Labor Costs Rise, Factory Orders Accelerate and Oil Inventories Rise

- Final 1Q Non-farm Productivity rose 2.9% versus estimates of a 3.0% rise and a 2.6% prior estimate.
- Final 1Q Unit Labor Costs rose 3.3% versus estimates of a 2.2% increase and a 2.2% prior estimate.
- Initial Jobless Claims for last week rose to 350K versus estimates of 325 and 325K the prior week.
- Continuing Claims rose to 2602K versus estimates of 2581K and 2570K prior.
- Factory Orders for April rose .9% versus estimates of a 1.1% gain and an upwardly revised .7% increase in March.
- Summary of Weekly Petroleum Data for the Week Ending May 27, 2005.
- The EIA said crude inventories rose 1.49M barrels versus estimates of a 250K rise. Distillate fuel inventories rose 783K barrels versus estimates of a 1.45M barrel rise. Gasoline inventories rose 1.3M barrels versus estimates of a 400K rise. Natural Gas inventories rose 86 bcf to 1778 bcf versus estimates of a rise of 89 bcf.

BOTTOM LINE: Productivity rose in the first quarter at the fastest pace in 9 months. Productivity gains exceeded 4.0% in each of the last three years. At no time in history had there even been back-to-back increases greater than 4.0%. The year-over-year increase in unit labor costs was 4.3%, the most since the third quarter of 2000. While this increase is higher than I would like to see, there is little evidence that these costs are being passed to the consumer. Moreover, increasing labor costs haven’t pressured corporate profits to any extent. US corporate profits grew 4.5% in the first quarter and accounted for the largest share of the US economy since early 1967. I also expect moderating job gains over the coming months to dampen labor costs somewhat going forward.

The number of Americans filing first-time applications for jobless benefits rose last week to a 2-month high as a result of temporary layoffs in the automobile industry. Even with the increase last week, claims have averaged 328,000 so far this year, down from 343,000 for all of 2004, when the job market was the strongest in five years. The four-week moving average of claims, a less volatile measure, rose to 334,500 from 331,000. The four-week moving average of continuing claims rose to 2.59 million, from 2.586 million. The insured unemployment rate, which moves with the US unemployment rate, held at 2.0%.

US factory orders rose the most since November, spurred by demand for autos, aircraft and computers. Excluding transportation equipment, orders fell .2%. Orders for capital goods excluding aircraft, a proxy for future business investment, rose 1.7% in April after declining 1.6% in March. I continue to expect overall weaker factory activity as companies cut inventory to healthier levels.

Oil is steady even with another rise in inventories during the seasonably strong driving period. The perception that demand will accelerate in 4Q from last year’s rates is propping up energy. I continue to believe this perception will change over the coming months, resulting in a substantial fall in crude prices.