WASHINGTON (AFX) - Economic indicators to be released this week will show the US economy remains on a recovery path, but not one strong enough to bring down the unemployment rate, economists said.
"At the end of the day, the conclusion is that we're still headed for a modest recovery -- not a strong recovery by any means," said Mark Vitner, economist at Wachovia Securities.
The week's data will likely reinforce expectations for the Federal Reserve to keep interest rates at 40-year lows, with little prospect of monetary tightening until the fall at the earliest.
Non-farm payrolls, which probably have the biggest market-moving potential, are likely to record their second straight increase in May, after eight months of declines.
The consensus forecast is for payrolls to rise 44,000 and for the unemployment rate to rise to 6.1 pct, its highest level since July 1994, from 6.0 pct in April.
The unemployment rate usually rises in the initial stage of a recovery as more people enter the job market in search of a job after having left the labor force during the recession due to lack of hiring.
The May employment report will include revisions to previous monthly reports, going back two years, and these could significantly alter current perceptions, analysts cautioned.
Vitner said in recessions, these revisions are typically in the downward direction, holding the potential for an even higher unemployment rate, and lower levels of payrolls.
Given that continuing jobless claims -- which include all unemployed workers continuing to draw regular state unemployment benefits -- are at their highest since Jan 15, 1983, a jump-up in the unemployment rate to 6.4 pct would not be a shock, Vitner said.
Henry Wilmore, economist at Barclays Capital, said the labor market "is still very sluggish...I don't think we're yet to the point where the labor market numbers are going to show much improvement."
The Fed is not expected to begin tightening monetary policy until a decisive turn is marked in the job market, economists said.
"On the whole, this is not the kind of report that gets the Fed nervous about an inflationary break out," Lehman Brothers economists noted.
Vitner cautioned that "all the risk is on the downside," for the report, which could lead the markets to sell off US stocks and the dollar, while bidding up Treasuries.
The sluggish job market has prompted some observers of the economy to compare the current recovery to the early 1990s expansion, which was characterised as a "jobless recovery."
"I hope it doesn't last but so far our rebound bears some resemblance to the so-called jobless recovery that we had following the 1990-1991 recession," said Robert McTeer, president of the Dallas Federal Reserve Bank, in remarks on Thursday.
Companies are focused on improving profit margins after profits were shredded last year and will likely continue to be hesitant about taking on new employees for at least a few more months, analysts said.
However, this period is likely to last only around 9 months, according to Vitner at Wachovia, much shorter than the 18-month period in the early 1990s recovery when the unemployment rate stubbornly refused to come down.
After the previous recession, "we went a long time before we saw job growth. (but) I think it will be a little bit sooner this time," Willmore said.
Among other key data in the week, the purchasing managers' index of manufacturing activity is expected to show continued recovery in this sector, although without a great deal of momentum. The Institute of Supply Management (ISM) manufacturing index is expected to rise to 54.8 in May from 53.9 in April.
The Chicago Purchasing Managers Index released last Friday showed a big jump in May to 60.8 from 54.7 in April. This is the highest level of the Chicago PMI since April 1999. However, economists said this is unlikely to be duplicated in the ISM report.
Vitner explained that the Chicago report is centered on the durable goods sector, which has been on the upswing after getting "crushed" in the recession.
Kim Rupert, economist at Standard & Poors' MMS, said "this still suggests a recovery, not strong momentum in manufacturing."
"The economy is sort of trudging ahead here. The recovery is ongoing, it's modest. It is going to take some time for traction here," said economist Josh Shapiro at Maria Fiorini Ramirez.
Following are the consensus forecasts of Wall Street economists for data to be released this week.
APRIL CONSTRUCTION SPENDING, Monday (10.00 am): The consensus forecast of Wall Street economists is for construction spending to remain unchanged in April. Construction spending fell 0.9 pct in March, the first drop since February.
The report should reflect cross-currents in the construction sector, with rising public sector spending counteracting declining private construction activity, economists said. Construction was also boosted in the winter by mild weather, leaving scope for some give-back in succeeding months.
MAY ISM MANUFACTURING INDEX, Monday (10.00 am): Wall Street analysts forecast the ISM rose to 54.8 in May from 53.9 in April. The index had fallen for two straight months in April. A reading above 50 indicates expanding activity, while a below 50 index denotes contraction.
"Inventory re-stocking, an increase in auto production, together with a stabilisation of capital equipment spending probably pushed the ISM up" in May, Lehman Brothers economists said.
MAY VEHICLE SALES, Monday (afternoon, times vary): Domestic car and light truck sales are expected to fall 2.2 pct in May to 13.5 mln units on an annualised basis from 13.8 mln in April. Total sales, including foreign producers, are seen falling 2.9 pct to at an annual rate of 16.7 mln units from 17.2 mln in April.
"Continued generous incentives and low interest rates should result in another healthy vehicle selling rate in May, although below the April level," CS First Boston economists said in a research note.
Lehman Brothers economists said domestic vehicle sales will trend down to a sustainable 12.5 mln annualised pace "before the year is out."
They cited four factors behind the expected slowdown: less attractive dealer financing incentives, moderation in income growth, and dissipating stimulus from lower tax rates and mortgage refinancing activity.
MAY ISM NON-MANUFACTURING INDEX, Wednesday (10.00 am): Economists expect the ISM non-manufacturing index rose slightly to 55.7 in May after it slipped to 55.3 in April. In March, the index, which measures the service sector, stood at 57.3. A reading above 50 indicates expanding activity, while a below 50 index denotes contraction.
WEEKLY JOBLESS CLAIMS, Thursday (8.30 am) Forecasts indicate that initial claims for regular state unemployment benefits fell 4,000 to a seasonally adjusted 406,000 for the week ended June 1. Claims fell 12,000 to 410,000 in the previous week, the lowest level since March 16.
MAY NONFARM PAYROLL, Friday (8.30 am) The consensus forecast of Wall Street economists is for nonfarm payroll employment to rise by 44,000 in May after rising 43,000 in April. The unemployment rate is expected to tick up to 6.1 pct from 6.0 pct, its highest level since July 1994. Average weekly earnings are expected to rise 0.3 pct following a 0.1 pct rise in April.
APRIL WHOLESALE INVENTORIES, Friday (10.00 am): Economists said wholesale inventories are likely to be flat in April for the second straight month.
Wholesale inventories have now declined or remained flat for 15 straight months. The last time inventories rose was in Dec 2000.
APRIL CONSUMER CREDIT, Friday (3.00 PM): Consumer credit is expected to expand by 6.1 bln usd in April, after rising 4.6 bln in March. Continued increases in auto sales and widespread rises in retail sales during the month likely kept consumer credit on the upswing, analysts said.