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SIMPLY ECONOMICS

Job growth slows but still plenty of pressure and pace
Simply Economics - April 6, 2018
By Mark Pender, Senior Editor

  

Introduction

The week's headlines point to slowing growth in the labor market and a deepening deficit for the trade balance, the former easing pressure on the Federal Reserve to raise rates and the latter adding urgency to the rising struggle between the U.S. and China. But these indications could in the end prove a clumsy head fake given some less visible signals in the week, evidence that underlying demand (including consumer demand) may in fact be accelerating.


 

The economy

The labor market may not be quite as strong as thought. March payroll growth of 103,000 came in well below expectations and the unemployment rate, instead of moving lower as many had expected, held steady at 4.1 percent. Revisions are also a factor, lowering growth in the two prior months by a net 50,000 and pulling down the first quarter's average to 202,000 which is below the fourth quarter's 221,000. But there are positives in the March report including another solid showing for manufacturing, up 22,000, and also a 33,000 gain for professional & business services. Yet in an offset the key subcomponent for the latter, temporary help, actually fell 1,000. Other areas of weakness include a 15,000 decline for construction payrolls, which had been on the rise, and a 4,000 dip for retail which had been showing strength.


 

Not weak, however, is the wage signal from average hourly earnings which rose 0.3 percent. The trend for this monthly rate has been edging higher to between 0.3 and 0.2 percent despite being held down by February's soft 0.1 percent showing. If this rate begins to post consistent 0.3 percent gains, expectations for less friendly monetary policy would build quickly. Note the spike and drop in September and October which are hurricane effects that are common in the graphs for 2017. Also note that average hourly earnings are the first inflation reading for any one month, setting the tone for following readings including the consumer price report which, for March, will be posted in the coming week.


 

But policy goals for inflation are in year-on-year terms and here too, slight upward movement is visible. Average hourly earnings on this basis rose 1 tenth in March to 2.7 percent which may hint, at least indirectly, at an improving slope for general prices including the Fed's core PCE index. The Fed's stated expectation for the core (and this is what first unhinged the stock market back at the January FOMC) is for gradual but tangible improvement this year to the 2 percent line. But unlike average hourly earnings, the core rate hasn't been showing much lift at all, at least yet.


 

Whether demand for labor re-accelerates will depend on the strength of the economy including cross-border trade. A U.S.-China tariff war would of course limit overall trade but in as much as it would limit imports in relation to exports, the war could be a positive for GDP where imports are a subtraction. Going into the metal tariffs of March, imports were on the rise and were deepening the deficit, totaling $57.6 billion in February. February was the fourth straight $50 billion showing in a curve that continues to sink. Imports rose 1.7 percent to $262.0 billion in the month, far higher than the $204.4 billion in exports which however also rose 1.7 percent in a healthy gain that we'll break down in a moment. But for GDP, net exports don't look like they'll be contributing much, to say the least, to the first quarter.


 

With all the talk about cross-border weakness, let's look at centers of strength for U.S. trade. Services are at the forefront, extending their steady climb to an impressive $67.3 billion in March and well out in front of imported services at $47.8 billion. This is the kind of mix that is most healthy, a nation producing something in demand not because of low prices but because of its excellence. Exports of U.S. intellectual property have been climbing sharply as have insurance services, financial services and telecommunications & information services. Of all the things the U.S. produces, it's the nation's technicial and managerial expertise that is in highest demand.


 

Also in high demand are U.S. capital goods, from machinery to heavy equipment to aircraft. But here unlike services, the nation imports more than it exports, at $57.8 billion for related imports in February vs $45.6 billion for exports. Tariffs targeted here would of course raise prices and could end up lowering business investment, whether for U.S. firms buying foreign equipment or foreign firms buying U.S. equipment. Such a result would eat depper into the central weakness of the global economy and that is low productivity growth. This is a reminder that tariffs have more than immediate effects, but long-term ramifications on global production capacity.


 

Now let's turn to a smaller component where the U.S. also does well: the import and export of foods, specifically foods, feeds & beverages as tracked by the government. Here the nation runs a mostly even trade balance, at $10.7 billion for February exports vs $11.9 billion for imports. Yet, looking at recent results, imports have been deepening slightly while exports have been flat. Tariffs on food not only get big headlines, but any resulting inflationary effects would be quickly visible to the consumer and quickly registered in the consumer price report.


