Vital Signs: Investors Want More Cuts from the Fed

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JOBLESS CLAIMS - Thursday, Jan. 31, 8:30 a.m. EST

The number of initial jobless claims slipped to 301,000 from 302,000 for the week ended Jan. 19. In the week ended Jan. 5 claims stood at 322,000. Holiday shortened weeks may be one factor for the recent retreat in claims. The upcoming numbers for January will be key in judging whether this is a temporary improvement or if labor market conditions aren’t quite as bad as feared.

The four-week moving average did drop to 314,750 in the week of Jan. 12 from 328,750. Continuing jobless claims, which are a week behind the initial claims figures, pulled back to 2.67, from 2.75 million in the week ended Jan. 5.

PERSONAL INCOME AND CONSUMER SPENDING - Thursday, Jan. 31, 8:30 a.m. EST

Personal income probably rose by a decent amount in December. The consensus view among economists is that wages, dividends, and other forms of income grew by a solid 0.4% for a second straight month. A key component of income to watch is wages and salaries, which make up over 50% of all personal income.

The apparent weakness in the labor market appears to already be causing slower wage growth. In November, the yearly gain in wages and salaries was 5.2%, vs. 6.3% in September. This pace is still relatively strong, and is above the pace of inflation. However, if the labor markets deteriorate further, wage growth should be expected to cool off and put some pressure on consumer spending in light of the ongoing housing recession and cost pressures from elevated food and energy prices.

Consumer spending has held up reasonably well so far as well. Various chain store and retail sales figures are looking poor, but data from the Bureau of Economic Analysis encompasses more areas of spending, including various services not covered in other reports. Spending is expected to post a lukewarm 0.2% monthly rise for December, after a 1.1% jump in November. The pattern may be the result of an early Thanksgiving which meant more holiday season shopping days in November.

The yearly pace of sales was a stout 6.7% in November. Even after adjusting for inflation, sales were growing at a solid 3% pace. Barring a far weaker than expected December result, fourth-quarter consumer spending should top an annualized pace of 2% growth, beating many economists’ expectations heading into the final period of 2007.

The Personal Consumption Expenditures (PCE) price indexes, which are the preferred inflation gauges of the Federal Reserve, also come out in this report. The latest interest rate cuts show the Fed has put economic growth concerns above inflation.

However, the latest numbers through November show that price pressures haven’t abated just yet. Overall inflation rose 0.6% in November on higher energy costs. The yearly pace picked up to 3.6%, and it appears that price gains in the fourth quarter are gaining steam relative to the third quarter.

Excluding food and energy, prices rose 0.2% in November and 2.2% from a year ago. That puts inflation back above the Fed’s comfort level of 1.5% to 2%. So far in the fourth-quarter, it looks as if core inflation is also picked up some momentum. The Fed believes it must act to help the economy, and expects the slowdown in real activity and the a higher jobless rate will reduce price pressures.

EMPLOYMENT COST INDEX - Thursday, Jan. 31, 8:30 a.m. EDT

The Labor Dept.’s fourth-quarter employment cost index -- a measure of wages, salaries, and benefits paid by businesses -- is expected to match the third-quarter gain of 0.8%. In the second quarter, costs grew 0.9%. On a yearly basis, the third quarter increase was 3.3% for a second straight period after a 3.5% yearly increase in the first quarter.

Two trends emerge when splitting total compensation into wages and benefits. Wage growth has been holding up well. On a yearly basis, wages and salaries among civilian workers were up 3.3% from a year ago in the third quarter. In the past five quarters, the yearly gains have topped 3% after a long stretch of sub-3% growth.

Conversely, increases in benefit expenses have been cooling off, coming in at a yearly clip of 3.2% by the third quarter. That’s a considerable slowdown from the 7.1% pace in early 2004. Businesses appear to be focusing on controlling health care and other benefit costs. However, a tighter labor market has led employers to give some ground on wages in order to attract qualified workers. The trend in wage growth could break down if the labor market weakens further.

CHICAGO PURCHASING MANAGERS SURVEY - Thursday, Jan. 31, 9:45 a.m. EST

The Chicago-area National Association of Purchasing issues its January Business Barometer report. The report is expected to show a deceleration in activity after a surprising jump to 56.6% in December, from 52.9% in November. The October reading of 49.7% indicated a very slight decline in activity. Economists don’t expect such a reading for January, but other regional and national surveys of manufacturers do point to some possible downside risk.

Among the other December indexes, orders picked up with a reading of 58.4%, from 53.9% in November. Production growth eased, while the backlog of unfilled orders surged and inventories contracted at a quicker pace. These numbers paint a pretty healthy picture for the region’s manufacturers, but it does contrast with many other reports covering the manufacturing sector.

HELP-WANTED INDEX - Thursday, Jan. 31, 10 a.m. EST

The Conference Board releases it December index of help-wanted ads. The index keeps sliding, falling to 21 in November, from 22 the month before, 24 in September, and 29 a year ago. Once again, help-wanted advertising declined in all nine regions of the country.

According to Conference Board economist Ken Goldstein, online advertising figures also indicate reduced job recruitment efforts. Online advertised vacancies were off 6% in December vs. a year ago, the smallest annual increase since this series began in May 2005. These figures are not seasonally adjusted, making the yearly comparison the more reliable measure of activity. The number of advertised vacancies online for every 100 persons in the labor force slipped again, to 2.3, from 2.64 in October, and 2.19 a year ago.