All posts by joel

April Durable Goods Orders

KEY DATA: Orders: -2.1%; Ex-Nondefense Aircraft: -1.0%; Capital Spending: -0.9%

IN A NUTSHELL:  “The growing signs that manufacturing is softening cannot be overlooked and it looks like second quarter growth could be weaker than expected.”

WHAT IT MEANS:  Summer may be coming, but it’s beginning to look like winter in the manufacturing sector.  Durable goods order collapsed in April, though that was expected.  Boeing is seeing basically no new orders and that led to a huge 25% drop in aircraft demand.  But if you take out the nondefense aircraft segment, orders were still off one percent, so we are not looking at a growing demand for big-ticket items.  Still, this report was not uniformly weak.  There were increases in orders for computers, fabricated metals and electrical equipment and appliances.  More than offsetting those gains were declines in communications equipment, vehicles and primary metals.  As for the proxy for business investment – nondefense capital goods orders excluding aircraft – orders also declined sharply.  This segment has been slowing for quite some time now and it is becoming clear that whatever boom the tax cuts may have created, if they did much at all, is largely gone.  And finally, backlogs declined and over the year, order books are filling much more slowly.  That does not bode well for future production.

MARKETS AND FED POLICY IMPLICATIONS:  A long weekend could not have come at a better time, as long as investors don’t look at their phones.  I am sure there will be a whole slew of “fascinating” tweets coming out of the White House.  There will be plenty of time next week to panic and then breath deeply and then panic again.  But there are some patterns emerging.  The first is that the manufacturing sector is flattening out.  The second is that the progress that was supposed to have been made on a trade agreement with China was mostly puff with little pastry.  The third is that it appears that households don’t really care that much, as long as jobs are plentiful.   It’s that last point that needs to be watched, as often, changes in confidence, up or down, are not followed by modifications in spending habits.  Remember, first quarter consumption was tepid, at best.  It was initially assumed that the extreme weakness in durable goods spending would dissipate in the spring, but the pathetic April vehicle sales pace raises questions about whether that will happen.  The May vehicle numbers are ten days out, so we can still harbor some hopes for consumers, but I am not so sure.  As for the other weak link in the first quarter GDP report, business investment, it looks like it continues to go nowhere.  The economic fundamentals are not strong despite solid job growth and until that disconnect is ended, we have to assume growth will moderate.  Investors, though, continue to be jerked around by the president’s tweets and until that changes, all I can do is point out what the economic data mean, not what the markets may do.  As for the Fed, the members’ comments show there is little agreement on what to do.  So, the best thing is to punt, which is what they are planning to do.Have a safe and enjoyable Memorial Day weekend!

April New Home Sales and Weekly Jobless Claims

KEY DATA: New Home Sales: -6.9%; Over-Year: +7%; Prices: 8.8%/ Claims: -1,000

IN A NUTSHELL:  “The new home market is doing better than the existing home sector, but neither is in great shape.”

WHAT IT MEANS:  Earlier this week we saw that existing home sales dropped in April, despite easing mortgage rates and today it was reported that new home demand also dropped.  However, the decline in new home sales came after a huge jump in March, so what we really have is a movement back toward a more realistic level.  Unfortunately, that level is not particularly high.  Indeed, we need about a fifteen percent rise in purchases before we can categorize the new home sales pace as strong.  Nevertheless, sales are on the upswing and we could see a double-digit increase over the 2018 totals. So far this year, total sales were up nearly seven percent and given how soft they were in the second half of last year, it would take a collapse in demand not to get at least a ten percent rise.  As for the April report details, the one region reporting a rise was the Northeast, but that area makes up only about five percent of the total.  The other three regions were down sharply.  The median price jumped, but I would be cautious about the number.  The distribution of sales across the price ranges has been strangely volatile the last few months, so let’s see what happens when things settle down.  

New unemployment claims remain at incredibly low levels, a sign that the labor market remains extremely tight.