 

An ongoing inflationary risk is being signaled by the delivery indexes of both the ISM manufacturing and non-manufacturing reports. The manufacturing reading, at 60.6, has been above 60 for two straight months while that for non-manufacturing, at 58.5, is also severe. Aside from the recent hurricane season, it was back in 2005 and 2004, at the height of the prior expansion, that these readings have been this high. What this means is that business is heavy and orders are taking longer to ship in what is a very clear indication of capacity stress. And it's not just ISM's samples that are complaining of lengthening times with similar results found in other private and regional surveys as well. It should be no surprise that inflation readings in these surveys are also on the climb, at a 7-year high of 78.1 for the ISM manufacturing prices paid index and at 61.5 for non-manufacturing which, for the first time in 3-1/2 years, has posted three straight plus 60 readings.


 

Another sleeper in the week's data is a very welcome jump in vehicle sales. Unit sales rose to a 17.5 million annualized rate in March for the best showing so far this year. Yes, unit sales also include sales to businesses as well as consumers and are not a completely consistent indicator for retail sales, but the relationship is close as the graph shows. March's results do point to a rise for the motor vehicle component of the retail sales report, perhaps to the $100 billion level in data that will be released later this month. The consumer has been sitting still so far this year and these results are likely to prove the year's first major success for consumer spending.


 

Markets: Caught in an increasing wobble

Session-to-session volatility has been with us all year but now volatility is spreading to daily movements, such as Wednesday when a 0.5 percent morning decline for the Dow transformed into a 1.0 percent gain by the close or Friday when recovery early in the session fizzled to make way for a 2.3 percent loss. Oversize percentage movements are this year's new norm, starting in late January when the Dow's 8 percent monthly gain quickly fell apart following the month-end FOMC statement that upgraded the risk of inflation. Inflation is still a live landmine with overhead fire from a tariff war now a new risk. But however much the stock market has been flying around, the bond market of late has been quiet and steady. Moves into and out of Treasuries have been limited in what may, however, be the calm before a storm. Whether accounts still see Treasuries as a safe haven, given the risks tied to inflation and rising Fed rates not to mention the risk of a deepening government deficit, could yet be this year's biggest market story. On the week, the Dow fell 0.7 percent to 23,932 while the 10-year Treasury yield rose 4 basis points to 2.78 percent.


 

Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2017 29-Mar-18 6-Apr-18 Change Change
DJIA 24,719.22 24,103.11 23,932.76 -3.2% -0.7%
S&P 500 2,673.61 2,640.87 2,604.47 -2.6% -1.4%
Nasdaq Composite 6,903.39 7,063.44 6,915.11 0.2% -2.1%
     
Crude Oil, WTI ($/barrel) $60.15 $64.94 $62.00 3.1% -4.5%
Gold (COMEX) ($/ounce) $1,305.50 $1,329.70 $1,336.70 2.4% 0.5%
Fed Funds Target 1.25 to 1.50% 1.50 to 1.75% 1.50 to 1.75% 25 bp 25 bp
2-Year Treasury Yield 1.89% 2.27% 2.27% 38 bp 0 bp
10-Year Treasury Yield 2.41% 2.74% 2.78% 37 bp 4 bp
Dollar Index 92.29 90.07 90.1 -2.4% 0.0%

 

The bottom line

Judging by the week's news, the labor market isn't quite as hot as once thought which should ease concern over wage inflation, even though wage pressures do appear to be rising. And underscoring the risk of the inflation was Jerome Powell at week's end who, in a speech to the Economic Club of Chicago, sounded a bit hawkish noting that prices have in fact been firming and that inflation readings may move up "noticeably" this spring. Concern over inflation may be the key reason why the stock market ultimately tanked on Friday, not to mention the brewing trade war where, forget about imports, the nation's exports may be at stake.


