Last week saw a number of important economic updates, with a focus on business confidence in April and the recent jobs reports. The April employment report showed a slowdown in the number of new jobs added, but weekly unemployment claims fell to a new pandemic-era low by the end of the month. This will be another busy week, with updates to come on April’s inflation, retail sales, and industrial production, as well as a first look at consumer confidence in May.
Last Week’s News
On Monday, the ISM Manufacturing index for April was released. This widely monitored gauge of manufacturer confidence fell by more than expected during the month. The index dropped from 64.7 in March to 60.7 in April, against calls for an increase to 65. Manufacturers largely cited supply chain constraints as the major factor in the slowdown during the month. The global shortage of semiconductor chips served as a headwind for faster overall output growth in key industries. This is a diffusion index, where values above 50 indicate expansion. So, despite the miss against forecasts, the manufacturing industry is set for further growth ahead. Demand has been strong this year, and it’s expected to remain strong as we continue to reopen the economy. In the short term, however, supply chain constraints may serve as a headwind for significantly higher levels of manufacturing output, until the issues are resolved.
On Tuesday, the March international trade report was released. During the month, the trade deficit widened from $70.5 billion in February to $74.4 billion in March, in line with economist estimates. This result brought the trade deficit to its widest monthly level on record. Imports increased by 6.3 percent, reaching a new record high, while exports increased by 6.6 percent. Despite the faster growth for exports on a percentage basis, on a dollar basis, imports increased by more than exports. Export growth was supported by a 7.2 increase in vehicle exports, which partially offset a weather-related slump in auto exports in February. Imports were boosted by increased building material costs, which hit a record high in March. Looking forward, the continued global economic recovery is expected to support further export growth throughout the year. But the pace of export growth will likely rely heavily on the path and pace of the global recovery.
Wednesday saw the release of the ISM Services index for April. This widely followed measure of service sector confidence fell from 63.7 in March to 62.7 in April, against forecasts for an increase to 64.1. Despite this modest decline from March’s record high, the index sits at its second-highest level on record, indicating strong levels of service sector confidence. This is another diffusion index, where values above 50 indicate expansion, so this report shows the service sector continuing to expand at a healthy pace. Over the past few months, consumer demand has picked up, along with the easing of pandemic-related restrictions. Nonetheless, service sector businesses cited supply chain disruptions as a headwind for faster growth in April. Despite the miss against expectations for April, this report represents a strong result for service sector businesses. It indicates that business owners are optimistic that reopening efforts will support further growth.
On Thursday, the initial jobless claims report for the week ending May 1 was released. The number of initial unemployment claims fell by more than expected. They dropped from 590,000 to 498,000, against calls for 538,000 claims. This result represents the fewest weekly initial unemployment claims since the start of the pandemic. Although claims can be volatile on a week-to-week basis, we’ve seen continued progress in getting the number of weekly initial claims down over the past few months. Improvements on the public health front and the associated easing of state and local restrictions have supported the slowdown in the pace of layoffs. The decline in claims was widespread throughout the country, with New York and Virginia showing the largest drop. Claims remain high on a historical basis, however. But the recent improvements give hope for a return to more normal levels of unemployment claims as we continue to reopen the economy.
We finished the week with Friday’s release of the April employment report. It showed that 266,000 jobs were added during the month, a figure below economist estimates for 1,000,000 new jobs. This disappointing result leaves the overall level of employment below pre-pandemic levels and highlights the continued work required to get the economy back to normal. Reopening efforts continued to boost hiring in the hard-hit leisure and hospitality sector. Still, declines in temporary workers and transportation jobs held back overall job growth in April. Business owners have recently noted difficulties in some areas of the country to find workers for open positions. This situation likely reflects lingering concerns around the pandemic, as well as the impact from enhanced unemployment benefits and the recent stimulus checks. The underlying data was disappointing as well. The unemployment rate increased from 6 percent to 6.1 percent, against calls for a decline to 5.8 percent. This weaker-than-expected report is a reminder that the labor market recovery continues to face headwinds. It also indicates that the Fed’s supportive policy is likely to remain in place for the foreseeable future.
