KEY DATA: Phil. Fed: -10.8 points; Orders: -11.2 points; Jobs: +2.4 points/ LEI: +0.4%/ Claims: +10,000
IN A NUTSHELL: “The economy continues to move forward even as the manufacturing sector slows.”
WHAT IT MEANS: The more data we get, the clearer it becomes that the slowdown in consumption and the cautious spending on capital goods is taking its toll on manufacturers. The Philadelphia Fed’s Business Outlook Survey, which looks at manufacturers in the Mid-Atlantic region, dropped sharply in early April. This number is extremely volatile, so don’t read too much into the decline. Indeed, the level of activity is still quite solid. But, as can be seen in the moderation in the growth of new orders, the manufacturing is no longer accelerating as fast as it had been. But there were some good numbers in this report. Hiring is improving and worker hours are expanding. Also, expectations on capital spending were quite strong, with much of the funds being directed toward non-computer equipment and software. Firms are taking a wait and see approach, though, as most of the new investment is expected to occur in the second half of the year.
Looking forward, we could see a pick up in activity. The Conference Board’s Leading Economic Index rose solidly in April after even bigger increases in February and March. The gains were in most components, another sign that conditions could be firming. But it will still take more consumer and business spending if we are to shake off the first quarter lethargy.
Jobless claims jumped last week but that was not the big news in the report. The number of people on unemployment insurance was the lowest in seventeen years. Adjusting for the size of the labor force, we are closing in on historic lows set in the 1960s, when benefits were much less generous and less long lasting. In other words, there just are not a lot of people in the reserve army of the unemployed.
MARKETS AND FED POLICY IMPLICATIONS: While there are lots of numbers to come out over the next two weeks, we really need to focus on just two: The first quarter GDP report, which will be released on Friday, April 28th, and the April jobs report, which will come on the following Friday, May 5th. A first quarter growth rate below 1% cannot be ruled out, though I think it will be closer to 1.5%. Regardless, a low increase would set us up for another year of trend growth, which is pretty mediocre. The April jobs report should be a good measure of what are sustainable job gains. The January and February increases were excessive and the soft March number moved the three-month average to a more normal level. If the April increase is in the 150,000 to 175,000 range, we should assume the economy is not likely to accelerate sharply. That is something that will play on the minds of the FOMC members when they meet May 2-3. Don’t expect much to come out of that meeting, though a hint on when the Fed might start shrinking its swollen balance sheet could create a stir. Today’s numbers shouldn’t move investors one way or the other. Investors do have earnings reports, which continue to dribble out, to mull over.