Firstly, the rise in consumption and construction spending in the private sector in April confirms that the US economy got off to a positive start in the second quarter. Secondly, the purchasing managers’ index for the manufacturing sector (ISM index) in May was still well above the expansion threshold of 50 and – despite slipping on the previous month – was not significantly below the average level in the first four months of the year. In addition, the assessment of new orders improved at a high level. This is above all remarkable given the recent stress on the financial markets that could have prompted firms to be more cautious about the sales outlook. Negative effects on hiring behavior would not have been surprising either.
On its own the labor market report for May provides no clear pointer to heightened uncertainty among firms. The ongoing slow job creation in private sector nonfarm payrolls can still be interpreted as a correction of the above-trend labor demand seen in the winter months. Well over 200,000 jobs were created, resulting in a slight decline in labor productivity. However, companies will only tolerate this temporarily. The labor market report also provides figures on employment trends based on a household survey. Here, too, the renewed increase in the number of people in work following declines in the two preceding months does not flag a fundamental deterioration in the demand for labor. The main factor behind the slight increase in the unemployment rate was rather a renewed uptick in the labor force participation rate. Given the appreciable decline in recent years, this is not particularly surprising.
Grounds for concern come from the weak growth in labor income, not least the upshot of low wage increases. In the short term private household real incomes are being buoyed by declining oil, and hence gasoline, prices. However, in the months ahead downside risks to consumption momentum exist should the recent erosion of stock wealth not be gradually reversed.