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Productivity up, joblessness down

Economics in a nutshell: The labor market data seem to be better than expected and that holds out hope that tomorrow's employment report could surprise on the upside.

INDICATOR: First Quarter Productivity/Jobless Claims/Layoff Notices

KEY DATA: Productivity: +0.7%; Labor Costs: +0.5%/Jobless Claims: 324,000 (down 16,000)/Layoffs: down 23%

IN A NUTSHELL: "The labor market data seem to be better than expected and that holds out hope that tomorrow's employment report could surprise on the upside."

WHAT IT MEANS: There was a flood of data today with a concentration on the labor market. First quarter productivity rose somewhat modestly, which may have disappointed some. However, the gain came after a sharp decline at the end of last year. More importantly, labor costs, which had surged in the fourth quarter of 2012, were largely flat in the first quarter. Businesses continue to keep a tight lid on compensation, which increased modestly. Manufacturing is once again leading the way as productivity rose at twice the pace seen in all of 2012 and nearly three times as fast as in 2011. The growing demand is allowing companies to use their factories more efficiently and they are doing just that. Meanwhile, productivity in the nonfinancial portion of the economy is barely growing.

Productivity and labor costs all are part of the equation that leads to growing employment and it just may be that the job situation is better than currently perceived. Weekly jobless claims dropped sharply, hitting the lowest level in about five years. Supporting those numbers was the April report on layoffs by Challenger, Gray and Christmas. Announced payroll cuts were down sharply from March's pace and moderately from April 2012. It appears that the early year jump in layoffs has ended.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday's disappointing ADP estimate of April job gains lowered expectations for tomorrow's payroll number, but today's data may raise that back up. The claims and layoff notices reports seem to point to job gains in the 175,000 to 200,000 rather than the roughly 135,000 consensus forecast. I am in the 175,000 range so we shall see. A note of warning is that while the claims and layoffs are coming down, it is doubtful that businesses have shifted gears and started hiring. We simply may be seeing a stand in place approach - few layoffs and few hires. Indeed, even my job gain number would not signal a strong labor market. We need much better growth for businesses to really ramp up hiring and as the FOMC clearly put it yesterday, fiscal policy is restraining growth so don't expect really good job gains for a while. Investors, who may have gotten concerned after yesterday's ADP report and FOMC statement will probably breathe a sigh of relief today. The economy is not falling apart even if it is not booming either. In other words, more of the same.