The latest economic reports are sobering. April now looks to be the weakest month in this economic slowdown although several more months of modest production declines are still likely.
The pattern remains the same – consumer packaged goods shipments are steady while consumer durable goods and capital goods shipments shrink sharply. Fortunately, the weakest industry is not a significant motor freight customer. Telecommunications equipment shipments fell nearly 10% in April with more declines ahead.
First, the labor department said that labor productivity fell at a 2% annual rate during the winter quarter, pushing up unit labor cost to nearly a 7% annual rate. Then the Census Bureau reported that April manufacturing shipments dropped 2.5% below Mar. That is more than a 30% annual rate of decline. Manufacturing orders fell 3% and inventories edged up 0.1%. That puts surplus inventories in the 1-2 day range for non-durable goods and 5 days plus for durable goods.
The productivity news is the most disturbing. Inflation tracks unit labor cost very closely. The April-June quarter is likely to see another small decline in labor productivity. Employment, as always, is not cut as quickly as production. The economy can stand two quarters of decline after the long string of very high productivity gains. But if the demand and inventory problems that set off the productivity decline are not solved early in the summer, expect inflation to accelerate in the second half of the year, bringing credit costs and wages along for the ride.
The Federal Reseve Board still believes that production and productivity will resume rising this summer. Recent reports on construction, retail trade, and consumer confidence tend to confirm this.