Monday Update: Strong Job Growth and Consumer Confidence

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 6, 2019 1:51:40 PM

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Monday updateLast week was a very busy one for economic data, with a number of key reports. This week’s data is focused around prices, but there will also be an update on the trade balance.

Last week’s news

On Monday, the personal income and spending report was released. It disappointed on the personal income side with decelerating growth in income, down from a gain of 0.2 percent for February to 0.1 percent for March. This result was well below expectations for 0.4-percent growth. The personal spending report was significantly better and included both February and March figures in a final catchup from the government shutdown. February spending growth came in at 0.1 percent, while March was much stronger at 0.9 percent on the recent strong retail sales report. These figures signal faster consumption growth after a slowdown in the first quarter.

On Tuesday, the Conference Board’s survey of consumer confidence also surprised to the upside, which is consistent with and supportive of the faster spending growth. Confidence rose from 124.1 in March to 129.2 in April, well above the expected 126.8. This signals that the rebound from the drop after the government shutdown continues, which is positive, and should support continued spending growth despite weak income growth.

On Wednesday, the Institute for Supply Management (ISM) Manufacturing index showed a worse pullback than expected. It went from 55.3 for March to 52.8 for April, a two-and-a-half-year low and well below the expected 55. This is a material decline and may suggest that a slowdown in global demand is starting to affect the U.S. manufacturing sector. The new orders index was hit especially hard, which would support that idea. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this remains a reasonably healthy figure, despite the decline, and suggests continued growth.

Also on Wednesday, the Federal Open Market Committee concluded its regular policy meeting with a statement and press conference. The committee took no meaningful action, as expected. But markets interpreted the press conference as being more hawkish about expected inflation than anticipated and reacted to reduced expectations for rate cuts.

On Friday, the ISM Nonmanufacturing index decreased slightly, from 56.1 in March to 55.5. This still leaves it at a healthy level on strong domestic demand for services. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this remains a healthy figure, suggesting continued growth.

Finally, on Friday, the employment report substantially surprised to the upside. Job growth spiked from 189,000 for March to 263,000 in April, indicating that job growth continues to be healthy. Plus, the unemployment rate dropped from 3.8 percent to 3.6 percent, a 50-year low. Wage growth stayed in line with expectations, with an upward revision to March’s growth, from 0.1 percent to 0.2 percent. This offset a 0.2-percent growth level for April, which came in below the 0.3 percent expected. This result kept annual growth at 3.2 percent. Given this strong report, the economic fundamentals remain supportive of growth.

What to look forward to

The producer price reports are due on Thursday. The headline index, which includes energy and food, is expected to drop from a 0.6-percent increase in March to a 0.2-percent increase for April on a moderation in overall energy prices. Here, there may be some upside risk from continued gasoline price increases. This result would take the annual rate from 2.2 percent up to 2.3 percent, which is still reasonably consistent with the Fed’s inflation target. The core index, which excludes energy and food and is a better economic indicator, is expected to edge lower on a monthly basis, from 0.3 percent in March to 0.2 percent in April. The annual rate is still expected to increase, from 2.4 percent to 2.5 percent, on base effects.

Also on Thursday, we will see the international trade report. It is expected to show that the trade deficit worsened slightly, going from $49.4 billion for February to $51.4 billion for March. This is a reversal of the improvement seen during the first quarter. It may suggest that, as expected, the trade balance will likely not contribute as much to growth for the second quarter.

On Friday, the consumer price reports are due. The headline index, which includes energy and food, is expected to stay steady at a 0.4-percent increase from March to April on a continued rise in gasoline prices. This result would take the annual rate from 1.9 percent up to 2.1 percent, which is consistent with the Fed’s inflation target. The core index is expected to edge up from 0.1 percent in March to 0.2 percent in April, with a similar increase in the annual figures from 2 percent to 2.1 percent. Overall, if the numbers come in as expected, they would show that inflation remains under control.

Have a great week!

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