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Jun 11, 201412:58 PMOpen Mic

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Market and economic update: Long-term unemployment on the decline

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The U.S. economy continued to emerge from the shadow of winter weather both in terms of national temperatures and evolving economic data. U.S. payroll employment (finally) exceeded its prior peak, set in 2008.

The addition of 217,000 jobs to payrolls pushed totals to 138.46 million employees, exceeding the prior peak by 98,000 jobs after more than five years. The unemployment rate remained at 6.3%, but long-term unemployment has continued its decline, with the number of unemployed for more than 27 weeks falling more than 22% over the past year and more than 10% over the past three months.

Overall, the jobs market continues to heal at a modest but reasonable pace. Institute for Supply Management (ISM) surveys for manufacturing and nonmanufacturing activity for May both indicated activity improved across the economy. The surveys corroborated comments from the 12 districts in the Federal Reserve’s Beige Book survey, which indicated healthy growth in consumer spending as well as manufacturing activity. It appears the U.S. economy may be on pace for economic growth in the second quarter to return to slightly above trend as it recovers from first quarter contraction due to winter weather.

Weak growth (up just 0.2% for the first quarter), weak inflation, and a flash estimate of the Consumer Price Index (CPI), up just 0.5% year over year through May, led the European Central Bank (ECB) to engage in further monetary accommodation. In a well-telegraphed move, the ECB cut its headline interest rate by 0.10% to 0.15% and cut its deposit rate to negative 0.1%. The cut in the deposit rate to negative means banks with cash on deposit at the ECB will be paying for the privilege and thus have an incentive to move money into riskier assets, such as loans and bonds.

The ECB is also considering forms of quantitative easing, but implementation seems unlikely until late this year. Markit Purchasing Managers Index (PMI) for May for the eurozone indicated the pace of economic activity has perhaps slowed but continues to expand. Growth in Europe seems likely to remain constrained, and we would expect average growth of just 1% across the region due, in part, to ongoing deleveraging by financial institutions.

(Continued)

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