Producitivity Strong, Largest Component of Inflation Decelerates, Jobless Claims Rise, Construction Slows, Housing Weakens, Manufacturing Decelerates

- Final 1Q Non-farm Productivity rose 3.7% versus estimates of a 3.9% increase and a prior estimate of a 3.2% gain.
- Final 1Q Unit Labor Costs rose 1.6% versus estimates of a 1.8% rise and prior estimates of a 2.5% gain.
- Initial Jobless Claims for last week rose to 336K versus estimates of 320K and 329K the prior week.
- Continuing Claims rose to 2433K versus estimates of 2413K and 2414K prior.
- Construction Spending in April fell .1% versus estimates of unchanged and a .9% increase in March.
- Pending Home Sales for April fell 3.7% versus estimates of a 1.0% fall and a 1.3% decline in March.
- ISM Manufacturing for May fell to 54.4 versus estimates of 55.7 and a reading of 57.3 in April.
- ISM Prices Paid for May rose to 77.0 versus estimates of 74.6 and a reading of 71.5 in April.

BOTTOM LINE: The productivity of US workers accelerated last quarter and labor costs slowed over the last year, easing concern that rising wages will fuel inflation, Bloomberg said. Labor costs were up .3% in the 12 months ended in March, matching the smallest gain in more than 12 months. Moreover, unit labor costs fell .6% during the fourth quarter, revised lower from a previously reported gain of 3%. Unit labor costs comprise two-thirds of inflation. In my opinion, it is impossible to make the case for an inflation problem without making the case for a substantial rise in unit labor costs. I continue to believe inflation fears have peaked for the year.

The number of US workers filing first-time applications for state jobless benefits unexpectedly rose to 336,000 last week, signaling the labor market is softening as the economy cools, Bloomberg reported. The four-week moving average, a less volatile measure, rose to 333,500, the highest since October. Hiring has declined significantly at builders, mortgage companies and real estate agencies as housing slows. The unemployment rate for those eligible for benefits, which tracks the US jobless rate, remained at 1.9%. I continue to believe the labor market, while softening, will remain healthy without generating a substantial increase in unit labor costs.

Construction spending in the US fell in April for the first time in almost a year as builders started work on fewer homes, Bloomberg reported. Private residential construction spending fell 1.1%, the largest decrease since January 2004. I expect construction spending to continue to decelerate as increased commercial construction is more than offset by declining residential construction.

Contracts to buy previously owned US homes fell to the lowest level in more than two years in April as rising interest rates and a glut of unsold homes weighed on sales, Bloomberg said. Pending re-sales fell 9.8% in the West, 5.6% in the Midwest and 5.5% in the Northeast. They rose 1.4% in the South. I continue to believe housing is slowing to more healthy sustainable levels, which will result in a slowdown in consumer spending and GDP growth back to average levels from robust rates.

Manufacturing growth in the US slowed last month as energy costs rose and new orders weakened, Bloomberg reported. The new orders component of the index fell to 53.7, the lowest in 12 months. The employment component of the index fell to 52.9 from 55.8 in April. I continue to believe manufacturing will slow to average levels as demand slows. Moreover, the prices paid index has likely peaked for this cycle.