There were a couple of other reports released today that need to be looked at carefully.  The April IHS Market manufacturing index fell to its lowest level since September 2009 while the services index dropped to its lowest point in over three years.  We’ve known for a while that manufacturing is hurting but services may be following in its footsteps.

MARKETS AND FED POLICY IMPLICATIONS:  The new home market may be outperforming the existing home market, but together, housing is not really doing much for the economy.  In addition, more and more data are pointing to troubles in manufacturing, in no small part because of trade issues.  And welfare payments are holding up the farm sector, which could get crushed once again by the tariff war.  Yet the labor market continues to boom and CEO surveys point to business leaders being almost irrationally exuberant.  In addition, households are pretty happy as well.  So, what is going on?  I guess it is time for my favorite saying: “You tell me and we both know!”  I have growth below two percent this quarter but I am somewhat below consensus.  On the other hand, I haven’t seen a whole lot of 3% estimates.  Households continue to hold the key to the economic kingdom.  April vehicle sales were pathetic and if we don’t see a sharp rebound in May, consumption could be really disappointing.  That would make it extremely hard to get to two percent growth, so I am sticking with my forecast.  The minutes of the last FOMC meeting indicated the members were more upbeat about growth.  Even so, they don’t expect to raise rates this year and a slowing in growth would only support that.  It would likely take at least two consecutive sub-two percent quarters to create a rate cut groundswell.  So, rates are likely to remain steady for quite some time. 

April Existing Home Sales and May Philadelphia Fed NonManufacturing Activity

KEY DATA: Sales: -0.4%; Median Prices (Over-Year): +3.6%/ Phil. Fed: -3.7 points; Orders: -14.8 points

IN A NUTSHELL:  “Despite months of declining mortgage rates, the housing market is just not coming around.”

WHAT IT MEANS:  It just doesn’t seem to be happening in the housing market.  Mortgage rates, which hit their highest rate in nearly eight years in November, have declined steadily since then.  Yet there are no signs that buyers have reacted significantly to the drop.  The National Association of Realtors reported that sales of existing homes eased in April.  That makes two months in a row now that demand was off.  Two months doesn’t make a pattern, but when you look at sales over the year, it was off by 4.4%, which is not good news.  Indeed, so far this year, the sales pace is running about 2.5% the rate posted in 2018.  That is really discouraging since mortgage rates have been below last year’s average.  In April, moderate weakness in the Northeast and a modest decline in the Midwest were largely offset by a relatively mild increase in the West.  In other words, there were no regions that showed either large increases or decreases, indicating that sales were not greatly impacted by the dreaded “weather issue”.  As for prices, they continue to rise, but the gains are moderate.  There was one good piece of data in the report: Inventories are rising.  Since so much has been made of the last of supply holding down sales, maybe with more homes on the markets, buyers will be able to find the home of their dreams – or at least one they can live with or in.

With manufacturing output faltering, it is imperative that the service side of the economy holds up if growth is to remain solid.  Well, it is not clear how much that is happening. The Philadelphia Fed’s nonmanufacturing index was down during May, led by somewhat slower growth in new orders.  But this report was not all negative.  Employment and investment remained strong and optimism increased sharply.  Indeed, about 65% of the respondents expect their own business activity to grow over the six months while only 8% expect it to decline.

MARKETS AND FED POLICY IMPLICATIONS:  Eventually, the economic data will actually matter again, but I suspect for a while only the really major and wildly unexpected reports will make a sound in the market forest.  The puppet master has control and investors have tunnel vision.  That is fine as long as the economy continues to grow decently.  And there is every reason to think that will be the case for quite a while.  Job gains are strong, incomes are rising and inflation is not destroying spending power completely.  Meanwhile, dividends are hitting record highs and coupled with the massive buybacks, the crutches supporting the markets continue to keep things from falling apart.  But the buybacks are waning and the ability to maintain the dividends will depend upon earnings and that means the economy could come back into play, maybe sooner than many believe.  That should give investors pause.  Strong growth is needed and that means wage gains will be key.  There is little reason to think that with companies already having committed so much of their tax cuts to buybacks and dividends, capital spending will surge.  In addition, fiscal policy is largely off the table, especially given the war between the president and the Democrats.  But if wage gains don’t accelerate, and they have been decelerating lately, consumer demand will not surge.  That means earnings could falter.  And if they do rise faster, margins could narrow.  In other words, there are real risks to market values and I haven’t even mentioned the Long March on trade the Chinese say they have started. The Chinese have long memories and even if an agreement is reached, be it more puff than pastry or not, they will not allow themselves to be put in a position of weakness again.  Over the next few years, they are likely to de-link themselves s from key relationships and that cannot be good for some U.S. companies or sectors. 