What to Look Forward To
Wednesday will see the release of the April Consumer Price Index. Consumer prices are expected to increase by 0.2 percent during the month, following a 0.6 percent rise in March. On a year-over-year basis, consumer prices are slated to increase by 3.6 percent, up from a 2.6 percent annual growth rate in March. The jump in annual inflation is anticipated in part due to factoring in the sharp decline in prices during initial lockdowns last year. In addition, over the past few months, consumer prices have seen upward pressure, as demand rebounded along with the easing of restrictions. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.3 percent during the month and 2.3 percent year-over-year. Still, despite anticipations for rising headline and core consumer inflation, Fed board members have made it clear they view this upward inflationary pressure as largely transitory.
On Thursday, the April Producer Price Index is set to be released. Producer prices are expected to increase by 0.3 percent during the month and 5.8 percent year-over-year. As was the case with consumer inflation, the expectations for large annual growth can be partially attributed to the effect of lockdown-induced fall in prices we saw last April. Core producer prices, which strip out volatile food and energy prices, are expected to increase by 0.4 percent during the month and 3.8 percent year-over-year. Producer prices have seen upward pressure recently due to rising material costs and supply chain disruptions that have negatively affected shipping costs and times. Nonetheless, the Fed is not expected to tighten policy as a response, although it is monitoring inflationary pressure. For the time being, the central bank is focused on supporting the labor market recovery.
Thursday will also see the release of the initial jobless claims report for the week ending May 8. Economists expect to see 500,000 initial unemployment claims filed during the week, in line with the 498,000 initial claims filed the week before. If estimates hold, this report would mark the fifth straight week with initial claims coming in under 600,000. Claims near current levels represent a notable improvement from the 2021 high of more than 900,000 initial weekly claims we saw in early January. Still, despite the recent progress made in getting initial claims down, the April job report showed that the labor market continues to face pressure. Given a level of claims that remains historically high, as well as the April slowdown in hiring, this weekly look at the health of the job market will continue to be widely monitored.
On Friday, the April retail sales report will be released. Economists expect to see sales increase by 1.1 percent during the month, following a 9.7 percent surge in March. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to increase by only 0.7 percent in April, after rising by 8.2 percent in March. In March, the stimulus-fueled surge in spending was the second-largest monthly increase on record. So, a pullback in April is understandable. If estimates hold, this report would mark two consecutive months of retail sales growth. This would be a good sign that consumers continued to benefit from reopening efforts and the federal stimulus payments. Continued sales growth would also be a positive sign for the overall economic recovery. Consumer spending accounts for the majority of economic activity in the country.
Friday will also see the release of the April industrial production report. Industrial production is expected in increase by 1.3 percent during the month, following a 1.4 percent rise in March. The March result was partially driven by a 2.7 percent increase in manufacturing production. In April, economists are forecasting a solid 2.3 percent increase in manufacturing production, which would continue to support overall industrial production levels. Over the past year, the producer side of the economy has been slower to recover than the consumer side. But we have seen an increase in producer output this year. Supply chain constraints and rising input costs may serve as a headwind for significantly higher levels of manufacturing growth, especially for the auto sector. With that said, high consumer demand is expected to support manufacturing output in the months ahead, as we continue to reopen the economy.
We’ll finish the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence is expected to increase from 88.3 in April to 90 in May. If estimates hold, this report would mark three straight months with increased confidence, bringing the index to its highest point since the start of the pandemic. Consumer confidence has been supported by recent improvements on the public health front, as well as the federal stimulus payments. The recent stabilization in gas prices, along with four consecutive months of job growth, should support higher confidence levels in May. Historically, improving confidence levels have supported faster spending growth, so any improvement for the index would be a positive sign for spending in May. While work must be done to get confidence back to pre-pandemic highs, the recent improvements are an encouraging sign we’re heading in the right direction.
That’s it for this week—thanks for reading and stay safe!