On Monday, the ISM Manufacturing survey for April was released. This measure of manufacturer confidence surprisingly dropped from 57.1 in March to 55.4 in April against calls for an increase to 57.6. This is a diffusion index where values above 50 indicate growth, so this report showed continued expansion for the manufacturing industry despite the miss against expectations. The drop in the index was largely due to softer demand for manufactured goods. The report also showed that the measure of new orders fell to its lowest level since May 2020, with hiring also showing signs of weakness. All in all, this report indicated that the recovery for the manufacturing industry slowed during the month; however, slower growth is still growth, and the industry is expected to continue to improve in the months ahead.
On Wednesday, the March international trade balance report was released. It showed that the trade deficit increased more than expected. The monthly trade deficit widened from an upwardly revised $89.8 billion in February to $109.8 billion in March against calls for an increase to $107.1 billion. The trade deficit has increased in each of the past five months, and the March result marked a new record monthly deficit. The larger-than-expected increase in March was due to a 10.3 percent increase in imports during the month, which more than offset the 5.6 percent rise in exports. The large monthly trade deficits throughout the first quarter were driven by record imports, which indicated high levels of domestic demand for goods and services. That said, the slower export growth over the quarter, due to faltering international demand, caused net trade to serve as a drag on economic growth. Economists largely expect to see the trade deficit start to normalize in the months ahead, which, in turn, could help support overall economic growth.
Wednesday also saw the release of the ISM Services index for April. Service sector confidence declined during the month, with the index falling from 58.3 in March to 57.1 in April against calls for a modest increase to 58.5. This is another diffusion index where values above 50 indicate growth, so this result still signals continued expansion for the service sector. The decline in April was largely due to a slowdown in service sector hiring, which, in turn, was caused by the current labor shortage and rising employment costs. While the headline index dropped, there were positive signs in the underlying data, including an increase in business activity. Looking ahead, economists largely expect to see service sector confidence improve heading into the summer months, as consumers continue to pivot from spending on goods to spending on services.
The third major data release on Wednesday was the FOMC rate decision from the Fed’s May meeting. The Fed raised the upper limit for the federal funds rate from 0.50 percent to 1 percent, as expected by markets and economists. This 50 bp interest rate hike is part of the Fed’s larger plan to tighten monetary policy throughout the year to combat inflation. Fed Chair Jerome Powell indicated at his post-meeting press conference that the central bank is planning on further rate hikes at future meetings. Markets are largely expecting another 50 bp increase when the Fed meets again in June. Aside from the rate hike announcement, the Fed also stated its plans to begin trimming its balance sheet in June. The balance sheet reductions will start at just under $50 billion per month and will increase to $95 billion per month later in the year, although the pace of balance sheet reductions will depend on market and economic conditions.
We finished the week with Friday’s release of the April employment report. It showed that 428,000 jobs were added during the month. This was better than the 380,000 jobs economists expected and in line with the downwardly revised 428,000 jobs that were added in May. This marks 16 consecutive months of job growth, highlighting the impressive labor market recovery we’ve seen since the end of initial lockdowns in spring 2020. The gains were widespread, as most industries saw increased hiring throughout the month. That said, leisure and hospitality saw notable gains, with manufacturing not far behind. The underlying data was also solid, as the unemployment rate remained unchanged at 3.6 percent. This ties the pandemic-era low that was set in March and is close to the pre-pandemic low of 3.5 percent from February 2020. Overall, this was a strong report that showed the economic recovery continued at a healthy pace in April despite headwinds created by rising costs and tighter monetary policy.
On Wednesday, the April Consumer Price Index report is set to be released. Consumer inflation is expected to slow down during the month, with economists forecasting a 0.2 percent rise in prices in April following a 1.2 percent increase in March. On a year-over-year basis, headline consumer prices are expected to increase 8.1 percent in April, down from 8.5 percent in March. Part of the anticipated slowdown in headline consumer inflation in April is due to relatively steady gas prices, as the surge in gas prices in March was a major driver of inflation. Core consumer prices, which strip out the impact of volatile food and energy prices, are set to increase 0.4 percent during the month and 6.1 percent on a year-over-year basis. Consumer prices have experienced significant inflationary pressure throughout the past year driven by high levels of consumer demand, shipping bottlenecks, and rising material and labor costs.
On Thursday, the Producer Price Index report will be released. As was the case with consumer inflation, producer inflation is expected to moderate in April. Headline producer prices are expected to rise 0.5 percent during the month, down from 1.4 percent in March. On a year-over-year basis, producer prices are expected to increase 10.6 percent in April, down from 11.2 percent in March. Core producer prices, which strip out the impact of volatile food and energy prices, are also expected to show slower growth in April. Core producer prices are expected to increase 0.7 percent during the month and 8.9 percent on a year-over-year basis, down from the 1 percent monthly and 9.2 percent year-over-year increases we saw in March. In the past year, producer prices have experienced similar upward pressure as consumer prices due to high levels of demand and tangled supply chains. This year, the Fed is expected to continue focusing its efforts on combating inflation through the use of tighter monetary policy. So, both the consumer and producer inflation reports will be closely watched by investors and economists in the months ahead.
We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for May. Economists expect to see the index decline modestly during the month, with forecasts calling for a drop from 65.2 in April to 63.6 in May. Consumer sentiment has been challenged during the year by the impact of the Omicron variant, rising prices, and market volatility. Additionally, the war in Ukraine and the surge in Covid-19 cases in China have also increased geopolitical risk over the past two months. While there have been several challenges for consumer confidence throughout the year, consumer spending growth has remained relatively strong; so the declines in confidence have yet to negatively impact the current economic recovery. Looking forward, we’ll likely need to see progress in getting inflation under control before we see sentiment recover to the recent highs we saw early last year.
That’s it for this week—thanks for reading!