Early May Consumer Sentiment and April Leading Indicators

KEY DATA: Sentiment: +5.2 points; Expectations: +8.6 points; Current Conditions: +0.1 point/ LEI: +0.2%

IN A NUTSHELL:  “Hopes for the future run high, but that was before the trade war went nuclear, so let’s wait and see where things stand.”

WHAT IT MEANS:  Consumers will drive this economy and it looks like they are quite exuberant – maybe.  In the first part of May, the University of Michigan’s Consumer Sentiment Index hit its highest level in fifteen years, led by a surge in the expectations index.  But the report indicated that most of the data were collected before the trade talks collapsed.  The numbers coming in afterward were a lot different, with expectations much weaker.  This is especially important since the current conditions component was largely flat.  So, before we celebrate a consumer that is as happy as can be, let’s see what happens when the final numbers come out on May 31st

Looking ahead, the Conference Board’s Leading Economic Index rose moderately in April.  After having pretty much flattened early in the year, the index is moving back up.  However, the rate of rise points to more moderate growth in the near future, which is in line with what most economists and the data are forecasting.

MARKETS AND FED POLICY IMPLICATIONS:  The markets reacted quite negatively to the raising of tariffs and will likely do the same if the tariffs on Chinese goods are broadened.  But after thinking it over, investors seemed to decide that it was just a “never mind” moment.  I am not sure what investors are thinking or even consumers and that is a concern.  Do people think that tariffs don’t matter?  Really?  If so, then you can describe the current consumer confidence numbers and the behavior of the markets as showing signs of irrational exuberance.  Even worse, if tariffs don’t matter, what would stop our trading partners from putting tariffs on our goods and why would we not do the same with Europe and/or Japan.  Those nations may not be as egregious in their trade restrictions as China, but they have some pretty significant ways of controlling trade as well.  Do we really want to go down that road?  The trade situation undoubtedly will add even more volatility to the already volatile data.  That makes the Fed’s “data dependency” not much different than a roller coaster.  The Fed members need to buckle up, because things could get really crazy in the next few months.  

April Housing Starts, May Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: Starts: +5.7%; 1-Family: +6.2% Permits: +0.6%; 1-Family: -4.2%/ Phil. Fed: +8.1 points; Orders: -4.7 points/ Claims: -16,000

IN A NUTSHELL:  “The housing market is coming back a little, another sign the economy continues to expand at a decent pace.”

WHAT IT MEANS:  If you believe the bond market, where rates have been plummeting, you would think that the economy is in deep trouble.  But that is just not the case.  Housing starts rebounded in April, which really should not have surprised anyone.  The levels we had been seeing over the previous two months were way below where they should have been.  Why do I say that?  Because permit requests, which also rose, had been and still are running above the level of actual construction.  That had to change and there still is more to come.  For the past three months, permits have averaged nine percent more than starts, which means there is a backlog of construction that will likely be filled in the next few months.  In April, construction activity showed what was likely the effects of weather.  Starts skyrocketed by 85% in the Northeast and by 42% in the Midwest, but fell by roughly 5.5% in both the South and the West.  Wet weather may play havoc with activity in May, so any result should be viewed accordingly.  One issue for the economy that comes out of this report is that the number of homes under construction declined for the third consecutive month.  Building activity is what really matters for economic growth and right now, that is softening.

