The twin blizzards that blanketed much of the East Coast in February couldn't bury an improving economic picture: Payrolls declined less than many had expected and activity in the manufacturing and service sectors continued to expand. For the week, the S&P 500 Index rose 3.1% to 1,139 (for a year-to-date total return of about 2.5%). The yield of the 10-year U.S. Treasury note rose 8 basis points to 3.69% (for a year-to-date decrease of 16 basis points).

Unemployment rate holds steady at 9.7%

The job situation turned out to be less grim than expected in February. The unemployment rate remained at 9.7%, and nonfarm payrolls declined by 36,000 jobs—both figures were better than expected given February's two severe snowstorms in high-density population areas. The blizzards produced record snowfalls in cities such as Washington, D.C., and Philadelphia, and likely disrupted job-hunting and hiring. Payroll losses were highest in the construction industry, which shed 64,000 jobs. Analysts attributed the better-than-expected results to a recovery in the labor market as the nation claws its way out of recession. One sign of that is a continuing addition of temporary-worker jobs, often a precursor of more-permanent hiring. However, the "underemployment rate," which goes beyond the official jobless rate to incorporate people who have given up looking for work or who hold part-time jobs but prefer full-time positions, inched up to 16.8%. "Given that a significant number of laid-off workers haven't resumed their job search," said Vanguard economist Roger Aliaga-Diaz, "we expect the official unemployment rate to increase some."

Personal savings takes a nosedive

Personal income rose for the fourth straight month in January, but just barely. Lower dividend, farm, and rental income offset strong growth in wages and salaries. Personal spending continued to grow, but only at a modest pace. The increase in spending, paired with downward revisions to income estimates and increasing taxes, substantially cut the personal savings rate, from 4.2% in December to 3.3% in January—the lowest since October 2008. Inflation, based on the personal spending price index, remained tame.

Two key indexes complement one another in signaling growth

Gauges of activity in the manufacturing and services sectors released by the Institute for Supply Management (ISM) offer encouraging signs that an economic recovery is in the works. The ISM's manufacturing index for February was at an expansionary level (above 50) for the seventh straight month, although it declined to 56.5. Meantime, ISM's service-sector index jumped 2.5 points to 53.0, the second month of expansion in this portion of the economy that accounts for most of the country's output and jobs. The employment component of the services index posted especially strong gains, although it continues to reflect slow contraction.

Productivity surges as unit labor costs plummet

Continuing the strong growth that began in 2009's second quarter, productivity numbers for the third and fourth quarters were revised upwards to 7.8% and 6.9%, respectively.  The large gains are a consequence of strengthening demand met by a recession-shrunken workforce: Companies are reluctant to add workers until they're convinced that the economic upswing is on solid ground. Reflecting a weak labor market, fourth-quarter hourly compensation was revised downwards and was a key factor in the substantial quarterly drop (–5.9%) in unit labor costs—which led to the measure's largest decline on a year-over-year basis (–4.7%) since 1948, when these statistics were first recorded. Lower unit labor costs bolster profits and dampen inflation.

Construction spending falls despite residential-sector gains

Private residential construction increased in January, which is a good sign for the housing market. That gain, however, was overshadowed by a decline in construction in most sectors of the private nonresidential market, including manufacturing, retail, and health care, and in the public sector. The net result was a decline of 0.6% in overall construction spending. In the public sector, the first spurt of federal stimulus money released through the American Recovery and Reinvestment Act has run its course and, because of states' fiscal challenges, public construction spending has reverted to pre-stimulus levels.

Despite the cold, economic expansion continues to heat up

The Federal Reserve's latest Beige Book survey of its twelve districts, which covered much of January and February, found that the economy plowed ahead despite the severe weather conditions. Nine districts said their local economies expanded, while two reported mixed conditions. Only the Richmond district reported activity muted by the snow. The manufacturing sector—especially high-tech, semiconductors, and autos—improved almost everywhere in response to strong export growth (mainly due to demand from China) and restocking of recession-depleted inventories.

The economic week ahead

Reports looking outward and inward will be released as the week comes to a close: international trade on Thursday and, on Friday, retail sales and business inventories.