Monday Update: Amid Continuing Growth, Some Signs of Weakness

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 10, 2017 2:38:13 PM

and tagged In the News

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monday updateLast week was an eventful one in terms of economic data, with extensive news on both business and jobs. Although headline declines raised some concern, the details of the reports were better, and general levels of activity remain expansionary. Overall, it was a pretty positive week and shouldn't alter expectations going forward.

A look at last week’s data

Manufacturing sentiment ticks down. The ISM Manufacturing Index, which covers production businesses, declined slightly, from 57.7 to 57.2, but beat expectations for a larger decline to 57.0. This is still a relatively high level of sentiment, and it bodes well for continuing growth, particularly since 17 of 18 sectors reported expansion, matching the highest level since 2004.

Trade deficit narrows. The international trade report showed that the U.S. trade deficit improved substantially, narrowing from a downwardly revised $48.2 billion to $43.6 billion. The result beat expectations for a move to $45.1 billion as the Chinese New Year trade distortion fades from the data. The lower deficit is good news and should be positive for first-quarter growth.

Service sector growth disappoints. The ISM Non-Manufacturing Index declined to 55.2 from 57.6, a substantial drop and well below expectations of 57.0. Nonetheless, this level is still indicative of continuing growth, and 15 of 18 industries reported expansion. The decline may be related to weather—construction, in particular, took a hit in March—so it’s too early to panic, but we’ll need to monitor this index going forward.

Fed eyes more hikes. The minutes of the last meeting of the Federal Open Market Committee were released on Thursday. Somewhat more hawkish than expected, the minutes suggested that the Fed may start winding down its balance sheet by stopping reinvestment later this year. Still, market reaction was minimal, as any such normalization is likely to be well telegraphed and very gradual. Nonetheless, the news is now out there.

Jobs drop may not be so bad. The big news of the week was the jobs report for March. The headline number of 98,000 jobs fell significantly below expectations of 174,000, and it was a big drop from a downwardly revised 219,000 jobs in February. Though the decrease was a major surprise, the details of the report were better, suggesting that the weak headline number may be an outlier. Notably:

  • Strong job growth in the household survey drove the unemployment rate down to 4.5 percent from 4.7 percent.
  • Wage growth continued at 0.2 percent, which is typical of the expansion thus far.
  • Most of the underperformance came in weather-affected sectors, such as construction, leisure and hospitality, and retail.

Given the mixed underlying data, as well as the strong results in the first two months of the year, the negative aspects of the March report should be taken with a grain of salt.

The week ahead

This week’s data will focus on the consumer.

On Thursday, the University of Michigan Consumer Sentiment Index is expected to remain essentially flat at 97.0. Confidence is starting to stabilize as expectations drop back on a range-bound stock market and other factors.

Similarly, the Consumer Price Index reading for March looks likely to remain in its same range. The headline inflation index is expected to be flat for the month and up 2.6 percent for the year. That would be basically the same as the data from the previous month, when it was up by 0.1 percent on the month and 2.7 percent on the year. Similarly, the core inflation index, which excludes energy and food, is expected to stay about the same, at 0.2 percent for the month and 2.3 percent for the year (compared with 0.2 percent and 2.2 percent in February).

In the same vein, Friday’s retail sales report is expected to show that the headline sales index was flat in March, down from a 0.2-percent increase the previous month. Core sales, excluding autos, are expected to grow by 0.3 percent, up from 0.2 percent. There is some downside risk here, based on a decline in gas prices and normal weather, so a disappointing number wouldn’t necessarily be as bad as it might look.

Have a great week!

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