On the manufacturing front, conditions there may be firming a little as well.  The Philadelphia Fed’s survey of regional manufacturing activity jumped in early May.  Keep in mind, this measure is wildly volatile, so the surge we saw was not really out of the ordinary.  Indeed, the details don’t consistently argue that conditions are improving significantly.  For example, while employment improved a touch, new orders expanded at a less rapid pace.  Looked forward, expectations were largely the same, though firms are thinking that hiring may pick up.  As for inflation, which was in the special question section, firms say their prices may rise a little less than had been thinking in February, but that overall consumer inflation would run a little hotter. 

Jobless claims declined back to more typical, at least for this tight labor market, last week.   MARKETS AND FED POLICY IMPLICATIONS:  In a normal world, where it is all about the economy, concerns should be minimal.  However, this is not a normal world.  Fighting a full-fledged trade war with China and a shooting war with Iran at the same time should be enough to unnerve investors.  But it appears as if many don’t believe that will be the situation.  How else can you explain the cratering and unwinding of that decline that has occurred over the past week?  Maybe investors are starting to understand they are mere puppets and the strings are being pulled by the tweeter in chief?  I make that statement not because I think those risks are not real; I believe they are.  But at some point, you have to start seeing it to believe it.  And then you have to determine the extent to which the economy will be harmed.  Right now, it is all fear and little analysis, so expect volatility to hold sway. As for the Fed, the uncertainty plays right into its hands.Why do anything until you know what direction policy will take us?  The difficulty, though, is that economic data tend to tell us what happened or is happening, not necessarily what will happen.  Being data dependent in an uncertain world where the data – and the markets – can be whipped around is an awfully risky approach to take.

April Consumer Prices and Real Earnings

KEY DATA: CPI: +0.3%; Ex-Food and Energy: +0.1%; Food: -0.1%; Energy: +2.9%/ Real Hourly Earnings: -0.1%; Over-Year: +1.2%

IN A NUTSHELL:  “Inflation is neither too hot nor too cold, but for the Fed, it is hardly just right.”

WHAT IT MEANS:  Normally, news about inflation would take center stage and it should.  So let’s keep it there, even though there are now higher tariffs on Chinese imports.  Consumer prices rose solidly in April, but much of the gain came from a surge in energy costs.  Meanwhile, food prices dipped.  Netting out those two volatile sectors, prices rose modestly for the third consecutive month.  Over the year, both headline and core prices were up about two percent, so the Fed’s target has been reached, at least for this measure.  The details of the report were a bit odd.  Clothing prices cratered again, but there was a change in the data collection process, so maybe we should also exclude clothing.  And there was a large drop in used vehicle costs, but it is unclear why that is happening given all the vehicles coming off of lease.  Maybe we should exclude that too.  And while I am at it…  Okay, just kidding around.   Not really.  There is a serious point in saying we should exclude most components.  The Fed claims there are transient factors restraining inflation and we have to determine which ones they are referring to and how much of an impact they are having.  Right now, core – i.e., non-food and energy – prices rose at a less than two percent pace over the past three months.  How long will the Fed wait to see if the impacts are indeed transient?  The one factor that we can agree is not transient is the continued surge in housing costs.  Those should remain high for an extended period.

With prices up solidly but hourly and weekly earnings rising more slowly, real, or inflation-adjusted earnings fell in April.  Consumer spending power has grown about one percent over the year and that is hardly enough to support strong consumption growth. 

MARKETS AND FED POLICY IMPLICATIONS:  Today’s news on inflation may disappear in the uproar about the raising of tariffs on Chinese imports and the threats to broaden them to all Chinese products.  But consumer prices are something that need to be watched.  It’s not that inflation is likely to soar; there is little reason to believe that.  It is that the tariffs are passed through to consumers.  The tariffs affect only a small percentage of the economy, so the pass though of the costs should not raise consumer prices significantly.  But the impacts don’t fall evenly across income groups.  In addition, inflation-adjusted earnings are growing modestly and the combination of higher tariffs and slow spending power does not bode well for consumption going forward.  First quarter household spending was weak and April’s vehicle sales were really soft, so second quarter consumer demand may not be that much better.  Meanwhile, the tariffs only make the Fed’s job more difficult.  They slow growth but may raise inflation enough to keep it near the Fed’s target.  Yet any agreement would unwind those impacts, whipsawing the data.  With no clear idea where the economy and inflation are going, the Fed will likely stay on hold for a long time.   

