Monday Update: Employment Recovers with Strong Job Gains

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 8, 2019 2:31:17 PM

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Monday updateLast week was a busy one for economic news, including looks at retail sales, business confidence and investment, and the all-important jobs report. Although the data continues to trend down, the most significant reports—especially on employment—continue to signal growth. This week, we’ll see Fed meeting minutes and the latest numbers on consumer confidence.

Last week’s news

On Monday, the retail sales report came in well below expectations. The headline index dropped from a gain of 0.2 percent in January to a 0.2-percent decline for February, which was boosted by higher gas prices. Core retail sales, which exclude autos, slowed by even more, from an upwardly revised 1.4-percent gain to a 0.4-percent decline. Retail demand has clearly weakened again after a one-month rebound from the significant pullback in December and will likely signal slower first-quarter growth.

Also on Monday, the Institute for Supply Management (ISM) Manufacturing index rose slightly, from 54.2 in February to 55.3 for March, above expectations. This result suggests that a slowdown in global demand has not yet significantly damaged the U.S. manufacturing sector. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this is a reasonably healthy figure, suggesting continued growth.

On Tuesday, the durable goods orders report came in below already weak expectations. The headline level dropped from a downwardly revised gain of 0.1 percent in January to a decline of 1.6 percent for February, on a significant drop in aircraft orders. That said, this is an extremely volatile series that depends largely on aircraft. The core index, which excludes transportation and is a better economic indicator, outperformed. It rose from an upwardly revised decline of 0.1 percent in January to a gain of 0.1 percent for February. Although this figure is not great, it does suggest stability.

On Wednesday, the ISM Nonmanufacturing index disappointed. It pulled back from 59.7 in February to 56.1 in March, below expectations for 58. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this remains a healthy figure, indicative of continued growth, but suggests that growth may be slowing.

Finally, on Friday, the employment report surprised to the upside, with job growth of 196,000 for March. This result was above expectations of 177,000 and up from an upwardly revised 33,000 in February. The unemployment rate held steady at 3.8 percent, as expected, while wage growth pulled back from 0.4 percent to 0.1 percent. This took annual wage growth down from 3.4 percent to 3.2 percent. Although not a terrific report, it does indicate that last month’s very poor result was likely an outlier, rather than something worse, and that growth continues.

What to look forward to

On Wednesday, the consumer prices report is due. The headline index, which includes energy and food, is expected to rise from a 0.2-percent increase in February to a 0.3-percent increase for March on a rebound in energy prices. This will take the annual rate from 1.5 percent to 1.8 percent, which is still well below the Fed’s inflation target. This increase will be entirely due to gasoline prices. The core index, which excludes energy and food and is a better economic indicator, is expected to be lower. It should edge up from 0.1 percent in February to 0.2 percent in March but remain steady at 2.1 percent on an annual basis. Overall, if the numbers come in as expected, they would show that inflation remains under control.

Also on Wednesday, the minutes from the Fed’s March meeting will be released, giving us some insight into the Fed’s decision to leave rates unchanged last month. Expectations are that the notes will show that Fed members are unlikely to raise rates this year but could include more color on how they plan to stop reducing the Fed balance sheet. These notes are unlikely to move markets. But in conjunction with the price data, they could serve to reinforce market expectations of a steady rate policy.

The producer price report, due on Thursday, is expected to show similar results to the consumer prices report. The headline number is expected to rise from 0.1 percent to 0.3 percent, on energy. In this case, the annual rate should stay at 1.9 percent, due to base effects. Similarly, the core index will rise slightly, from 0.1 percent to 0.2 percent. Here, the annual rate is expected to drop from 2.5 percent to 2.4 percent. These numbers would be consistent with the consumer prices report and have the same meaning.

Finally, the University of Michigan consumer confidence survey, released on Friday, is expected to drop slightly from 98.4 in March to 98 in April. Although gas prices have risen, the stock market has done well and job growth has rebounded, which should leave confidence steady. If the number comes in as expected, this would be well above the historical average and serve as a counterweight to the weaker results from the Conference Board surveys.

Have a great week!

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