U.S. Personal Income Firm, Prices Tame

Consumer sentiment during all of June improved 7.3% from the prior month to 84.9 according to the University of Michigan. The increase recovered most of a 9.5% slump during May, built on the rise that was reported earlier and exceeded Consensus expectations for a reading of 82.5.

During the last ten years there has been a 77% correlation between the level of consumer sentiment and the y/y change in real consumer spending.

The reading of current economic conditions rose 9.3% as the index of current personal finances rose 10.8% (-7.4% y/y). Buying conditions for large household goods were judged to be 8.2% better (-7.6% y/y) than during May.

Expectations for the economy rose for just the second month this year. The 5.6% June gain reflected an 8.6% rise in business conditions expected during the next year. But long term (5 year) expectations for business conditions fell for the fourth month in the last five (-23.3% y/y). Consumers' opinion about gov't economic policy fell 3.9% m/m (-20.4% y/y).

Expected inflation during the next year slipped modestly to 4.4% and the five to ten year expected rate of inflation also fell to 3.5%.

The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

For Japan, as was the case yesterday with Germany, the last time we wrote about the labor market was three months ago. Back then, we were all excited about rising employment in Japan and falling unemployment, particularly for February. In the intervening months, however, Japanese labor conditions have hesitated somewhat, although employment has been basically stable with February's strong performance.

In May, employment gained 270,000 after a cumulative loss of 280,000 in March and April. The total amount in May, 63.91 million workers, remains above the levels of all but two months in the last 4 1/2 years. The highest was 63.93 million in September 2005, followed by February's 63.92 million. Other months, as evident from the graph and the table below, have been noticeably weaker.

The news headlines today highlighted May's low unemployment rate, 4.0%, which, as seen in the second graph, is the lowest since early 1998. However, our own enthusiasm was tempered by a look at labor force data. Japan's Ministry of Internal Affairs and Communications doesn't publish the labor force series on a seasonally adjusted basis, but we can calculate it by adding employment and unemployment. Last time we assessed these data, we were pleased to describe growth in the labor force, which meant that the decline in unemployment was coming from the strength of employment. This time, though, as we describe above, employment has been flat for three months and the second graph shows that the labor force has also stopped growing. Thus, May's dip in unemployment is not a sign of further strength, but of hesitation by workers, who likely remain skittish about the prospects for continuing growth.

At the same time, we don't want to downplay the employment performance. Two key sectors, manufacturing and construction are looking better. The third graph indicates that these have both stabilized after declines that began in about 1997. These industry data are not seasonally adjusted either, so they're a bit erratic. But manufacturing is notable for not experiencing the jobs decline that has characterized the spring months in several recent years; instead, gains from last summer have largely held, a situation we see as impressive with the competition Japan manufacturing faces from its neighbors. Construction job gains are a good sign that investment is picking up, a quite tangible expression of confidence.