April Producer Prices, March Trade Deficit and Weekly Jobless Claims

KEY DATA: PPI: +0.2%; Goods: +0.3%; Services: +0.1%/ Deficit: up $0.7 billion; Exports: +1%; Imports: +1.1%/ Claims: -2,000

IN A NUTSHELL:  “It looks like the big bump the economy received from a narrowing trade deficit in the first quarter will disappear in the spring.”

WHAT IT MEANS:  The events swirling around the economy continue to create chaos but economists still have to make sense of the economic data.  Wish me luck.  Let’s start with inflation, since that is the key to Fed behavior.  As long as inflation remains near the target, there is not likely to be any change in rates.  Well, that is likely to be the case.  Wholesale prices rose moderately in April, led by another sharp increase in energy prices.  Offsetting that, though, was a decline in food costs.  As a result, producer goods prices, excluding food and energy, were largely flat.  Since April 2018, business costs are up between 2% and 2.5%, depending upon which special index you look at.  As for the pipeline, there appears to be some pressure building in the cost of food.  Those higher prices tend to be passed through.  Still, given that the path from wholesale to retail prices is not straight and is often a dead end, it is hard to make the case that inflation will accelerate significantly due to rising costs of production.   That is especially true given that the trend in services inflation, which had been leading the way, is down.   

Meanwhile, all is not quiet on the trade front, even before the president made his threat to impose higher tariffs on Chinese imports.  The trade deficit widened somewhat modestly in March, in line with what would have been expected given the data in the GDP report. But while I don’t expect a major revision to the trade numbers for the first quarter, it looks like the narrowing we saw has largely disappeared.  At least in March, the numbers were actually heartening, despite the widening.  Both exports and imports rose, which is what should happen when the economy is strong and the rest of the world is growing.  On the export side, the soybean farmers were back in the market, as sales surged.  But that could change quickly if the tariffs are imposed.  Energy exports were also up.  On the other hand, aircraft exports cratered. As for imports, higher prices and growing demand led to a rise in demand petroleum-related productsIndeed, imports of just about everything else rose, the major exceptions being cell phones and televisions. 

Jobless claims remained slightly elevated, but there are few signs the labor market is weakening.    MARKETS AND FED POLICY IMPLICATIONS:The latest research makes it clear that consumers are paying the cost of the tariffs.  But the volume of goods being taxed is small given the size of the economy, so there is little pressure on prices.  That is likely to be the case if the tariffs in Chinese products are raised.  But the threats, their imposition, their relaxation, new threats and on and on just makes it impossible to determine where the trade deficit is going.  Clearly, given sufficient lead-time, firms will expand imports in the months before the tariffs are imposed and lower them afterward.  Just the threats change patterns.  With companies now making decisions on what to order for the holiday shopping season, the uncertainty over when and how much to order is heightened. If new tariffs do come on, as is likely to be the case, then firms could hesitate importing goods, hoping that the tariffs will be rescinded.  On the export side, the Chinese will be true to their word and respond in kind. I suspect the farmers are not a very happy bunch.  Since trade flows have been modified by politics, it is necessary to look at growth excluding this crucial sector.Trade added one full percentage point to growth and could add nothing or even subtract from growth this quarter.   That could help create an artificially low growth rate in the second quarter, just as it created an artificially high number in the second quarter.  As for inflation, there is no reason to think it will accelerate or decelerate, which is good news for the Fed.  Finally, while today’s data are important, the trade threats matter and until some of the fog of trade war lifts, uncertainty will likely drive investment decisions.  And that is rarely good for the markets.

March Job Openings (JOLTS report)

KEY DATA: Openings: +346,000; Separations: -142,000; Quits: -38,000

IN A NUTSHELL:  “Job openings are near record highs despite limited layoffs and quits.”