 

Week of April 9 to April 13

Inflation is the concentrated focus for the coming week starting on Tuesday with the producer price report which may offer the first hard evidence on price effects tied to steel and aluminum tariffs. On Wednesday consumer prices will offer the latest on whether tariff or wage pressures are beginning to be passed through while on Thursday import prices will update the inflationary effects of dollar depreciation. Also to watch will be two afternoon reports on Wednesday, FOMC minutes and with them details on the inflation debate inside the Fed and also the March Treasury Budget and an update on the early impact of this year's tax cuts. Inflation returns to the headlines with an expectations update in the consumer sentiment report on Friday which will also see the release of the latest job openings tally in the JOLTS report.


 

Tuesday

Small Business Optimism Index for March

Consensus Forecast: 106.5

Consensus Range: 105.0 to 108.0


 

Forecasters are calling for solid but easing strength in the small business optimism index which hit Econoday's top forecast in February on gains for the sales outlook and economic expectations. Econoday's call for March is 106.5 vs February's 107.6.


 

PPI-FD for March

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.4%


 

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


 

PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%


 

Amid reports of price volatility for steel and aluminum, the March producer price report could show the first definitive effects of U.S. tariffs. But forecasters aren't calling for much impact in March, at a consensus 0.1 percent gain though the high estimate is at 0.4 percent.. Less food and energy is seen up 0.2 percent with less food, energy and trade services expected to rise 0.3 percent.


 

Wholesale Inventories for February

Consensus Forecast, Month-to-Month Change: 1.1%

Consensus Range: 0.9% to 1.1%


 

February wholesale trade inventories are expected to rise 1.1 percent, in line with the month's advance reading and following strong builds of 0.8 and 0.7 percent in the two prior months.


 

Wednesday


 

Consumer Price Index for March

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.1% to 0.5%


 

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.4%

Consensus Range: 2.2% to 2.5%


 

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


 

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 1.9% to 2.1%


 

Pressures were up in January but quiet in February with the March consensus for consumer prices especially subdued, at no change. A modest 0.2 percent increase is expected for core prices (less food & energy) with the year-on-year rate, however, expected to show some pressure at a 2 tenths gain to 2.0 percent.


 

FOMC Minutes

Covering the March 20-21 Meeting


 

Moderation was the theme of the March FOMC, headlined by no increase in rate hike projections and including modest descriptions of economic growth and consumer and business spending. There was no upgrade for inflation though the surrounding debate is likely to be the highlight of the meeting's minutes.


 

Treasury Budget for March

Consensus Forecast: -$186.5 billion

Consensus Range: -$187.0 billion to -$185.0 billion


 

The Treasury budget for March will update the effects of this year's tax cut which lowered both individual and corporate receipts in the first two months of the year. At $391 billion from October to February, the government's fiscal year-to-date deficit was running 11.5 percent deeper than the prior year. Econoday's consensus for March is calling for a large deficit of $186.5 billion.


 

Thursday


 

Initial Jobless Claims for April 7 week

Consensus Forecast: 230,000

Consensus Range: 229,000 to 232,000


 

Initial claims are expected to come in at 230,000 in the April 7 week vs an outsized jump to 242,000 in the prior week. Even at 242,000, claims have been consistent with minimal layoffs and strong demand for labor.


 

Import Prices for March

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: -0.1% to 0.5%


 

Export Prices

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.0% to 0.4%


 

Inflationary effects of the lower dollar are what to watch for in import prices where Econoday's March consensus is a sizable 0.4 percent gain. In February, import prices rose 0.4 percent despite a sharp decline in petroleum prices. Export prices are seen rising 0.3 percent in March.


 

Friday


 

Consumer Sentiment Index, Preliminary April

Consensus Forecast: 100.8

Consensus Range: 99.0 to 102.0


 

The consumer sentiment index for preliminary April is expected to come in at 100.8 vs March's 14-year high of 101.4. The current conditions component, driven by strong assessments from lower income respondents, posted a record 121.2 in March, in contrast to a tick lower for the expectations component which fell to 88.8 and reflected softer income prospects among the high income bracket. Inflation expectations in this report have been moving higher but very slowly.


 

JOLTS: Job Openings for February

Consensus Forecast: 6.150 million

Consensus Range: 6.000 to 6.350 million


 

Job openings are expected to ease back in February to a consensus 6.150 million from January's unusually strong 6.312 million. Openings have been getting further ahead of hirings suggesting that employers are having trouble finding candidates to fill slots.


 

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