Monday Update: Growth Strong But Slowing

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on May 7, 2018 2:47:09 PM

and tagged In the News

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Monday updateLast week was an extremely busy one for economic news, which gave us a look at all major sectors and concluded with the all-important employment report. Overall, while the economic statistics remain quite positive, there are signs of slowing. This week, the main focus will be on prices, plus we’ll get a look at consumer confidence.

Last week’s news

On Monday, the personal income and spending report revealed that income growth remained strong at 0.3 percent for March, the same as the downwardly revised number for February. This result was below expectations of 0.4-percent growth, though, likely due to slower-than-expected job growth last month. Personal spending growth improved as anticipated, from a downwardly revised flat level in February to 0.4-percent growth in March, on rising auto sales and utility spending. This improvement is helpful after a first-quarter consumer spending slowdown and reflects continued high confidence levels.

The Institute for Supply Management (ISM) Manufacturing survey was released on Tuesday. It weakened from 59.3 in March to 57.3 in April, worse than the expected 58.5. Still, this indicator remains at a strongly expansionary level, as this is a diffusion index with values above 50 indicating expansion. The benefit from the weak dollar continued, although tariff worries appear to have had a negative effect—as most of the decline came from the production subindex, suggesting manufacturing growth may be slowing.

On Thursday, the international trade report did much better than expected. The trade deficit narrowed from $57.6 billion to a six-month low of $49 billion. This number was much better than the expected $55.6 billion, as import growth slowed even as export growth rose. With this improvement, net trade is likely to be neutral rather than negative for the economy this year, as growth abroad and the weaker dollar are likely to keep export growth going.

Also on Thursday, the ISM Nonmanufacturing survey weakened by more than expected. It went from 58.8 in March to 56.8 in April, well below the expected 58. As with the Manufacturing survey, however, this remains a strongly expansionary level and indicates that economic momentum continues to be strong into the second quarter.

Finally, on Friday, the employment report showed that job growth rebounded. The March figure was revised up from 103,000 to 135,000, with April at 164,000. This growth pushed the unemployment rate down from 4.1 percent in March to 3.9 percent for April, an 18-year low. But wage growth disappointed, with March revised down from 0.3 percent to 0.2 percent, and the April number staying steady at 0.2 percent. Overall, this month’s report shows continued job growth, albeit at a slightly slower pace, and it normalizes the variance of the past two months. Wage growth, however, remains a concern.

The final piece of economic news was the Fed’s regular meeting. As expected, the Fed left interest rates unchanged. This news was revealed in the postmeeting statement. It seemed to suggest the Fed is now less concerned about inflation running too low and was taken as confirmation that rate increases will continue at future meetings.

What to look forward to

Wednesday’s producer prices report is expected to show that headline price growth moderated from 0.3 percent in March to 0.2 percent in April. There is significant upside risk here, however, as energy prices have increased across the board. On an annual basis, producer price growth is expected to drop from 3 percent in March to 2.8 percent in April, which would still be a high figure. Here as well there is risk that inflation could move higher.

Core producer prices, which exclude energy, are also expected to moderate, from 0.3-percent growth in March to 0.2-percent growth in April. Here, though, there is less upside risk as energy prices are not included. On an annual basis, growth in core producer prices is expected to tighten from 2.7 percent to 2.4 percent. This would still put price growth above the Fed’s 2-percent inflation target, suggesting that more rate hikes are on the way.

Thursday’s consumer prices report is expected to show the opposite, with the headline index rising from a decline of 0.1 percent in March to a gain of 0.3 percent in April. This would take the annual figure from 2.4 percent to 2.5 percent, again primarily on rising energy prices. Core prices, which exclude food and energy, are expected to show constant growth, at 0.2 percent for both March and April. Due to base effects, however, the annual figure is expected to rise from 2.1 percent in March to 2.2 percent in April. Again, this would be above the Fed’s target, suggesting that rates will keep rising.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to pull back slightly, from 98.8 in April to 98.3 in May. The survey would remain at a high level, however, consistent with continued growth, and the pullback would have no material effect. In fact, if confidence remains at the expected level, it would suggest that consumption growth is likely to rebound after a slow first quarter, which would be constructive for the economy.

Have a great week!

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