WHAT IT MEANS:  Is the labor market tight?  You bet.  Job openings surged in March and are once again nearing the record high reached in January.  All of those new vacancies were in the private sector as the public sector openings declined.  The need for additional workers rose sharply in transportation and warehousing, health care, restaurants and real estate.  With demand increasing, firms continue to hold onto their workers as tightly as possible.  Layoffs dropped like a rock, as it makes little sense to cut workers if you cannot find replacements.  I guess anyone, almost regardless of the issues, is better than no one.  But to me the most impressive data in this report were the quit numbers.  You would think that in this sellers market, workers would be moving around like crazy.  That just doesn’t seem to be the case as the number of people quitting declined. 

In a separate report, CoreLogic indicated that home prices rose moderately in March, but the increase over the year continued to decelerate.  There are few metro areas where housing price increases are either accelerating or even high.

MARKETS AND FED POLICY IMPLICATIONS:  You have to hand it to the business community:  Despite being on the wrong side of the tight labor market, firms are managing to keep from a major bidding war for workers and are still not losing workers to competitors.  Yes, compensation is rising decently, but it is no longer accelerating.  At the same time, companies are squeezing out more output per worker.  This rise in productivity has kept labor costs down and earnings up.  All of this is happening in a world where information flows freely and quickly.  Workers know about openings yet they appear to be either reluctant to apply for them or unwilling to accept those offers. For the Fed, that has to be worrisome.  Inflation has moved back below target even as labor markets are tightening further.  What happens if the economy softens or even worse, falls into recession and the wage gains disappear?  One would think that the Fed should lower rates under these circumstances, but that would not make sense.  First of all, the economy is not weak and it is not clear that lower rates would actually improve growth.  Mortgage rates are extraordinarily low and it is housing supply that is the problem.  Businesses investment hasn’t surged even after a tax cut that almost paid firms to invest.  So cutting rates is not likely to accelerate growth significantly. But it would put the Fed in a bind if the economy faltered.  There are already few arrows in the Fed’s interest rate quiver and lowering rates would empty it further.  Also, the impact of lowering rates is not linear.  Does anyone really believe that going from one percent to zero would do anything, especially if the need to hit bottom occurs when the economy is collapsing?  Fed Chair Powell repeated that interest rate policy is the Fed’s main tool and lowering rates now would limit that tool greatly.  What the Fed needs is more inflation, but it is largely powerless to accomplish that goal.  To use a phrase that former President George H.W. Bush liked to use, the Fed is in “deep doo doo”.

April Employment Report and NonManufacturing Activity

KEY DATA: Payrolls: +263,000; Private: +236,000; Unemployment Rate: 3.6% (down 0.2 percentage point); Hourly Wages: +0.2%/ ISM (NonMan.): -0.6 point; Orders: -0.9 point

IN A NUTSHELL:  “With job growth strong and the unemployment rate barely measureable, it is hard to see why the Fed would even consider lowering rates.”

WHAT IT MEANS: If the Fed were to cut rates, it would have to see weakness in the labor market.  Well, forget that.  Job gains in April came in well above expectations.  Yes, the headline number was hyped by a surge in local government hiring, which is not likely to last.  But the gains in the private sector were also robust.  Health care, social services, restaurants, construction and employment services added new workers like crazy.  On the negative side, retail keeps thinning its payrolls and utility employment faded.  Otherwise, there were few areas where firms cut workers.  There was one really odd number in the report.  Building and swelling services added almost 21,000 employees, a nearly 1% rise in just one month.  That seems way out of line.  But even excluding that likely aberration, the hiring pace was still strong.  

As for the household side of the report, the unemployment rate dropped to its lowest level since December 1969, near the peak of the Viet Nam War when draft rates sliced the labor force dramatically.  But while the number unemployed fell, so did the labor force, which inflated the decline in the unemployment rate.  The labor force numbers bounce around like crazy, so don’t make too much of that drop or the decline in the labor force participation rate.  Despite the strong demand for workers and the low unemployment rate, wages rose moderately over the month and the increase over the year continued to decelerate modestly.

