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Last week’s news was mixed but more positive than we’ve seen recently, suggesting that the economy continues to stabilize and may be starting to improve.
Notably, business confidence remained stable for manufacturing and rose substantially for the service sector. The jobs report had a somewhat disappointing headline number but stronger internals. Overall, despite some areas of concern, the tone was more upbeat than in recent weeks.
A look at last week’s news
Both of the major business surveys from the Institute for Supply Management were released last week.
- The ISM Manufacturing report dropped back by more than expected, from 51.8 to 50.8, against expectations of a decline to 51.4. Nonetheless, this indicator continues to show growth, posting the second-highest reading in the past eight months, suggesting that the manufacturing sector is stabilizing. With the weakening dollar and continued adjustment by industry, this is both reasonable and good news.
- The ISM Non-Manufacturing report, which covers the service sector, beat expectations, rising to 55.7 from 54.7, its highest level this year. The forward-looking new orders index rose by even more, to 59.9, a six-month high. This increase suggests the trend has returned to positive and that the majority of the business economy continues to strengthen.
The international trade balance fell to a six-month low, with the U.S. trade deficit dropping from $47.1 billion to $40.4 billion on a decline in exports. Although an improving trade deficit is good news in many ways, in this case, it reflects a substantial decline in consumer goods imports, which ties in closely with weak consumer spending growth. Interestingly, however, this decline reverses a surge the previous month, suggesting that both may just be noise in the data. Goods exports also fell, although by much less than imports—also bad news. As with the manufacturing sector, however, the dollar’s recent reversal may mean this headwind abates over the next couple of quarters.
The jobs report was mixed, with a disappointing headline number but much stronger internal data.
- Employment growth declined from 215,000 to 160,000, well below expectations of a 200,000 gain.
- The unemployment rate remained stable, however, at 5 percent.
- The decline in job growth was offset by an increase in the average weekly hours worked, which ticked back up to 34.5 from 34.4.
- Total labor demand increased month-on-month, despite lower growth in jobs, suggesting that employer labor needs remain strong.
- Average hourly earnings also showed more strength, with a gain of 0.3 percent for the month and 2.5 percent for the year.
Other supporting details include the fact that most of the decline in job growth came from government, rather than the private sector, while manufacturing employment actually increased slightly. Both suggest that the private economy continues to improve.
The week ahead
Once again, this week’s data is all about the consumer. The two major releases will be the retail sales report and the University of Michigan Consumer Sentiment Index.
After a weak run, retail sales are expected to improve.
- The headline growth figure is expected to be 0.9 percent, up from a decline of 0.4 percent last month, given a recovery in motor vehicle sales and rising gasoline prices.
- The core retail sales figure, which strips out the more variable components, including gasoline, autos, and building materials, is also expected to show material improvement, with the growth rate increasing from 0.1 percent to 0.6 percent.
If these numbers come in as expected, it will be another signal that the economy is well on its way to recovery after the first-quarter slowdown.
Consumer confidence is also expected to improve, rising from 89.0 to 89.9, putting a stop to a string of declines. Although gas prices have risen, the stock market has largely recovered and the labor market remains strong. Other indicators have recovered as well, suggesting that, while consumers may not be feeling much better, confidence should still show some improvement. Improving consumer confidence would also be consistent with rising spending, so these two reports will be read in conjunction with each other.
Have a great week!
