The primary factor is the continued recovery of the job market. The jobless rate declined again in almost every state in April. The jobless rate was in double digits in only eight states, which is less than half the 18 states that saw double digit jobless rates in April 2010. Overall, jobless rates fell in 39 states from March to April, with only three states seeing a rise. The trend of decreasing unemployment levels is supported by the concurrent and ongoing trend of decreasing productivity levels. Last quarter, productivity grew 1.6%, which is down from the previous quarter’s 2.9%. Even with the slow pace of economic expansion, decreasing productivity means that companies will have to continue to hire in order to meet productivity needs. They’ve squeezed all they can out of current labor forces and need to hire more people.
This dovetails nicely with the recently release of the Fed’s Federal Open Market Committee (FOMC) minutes. The minutes show that FOMC members are coming together on the exit strategy from the current easy monetary policy. Most members viewed economic output as moderately expanding, consistent with a gradual but ongoing improvement in the labor market. Additionally, most members still view the recent commodity-inspired inflation as transitory, and as long as labor market pressures are subdued then overall inflation will climb at a slower, more manageable pace. Thus, if the labor market continues its upward trend at its current pace, the Fed watchers of the world are predicting a rate increase in the fourth quarter. If labor markets surprise to the upside, that could come a little sooner.
Next week the economic calendar brings us Tuesday’s New Home Sales report; Wednesday’s Durable Goods Orders report; and two biggies on Thursday: GDP and Jobless Claims.