The strong labor market is keeping the economy going, but the less than stellar income gains are keeping it from accelerating.  We could see that in the Institute for Supply Management’s April report on nonmanufacturing activity.  The overall index eased and the details were mixed.  Activity did expand faster, but order growth moderated and so did hiring.  In addition, orders books filled more slowly.  Basically, this report, when coupled with the manufacturing sector numbers, points to an economy that is growing decently but is not shifting into the next gear.

MARKETS AND FED POLICY IMPLICATIONS:  So much for a faltering economy that requires a kick-start from the Fed.  The labor market is in great shape yet wage inflation is not becoming a major threat.  We can thank the solid gains in productivity for that.  The high level of payroll increases has surprised myself and most other economist but there may be some special factors at work.  The monthly number is a net number.  It takes all additions to payrolls and nets out all reductions, which includes layoffs, company closures and, here is a key, retirements.  Baby-boomers are staying in the workforce longer and the labor force participation rate for those over 65 is rising not falling.  Thus, the willingness to continue working is easing the pressure on firms to find new workers, which indeed are in short demand.  That is the equivalent of reducing the “reductions” portion of the calculation, raising payroll gains.  That may sound somewhat wonky, but it makes sense, at least to me.  It would be awfully hard for the Fed to explain a rate cut given the strong job market. So forget that.  Indeed, this report argues more for a continuation of the normalization process than a reversal of it.  But to raise rates, the Fed would have to see an inflation rate well above target for an extended period.  So a hike is likely off the table for quite a while as well.  As for investors, strong labor markets should buoy expectations that earnings can hold up, even if the Fed is not likely to start mainlining liquidity into the markets’ veins once again. 

First Quarter Productivity, April Layoff Notices and Weekly Jobless Claims

KEY DATA: Productivity: +3.6%; Over-Year: 2.4%; Labor Costs: -0.9%; Over-Year: 0.1%/ Layoffs: 40,023/ Claims: Unchanged

IN A NUTSHELL:  “The rebound in productivity is restraining labor costs and keeping inflation in check.”

WHAT IT MEANS: With wages rising, it has been unclear why inflation remains tame.  One logical explanation is the rapid increase in productivity.  The growth in the first quarter was the strongest in over four years and over the year, it was the best in nearly nine years.  Output was up sharply while hours worked rose only modestly.  The improved production of workers more than offset the moderate gain in wages.  Indeed, wage increases have been decelerating for the past year and a half, even as productivity was accelerating.  So much for the theory that rising productivity leads to improved wage gains. 

Challenger, Gray and Christmas reported that layoff notices in April were up sharply (9%) from the previous April.  So far this year, plans to cut workers have increased by thirty one percent.  The industrial goods sector notices have soared this year, while retail, which is still cutting people like crazy, is doing so at a much slower pace than in 2018.

Jobless claims remained at a really low, but no longer record low level, last week. The new claims numbers still point to a tight labor market. 

MARKETS AND FED POLICY IMPLICATIONS:  The Fed noted yesterday that inflation was running below target but chalked it up to transitory factors.  That may be true, but fears that inflation may surge are unrealistic unless the improvement in worker productivity fades.  Businesses are managing to pass through only part of the productivity increases to workers, which is allowing them to keep profits rising and prices down.  While firms have some wiggle room to continue raising wages, that will be the case only if productivity remains strong.  If it starts easing back toward the longer-term trend, pressures on earnings and/or prices will rise.  But until that happens, the Fed will have to contend with inflation that is at best, fairly close to its target and I suspect the members would not mind seeing it run hot for a while.  Indeed, I suspect that one factor they believe is “transitory” is the unusually high level of productivity growth.  If that is the case, I would have to agree that it is more likely productivity will moderate than remain at current levels.  Thus, investors will likely have to wait quite a while before they see a rate cut. I don’t expect any easing in policy unless the economy fades significantly, which might not come until next year – or later.