KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -2.3 points; Employment: -2.4 points/ Construction: +0.1%; Private: +0.7%
IN A NUTSHELL: “The industrial sector has moved from robust to strong, which is hardly anything to worry about.”
WHAT IT MEANS: As the economy picked up steam, manufacturers benefitted greatly. The surge, though, may be ebbing. The Institute for Supply Management reported that manufacturing activity grew less robustly in March. Note, I said less robustly. The level of the index is still quite high, so we can still say the sector is in very good shape. Still, orders moderated as export demand decelerated sharply. Trade wars are never good for business, no matter what the administration may believe. They seem to be willing to accept the pain with the hopes there will be gain and that could happen. It is just that it rarely, if ever, does. There was also a slowing in the increase in production and hiring eased. Still, order books continue to fill and there is every reason to think that that the industrial heartland will continue to expand at a very good pace for an extended period.
Construction activity edged up minimally in February, but the headline number hides the true underlying strength. Private sector building surged led by big increases in office and educational construction. However, public sector activity was down sharply due to large declines in health care and school building. Construction spending is quite volatile and large ebbs and flows are not unusual, so don’t read too much into any one month’s data.
MARKETS AND FED POLICY IMPLICATIONS: There is little in today’s numbers that should worry investors. Manufacturing remains strong and construction activity is still solid. But on a day-to-day basis, economic fundamentals don’t necessarily drive the markets. The tweet of the day, the pronouncements of foreign leaders or the news reports of corporate mistakes often trump the economic data and frequently even the release of corporate numbers. Politics matter and we are in a world of wild and crazy statements, so expect the roller coaster ride to continue unabated. Still, there are some numbers that do make a real difference and Friday we get the March employment report. The February gain was so outsized that it is very possible we could see an extremely weak March job gain. If that turns out to be the case, and I expect it to happen, don’t worry about the headline number. Look at the quarterly job gain average. It should be really strong. Also, watch the wage increase, which in February was surprisingly modest. I expect that to jump, which could create a fear that the Fed could tighten more than expected. Indeed, I expect both of those things to happen: I anticipate a sharp increase in wages and the Fed to raise rate four times this year. So, if you think things in the markets will settle down sometime soon, you just might want to rethink your outlook.