KEY DATA: ISM: +1.3 points: Employment: +0.1 point / Trade Deficit: $15.5 billion wider; Imports: +7.7%; Exports: +0.9%
IN A NUTSHELL: “With the temperature rising, so is the economy.”
WHAT IT MEANS: I keep arguing that the soft economic conditions were just a function of the wicked winter weather, and the solid rise in the April Institute for Supply Management’s Non-Manufacturing index adds to that belief. The level was the highest since November. New orders rose solidly and order books filled, indicating that future activity should be strong as well. Payrolls continued to rise solidly, providing hope that the April employment report will be quite good as well. All this happened even as the oil industry continued to show real weakness.
Funny thing about port strikes: Ships anchored in a harbor don’t count toward imports. The West Coast port strike and its aftermath have totally messed up the trade data. The huge surge in imports in March (the rise was the largest on record!) was undoubtedly the result of the ships finally making it to port and being offloaded. The large rise occurred despite continued slowing in oil imports. Exports, meanwhile, rose modestly. Given that the import data are so skewed by the ending of the port strike, it really makes no sense to even discuss what went on. However, the deficit, adjusted for inflation, was greater than what was implied by the first GDP report, so it looks like the first quarter number will be revised downward. We may have another first quarter GDP negative number.
A couple of other reports also pointed to better economic conditions. The New York Supply Management report rebounded sharply in April, indicating that manufacturing conditions in that part of the nation improved solidly. CoreLogic reported that housing prices accelerated in March as a lack of supply, coupled with growing demand is driving up home values. And the Paychex/HIS Small Business Jobs Index inched up, indicating that the nation’s jobs creators are continuing to do just that.
MARKETS AND FED POLICY IMPLICATIONS: The economy stalled in the first quarter, but it appears that there is no reason to think the softness was anything different than we saw last year. With housing prices rising, manufacturing and services production levels increasing and negative impacts of the port strike turning around this quarter, we could see another near-5% second quarter growth rate. I expect Friday’s employment report to be a big one and I am not ruling out a number north of 300,000. That would bring us closer to what I believe is the trend of about 250,000 to 300,000 per month. A decline in the unemployment rate to 5.4% is also possible. Bond rates are starting to reflect the distinct possibility that the economy is indeed in good shape and the Fed could start raising rates this summer. Equity investors might want to start considering that possibility as well.