The Independent Market Observer

Monday Update (on Tuesday): Labor Market Recovery Picks Up Steam

Posted by Sam Millette

This entry was posted on Apr 6, 2021 10:00:00 AM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette reports on March employment, as well as news on international trade, the Fed, and producer inflation.Last week saw a number of important economic updates, with results largely coming in above economist estimates. Highlights included better-than-expected results for March’s consumer and business confidence surveys and a much-better-than-expected March jobs report. This will be another busy week for updates, with a focus on international trade, the minutes from the most recent Fed meeting, and a look at producer inflation in March.

Last Week’s News

On Tuesday, the Conference Board Consumer Confidence Index for March was released. Consumer confidence came in well above economist expectations, with the index rising from 90.4 in February to 109.7 in March. The forecasts were for a more modest increase to 96.9. This result, which echoed a surge in the University of Michigan consumer sentiment survey for the month, brought the index to its highest level in a year. The strength in March was driven by improved consumer views on the current economic situation as well as heightened expectations for future growth. The continued progress on the mass vaccination front and the tailwind from the recent federal stimulus package were likely the major drivers of the results. The report showed signs of pent-up consumer demand, as the percentage of consumers planning on buying large-ticket items such as houses, cars, and appliances in the next six months hit a multimonth high in March. Ultimately, this encouraging report supports a potential rebound in consumer spending growth in March.

Thursday saw the release of the initial jobless claims report for the week ending March 27, which showed that 719,000 initial unemployment claims were filed. This result was above economist estimates for a more modest 675,000 initial claims and a step up from the downwardly revised 658,000 initial claims filed the week before. The number of initial jobless claims can be quite volatile on a week-to-week basis, but this report brought the four-week moving average for initial claims to its lowest level since the start of the pandemic. We’ve seen a noted improvement in the number of initial claims since hitting a recent high at the end of January. This indicates that the easing of state and local restrictions over the past two months helped spur improvements for the labor market. Given the continued easing of restrictions and the anticipated tailwind from the recent stimulus bill, we may be set to see a continued improvement in the pace of the labor market recovery over the spring and summer. That would be a positive sign for the pace of the overall economic recovery.

Also on Thursday, the ISM Manufacturing index for March was released. This widely followed gauge of manufacturer confidence rose by more than expected during the month, moving from 60.8 in February to 64.7 in March. Calls were for a more modest increase to 61.5. This result brought the index to its highest level since 1983, as high levels of buyer demand and low levels of business inventory led to a surge in confidence. The improvements were widespread, with 17 out of the 18 surveyed industries reporting increased growth during the month. This is a diffusion index, where values above 50 indicate expansion, so this strong result bodes well for increased manufacturing output and spending over the upcoming months. We can see that business confidence and spending have remained impressively resilient throughout the year. Together, the improving public health situation and multiple federal stimulus bills have supported continued growth.

We finished the week with Friday’s release of the March employment report. The report showed that 916,000 jobs were added during the month, a result well above economist estimates for 660,000 new jobs. Marking the best month for job growth since last August, this report shows a notable acceleration in the pace of labor market recovery compared with the numbers from earlier in the year. Continued easing of state and local restrictions and increased vaccinations throughout the month supported the March surge in hiring. The underlying data also showed solid improvement, as the unemployment rate fell from 6.2 percent to 6 percent, as expected. The labor force participation rate ticked up slightly during the month, which is an encouraging sign that mass vaccination efforts are driving more workers back into the economy. All in all, this was an encouraging report showing that the economic recovery has continued to pick up steam in March. The strong results were driven in large part by improvements on the public health front and the tailwind from the recent federal stimulus bill.

What to Look Forward To

On Monday, the ISM Services index for March was released. As was the case with manufacturer confidence, service sector confidence surged well past economist expectations during the month. The index rose from 55.3 in February to 63.7 in March, against calls for a more modest increase to 59. This result brought the index to its highest level since records began back in 1997. This swift rebound following a weather-related slump in February signals that reduced state and local restrictions helped spur a surge in business confidence going into the spring. The rise in confidence was supported by a strong increase in new orders for the service sector, highlighting strong levels of buyer demand. This is another diffusion index, where values above 50 indicate expansion, so this strong result is a good sign for business spending to finish out the quarter. Given the progress on the mass vaccination front and the anticipated tailwind from the recent federal stimulus bill, business confidence and spending are expected to remain in healthy expansionary territory over upcoming months.

On Wednesday, the February international trade report is set to be released. The trade deficit is expected to widen from $68.2 billion in January to $70.4 billion in February. The advance report on the trade of goods showed that both exports and imports declined during the month, as the February weather negatively affected manufacturing and trade. Exports of goods fell by 3.8 percent, an amount more than enough to offset a 1.4 percent decline in imports. If estimates hold, this report would bring the trade deficit to its largest monthly level on record. Despite the notable widening of the trade deficit throughout the pandemic, exports and imports are expected to return to growth in March. The moderating weather and improvements we’ve seen in manufacturing confidence and consumer demand during the month should support this growth. Nonetheless, trade is expected to serve as a modest headwind for overall economic growth during the first quarter.

Wednesday will also see the release of the FOMC minutes from the Fed’s March meeting. The Fed lowered the federal funds rate to virtually zero last March, and there were no major changes to interest rates at this meeting, as expected. Still, although no major surprises were announced, the minutes will likely provide details regarding the Fed’s views on the current economic recovery and the potential path of future rate hikes. The majority of Fed members do not expect to see any interest rate hikes until at least 2023, but the minutes will let us know if any members are in favor of a potential earlier rate hike. The minutes should contain some discussion regarding the rise in long-term interest rates we’ve seen recently. While most Fed members have characterized the increase in long-term yields as reflecting a strengthening economic outlook, the minutes could show us if any Fed members are concerned about the recent rise in interest rates.

On Thursday, the initial jobless claims report for the week ending April 3 will be released. Economists expect to see the number of initial weekly unemployment claims fall from 719,000 to 685,000. If estimates hold, this report would bring the four-week moving average for initial claims to a new post-pandemic low, indicating continued progress for the labor market recovery. The recent improvement in the pace of weekly layoffs is due in large part to the continued easing of state and local restrictions, which has helped spur economic activity as we head into spring. Given the continued progress on the mass vaccination front and the anticipated tailwind from the recent federal stimulus bill, we may be in store for further improvements in the pace of initial weekly layoffs. Still, although we have made progress in reducing the number of initial claims compared with the peak of the pandemic, claims remain high on a historical basis. Accordingly, this report will continue to be widely monitored.  

On Friday, the March Producer Price Index is set to be released. Producer prices are expected to rise by 0.5 percent during the month, in line with February’s 0.5 percent increase. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to rise by a more modest 0.2 percent, matching their 0.2 percent rise in February. On a year-over-year basis, headline producer inflation is expected to rise to 3.8 percent in March, marking the fastest pace of producer inflation since 2011. Much of the recent increase in producer prices has been due to rising input costs for producers. The Fed will continue to closely monitor various inflation metrics. Based on comments from the Fed’s March meeting, however, Fed members appear willing to let inflation run hot for the time being to support the ongoing economic recovery.

That’s it for this week—thanks for reading and stay safe!

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