By Annys Shin
Washington Post Staff Writer
Friday, August 21, 2009
The manufacturing sector showed further signs of stabilization in August with a key index rising to its highest level in nearly two years. But an unexpected bump in first-time jobless claims last week offered fresh evidence that a turnaround in the labor market is still a long way off.
Businesses have been trying to catch up to falling demand by slashing inventories and payrolls. Now, they need to restock and that is helping to slow the decline in manufacturing, though not to the point where it is adding jobs. The Federal Reserve Bank of Philadelphia on Thursday said its index of manufacturing rose to 4.2 in August, in positive territory for the first time in nearly a year and at its highest level since November 2007. Activity in the bank's region, which covers Delaware, southern New Jersey and the eastern two-thirds of Pennsylvania, home to many auto suppliers, was also helped by increased vehicle production.
"What we're seeing is the manufacturing sector is getting support from the inventory cycle . . . That gets you only so far. After that you need final demand to carry the baton," said Joshua Shapiro, chief U.S. economist with MFR, a New York-based forecasting firm. "Unfortunately the consumer is in pretty bad shape still. The labor market remains weak, and household balance sheets are basically a wreck."
The positive manufacturing data, combined with stock market rallies in Asia and in Europe, outweighed the disappointing jobless claims report on Wall Street, where the major U.S. stock indicators closed up. The Dow Jones industrial average rose 70.89 points, or 0.8 percent, to 9350.05. The broader Standard & Poor's 500-stock index gained 10.91 points, or 1.1 percent, to 1007.37. And the tech-heavy Nasdaq composite index climbed 19.98 points, or 1 percent, to 1989.22.
Most economic forecasters are predicting the economy will grow in the third quarter, which runs July 1 through Sept. 30, after it shrunk during the first two quarters. The Conference Board, a business research group, bolstered that outlook Thursday with the release of its U.S. Leading Economic Index, which rose 0.6 percent in July, its fourth straight monthly increase.
"The indicators suggest that the recession is bottoming out, and that economic activity will likely begin recovering soon," Ken Goldstein, an economist with the Conference Board, said in a news release.
The question now is what sort of recovery.
Many analysts are expecting a tepid one largely because consumers are still digging out from debt and a record loss of wealth, which they are having a hard time rebuilding in the current labor market.
Job losses have slowed and first-time claims for unemployment benefits started to trend downward during the summer. But over the past two weeks the unemployment claims have reversed course. The number of people filing for state unemployment benefits for the first time rose by 15,000, to 576,000, the Labor Department said Thursday, defying analysts' predictions that claims would drop by roughly the same amount. First-time claims still remain below their peak in early January of 956,791 but well above the 300,000 range that marks a healthy economy.
Persistent weakness in the job market is shaping up to be one of the biggest threats to economic growth going forward, analysts said.
In recent months, low inflation has boosted consumers' buying power somewhat. And in the spring, tax provisions in the $787 billion stimulus package and a one-time increase in Social Security payments put extra money in consumers' pockets. But that's where it stayed.
"Consumers said 'thank you very much' and saved it," said Paul Ashworth, senior U.S. economist for Capital Economics in Toronto.
Retailers have seen their sales figures sink. Lower demand for appliances and apparel helped push Sears Holdings to a surprising loss in the second quarter, the department store reported Thursday. The Hoffman Estates, Ill.-based company joined a growing list of retailers, including home improvement chains Lowe's and Home Depot, that reported declining sales this week.
Gap Inc., the San Francisco-based clothing retailer that operates Gap, Old Navy and Banana Republic, said Thursday that its sales at stores open at least a year -- a key measure of health for retailers -- fell 8 percent during the second quarter. Same-store sales decreased 10 percent at the North American outposts of Gap and 15 percent at Banana Republic North American stores. Cost cutting helped hold the company's decrease in earnings to 0.4 percent.
"Restocking is definitely helping the factory sector, but unless consumers get out there spending, that restocking is only going to last so long," Ashworth said.