Economic Data Continues to Send Mixed Signals

By Neil Irwin and Dana Hedgpeth
Washington Post Staff Writers
Tuesday, September 1, 2009

The emerging economic recovery suffers from a great contradiction: Even as factories seem to be cranking out more stuff, the job market remains terrible. Both sides of that paradox are likely to be evident in a fresh round of economic data being published this week.

On Tuesday, the Institute for Supply Management is scheduled to release results of its survey of manufacturers, and forecasters expect to see evidence that those businesses are expanding. That would mark the first time the nation's factories were in expansion mode, as indicated by the survey, since January 2008, and it would match other evidence that the nation's industrial output turned a corner this summer.

For example, a survey of manufacturing conditions in the Chicago area released Monday indicated stronger-than-expected activity, and in July, industrial production rose in its first monthly gain since October.

Inventories are lean, as businesses have spent the past year aggressively reducing the amount of goods on their warehouse shelves, meaning that they now must increase production to keep up with demand. That process has been accelerated, in the automotive sector at least, by the government's "Cash for Clunkers" program, which has left car lots bare and is leading automakers and their suppliers to boost production.

Meanwhile, the economies of U.S. trading partners in Europe and Asia are stabilizing, helping exports, and there is some progress among manufacturers far removed from the auto industry, including aerospace and technology. Last week, the Commerce Department reported a 4.9 percent increase in July orders for durable goods, driven by orders for new Boeing airplanes, the strongest gain in two years.

"You're starting to see some international growth and some pickup in exports after they hit the wall in the fourth quarter of last year and first quarter of this year," said Thomas J. Duesterberg, president of the Manufacturers Alliance, a trade and research group. "Plus, in factory equipment you're starting to see some comeback in computers, as Intel and Dell signaled some strength in that sector, and Microsoft is coming out with a new operating system this fall."

For now, at least, the expansion seems to be strongest in the manufacturing sector. The Institute for Supply Management is scheduled Thursday to release a separate survey of service firms that is expected to show improvement but still indicate contraction. In both surveys, an index reading above 50 indicates expansion and below 50 indicates contraction. The manufacturing index is expected to rise to 50.5, from 48.9, while the non-manufacturing index is forecast to rise to 48, from 46.4

The big question is whether those positive signs for industrial output translate into any significant improvement in the job market. On Wednesday, payroll services company ADP is set to release its report on labor market conditions in August, and on Thursday, a weekly report on the number of people filing for unemployment insurance benefits is scheduled to be released.

The job market will get the greatest focus on Friday, when the Labor Department is expected to announce that the unemployment rate rose to 9.5 percent in August, from 9.4 percent, and that employers shed another 228,000 jobs.

Whatever the actual numbers, economists will be looking into the details of the report to get a sense of whether companies are bringing on more staff to support production increases. A key indicator is the length of the average workweek. Hours worked have plummeted during the recession, as employers have slashed hours to avoid having to lay off people altogether.

The average workweek finally leveled off in July; it would be a positive sign for the future if it starts rising in August.

"Once you get down into the bunker we have been in, it takes a long time to come out," said Brian Bethune, chief U.S. financial economist at IHS Global Insight. "The first thing that happens is you increase some hours, and bring back some workers who were furloughed. You eventually might add a shift, then bring in contract and temporary workers. We will go through that process for a while before you get new hiring."

© 2009 The Washington Post Company