January. The index rose to 56.8, its highest level since February
2011. There were gains in new orders, exports, and employment.
Backlogged orders slowed their decline. Overall, analysts view the
results of the ISM reports as positive and supportive of gains
seen in other economic reports released this week.
Productivity gains slower than expected
Nonfarm productivity increased an annualized 0.7% in the fourth
quarter of 2011, below expectations and the 1.9% gain in the
previous quarter. Still, nonfarm output jumped 3.6% in the fourth
quarter and hours worked rose 2.9%. Compensation per hour also
rose 1.9%. Unit labor costs rose 1.2%. Analysts attribute the
slowing in productivity growth to a rise in manufacturing hours
worked, which is a good sign for a recovering economy.
An upswing in factory orders
New orders for manufactured goods increased in December for the
second consecutive month, by $5.3 billion or 1.1%. Shipments of
durable goods—items expected to last at least three years, such
as automobiles—rose 2.2%. Nondurable goods orders and shipments,
which are often affected by shifts in energy prices, declined in
December. Orders for core capital goods, a measure of business
investment plans, rose 3.1%.
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