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US private hiring slows, but services sector accelerates Trade deficit widens to two-year high in April

WASHINGTON, June 4, (Agencies): US companies hired far fewer workers than expected in May, but an acceleration in services sector growth supported views the economy was regaining strength after sagging early this year. While other data on Wednesday showed the trade deficit hit its widest point in two years in April, a rise in imports to record highs underscored the economy’s resilience. “May job growth may have been a little less than expected but with imports rising, it looks like the economy is moving forward solidly,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. Private employers added 179,000 jobs to their payrolls in May, the ADP National Employment Report showed, compared to 215,000 jobs in April. That was below economists’ expectations for a gain of 210,000 jobs in May.

It was released ahead of the government’s comprehensive employment report on Friday. The ADP report, however, does not have a good record predicting nonfarm payrolls. A Reuters survey forecast payrolls rising 218,000 after a 288,000 increase in April. Separately, the Institute for Supply Management said its services sector index rose to 56.3 last month as new orders and business activity jumped. It was the highest reading in nine months and was up from 55.2 in April. In another report, the Commerce Department said the trade gap increased 6.9 percent to $47.2 billion as imports hit a record high. It was the largest deficit since April 2012 and followed a $44.2 billion shortfall in March. US financial market were little changed after the data.

When adjusted for inflation, the trade deficit increased to $53.8 billion from $50.9 billion in March, suggesting that trade remained a drag on growth in the second quarter. Trade subtracted almost a percentage point from first-quarter gross domestic product growth. The economy contracted at a 1.0 percent annual pace in the first three months of the year. While there are signs GDP growth has since rebounded this quarter, it will probably not top the 3.5 percent rate that many economists are anticipating. Barclays trimmed its second-quarter GDP growth estimate by one-tenth of a percentage point to a 2.9 percent rate. Morgan Stanley lowered its forecast to a 3.5 percent rate from 4.0 percent.

But the 1.2 percent increase in imports to an all-time high of $240.6 billion pointed to the economy’s underlying strength. Imports of automobiles, capital goods, food and consumer goods all hit record highs in April.
“Strong gains in capital and durable goods imports suggest a pickup in economic activity and sustained domestic demand,” said Gennadiy Goldberg, an economist at TD Securities in New York.
The trade deficit with the European Union was the largest on record, as was the gap with Germany. Imports from South Korea also touched a record high.
Chinese imports rose 16.3 percent, pushing the politically sensitive trade gap with China to $27.3 billion from $20.4 billion. Overall exports slipped 0.2 percent to $193.3 billion.
US productivity fell even more than previously thought in the January-March period while labor costs rose at a faster pace.

Productivity, the amount of output per hour of work, declined at an annual rate of 3.2 percent in the first quarter, the weakest showing since the beginning months of the recession in 2008, the Labor Department reported Wednesday. Unit labor costs rose at a 5.7 percent rate, the fastest pace in more than a year.
Rising labor costs and falling productivity can be a cause for concern if they are an indication that inflation is worsening. But the first quarter performance was seen as a temporary bump caused by an unusually harsh winter which caused the economy to go into reverse. A strong rebound is expected in the current quarter.
Initially, the government reported that productivity fell at a smaller 1.7 percent rate in the first quarter. The initial estimate put the rise in labor costs at a 4.2 percent rate. The reason the numbers were revised was that the economy’s overall output in the first quarter, as measured by the gross domestic product, was revised sharply lower. Instead of the GDP growing at a tiny 0.1 percent rate in the January-March period, the government reported last week that the economy actually shrank, falling at a 1 percent rate.

Analysts believe overall GDP will bounce back in the current April-June period and they also are looking for productivity to recover as well. The Federal Reserve keeps close watch on productivity and labor costs for any signs that inflation is threatening to rise to an unacceptable rate. But economists say the Fed will see the first quarter weakness in productivity and rise in labor costs as temporary developments reflecting the harsh winter rather than an indication of the start of a worrisome trend. Even with the first quarter spurt in labor costs, overall wage pressures remain mild, reflecting the long period it has taken the economy to regain the millions of jobs lost during the Great Recession. Economists are looking for a rebound in economic growth in the April-June quarter to around 3.8 percent as warmer weather boosts consumer spending. They expect further job gains will lift incomes and spur consumer spending in the second half of the year when they are forecasting the economy will be growing at a solid annual rate of around 3 percent.

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