Monday Update: Outlook Positive Despite Mixed Results

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 8, 2017 2:32:29 PM

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Monday updateLast week’s data was mixed, with two areas of concern, but it also included significant positive surprises. Overall, results suggest the slowdown in the first quarter is likely to get better, possibly a lot better, over the next couple of months.

Last week’s data

On Monday, the personal income and spending reports showed how American workers are making and spending their money. Income growth continued, up 0.2 percent, but it was below expectations for 0.3-percent growth. In addition, the previous month revised downward from 0.4 percent to 0.3 percent. Personal spending was flat for the second month in a row and came in below expectations of 0.2-percent growth. Weak spending growth, despite rising income, is a sign that high levels of confidence have yet to translate into actual consumer behavior. Also of concern is wage income growth, which was up only 0.1 percent, the lowest in nine months. These reports indicate that although growth continues, signs of acceleration are missing. But when looked at on a real basis (after considering inflation), the news looks better—suggesting that price changes are at least part of the problem here.

The ISM Manufacturing Index, which analyzes expectations of companies that make stuff, was also released on Monday. It dropped from 57.2 to 54.8, well below expectations for a smaller drop to 56.5 and down for the second month in a row. Here, numbers over 50 indicate expected expansion, so these companies continue to anticipate growth but at a slower level. Growth continued to be broadly based, with 16 of 18 industries indicating expansion. This indicator remains healthy overall, but the decline suggests that further acceleration may be less likely.

There was better news on Wednesday with the release of the ISM Non-Manufacturing Index, which tracks the service sector. It increased from 55.2 to 57.5. This is the largest increase in seven months and well above the expected 55.6, suggesting further economic acceleration is quite possible. The service sector constitutes seven-eighths of the economy, so the increase here more than offsets the relatively weak manufacturing number. Growth broadened as well, matching the highest level since May 2014, and export orders rose to the highest level since May 2007.

More good news came on Thursday, as the international trade balance narrowed slightly from $43.8 billion to $43.7 billion, which was better than the expected expansion to $45.2 billion. Despite the minor improvement, however, this figure is still in line with previous results and reflects a fall in industrial exports. Offsetting the better monthly result, however, the trailing 12-month trade deficit widened to $510 billion, the second-largest gap in four years.

Finally—and most important—Friday’s jobs report was expected to show significantly faster job growth in April over a weak result in March. In fact, it surpassed expectations with 211,000 new jobs reported. Wage growth also rose, from 0.1 percent to 0.3 percent. Drops in the unemployment rate, from 4.5 percent to 4.4 percent, and the underemployment rate, from 8.9 percent to 8.6 percent, were also welcome news. Rising labor demand combined with shrinking supply suggests that the labor market is likely to continue to tighten.

The week ahead

Three key economic reports will be released this week—all of them on Friday.

First, we’ll see data on consumer prices. This month’s report will be pivotal after March’s surprise decline—the first in seven years. The headline index, which includes everything, is expected to increase 0.2 percent. This would be enough to reverse most of the March decline and leave the year-on-year rate of increase at 2.3 percent. The core index, which excludes food and energy, is also expected to increase 0.2 percent. This would more than reverse the March decline and leave the annual price increase at 2 percent. Although these figures are consistent with Federal Reserve inflation expectations, everyone will be watching to see whether inflation continues to move higher in the coming months.

Retail sales numbers are also expected to come in stronger after a weak March. The headline number is expected to grow 0.6 percent—more than enough to reverse a 0.2-percent decline in the previous month. Core sales, which exclude autos, are expected to rise by 0.5 percent after a flat March. Both the March weakness and the anticipated April strength can be attributed to changes in gasoline prices and auto sales, which have rebounded. A strong result could be a sign that high confidence levels are finally starting to translate into faster spending growth, which has been a concern.

Finally, the University of Michigan will release its May consumer confidence survey. The number is expected to remain steady at a strong 97.0. Confidence surged after the election, but it appears to have stabilized in recent months. Still, as with the retail sales figures, continued confidence would be a positive sign for the economy and markets.

Have a great week!

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