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April ADP Jobs Estimate, Help Wanted Online and First Quarter Productivity and Costs

KEY DATA: ADP: 169,000/ Help Wanted: -104,500/ Productivity: -1.9%; Labor Costs: +5%

IN A NUTSHELL: “As we get conflicting information on the labor market, the Fed members have to feel very conflicted about when to start raising rates.”

WHAT IT MEANS: I had been hoping that the April data would start showing a clear trend, but alas, that is not yet the case. Decent if not solid Institute for Supply Management reports seemed to point to better economic conditions, including job gains, and that made sense given the low level of unemployment claims. But the ADP estimate of private sector job growth was well below expectations. There were reasonable increases in small business payrolls, moderate gains at mid-sized firms but almost no hiring at large companies. While we all know that the energy sector is cutting back, it is hardly clear that many of the layoffs have already occurred. Notices usually have to be given first. And the ADP report indicated that large service firms didn’t hire that many workers, which doesn’t match the ISM report. That said, the ADP estimate raises serious questions about the strength of Friday’s employment report.

Adding to the uncertainty about the April jobs numbers was the Conference Board’s Help Wanted Online index. There was a decent sized decrease in the number of want ads posted online. These data do bounce around on a monthly basis, so maybe that is all that was going on. Also, it is not clear the reason for the drop. Was it a result of a softer economy? If so, Friday’s number may be disappointing. Or, did firms finally start actually start filling all those open positions? The number of new ads was down much less than the total number of ads, which could mean HR is catching up. That suggests a better than expected jobs reports. I am not certain what Friday’s number will look like, but I am sticking with my view that it will be much, much better than the ADP report indicates.

Meanwhile, labor costs keep rising. Unit labor costs, which adjust compensation for productivity, jumped in the first quarter. GDP growth was weak (and the revisions should show it to have been even weaker), so it was no surprise that with more people working, output per worker would decline. But the jump in labor costs also came from a strong rise in compensation. That is a factor in the Fed’s decision calculus.

MARKETS AND FED POLICY IMPLICATIONS: While it is mostly about jobs, it isn’t all about jobs anymore. Compensation matters. Since the first quarter growth number was likely an anomaly, we can dismiss the productivity weakness. But it looks like compensation is accelerating and that is crucial for the Fed. The rising labor costs will not only put pressure on firms have to raise prices, but growing incomes should increases demand, providing a greater ability to pass those higher costs through. So watch on Friday not only the number of jobs and the unemployment rate, but also the wage data. Indeed, investors may look past a mediocre payroll number if the wage increase is sharp, since that could influence the Fed the most.

April Supply Managers’ Non-Manufacturing Survey and March Trade Deficit

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.


April Supply Managers’ Manufacturing Index, April Consumer Confidence and March Construction

KEY DATA: ISM: no change; Orders: +1.7 points; Employment: -1.7 points/ Confidence: +2.9 points; Construction: -0.6%

IN A NUTSHELL: “Consumers may be smiling more but they are not making manufacturers happy.”

WHAT IT MEANS: The manufacturing sector’s winter malaise appears to have stretched into the spring. The Institute for Supply Management’s April Manufacturing index indicated that the sector is growing, but not at a particularly solid pace. The details of the report were somewhat strange, though. New orders, including imports and exports, rebounded. That would seem to be good news, especially since firms ramped up production to meet the growing demand. Yet employment was down. With order books thinning, it is not clear when job growth will accelerate. And to confuse the matters more, fifteen of the eighteen industries reported they were growing. So you tell me what is going on here and we will both know.

The consumer will ultimately determine the direction of the manufacturing sector. Wage gains are accelerating and with that, confidence is improving. The Thompson Reuters/University of Michigan Consumer Sentiment index jumped in April, as both the perceptions of current conditions and expectations for the future were up. The index reached its second highest level since 2007. This report, though, contradicts the Conference Board’s finding that household confidence fell in April. Thus, it is hard to say what people are really thinking.

Construction activity moderated in March as residential building pretty much tanked. There was also a sharp decline in public construction. The only bright spot in the report was the rise in private nonresidential building. With permits exceeding starts, I expect that we will see construction rise solidly in April and May.


MARKETS AND FED POLICY IMPLICATIONS: So far, the hoped-for rebound remains just that: A hope. Some data are solid, some are soft and some are, well, totally confusing. It is hard to argue that the manufacturing sector is getting a lot better, even if orders are improving. Consumers are feeling better, or not, depending on which survey you like. And wages are rising; at least it looks that way. So, what does this all mean? Got me. This week’s data have provided no road map to the future. Maybe next week’s employment report will clarify things, at least I hope so. We have six weeks before the next FOMC meeting, so like the weather, if you don’t like the data, just wait a day. While economists may be willing to watch things evolve, traders don’t have quite that attention span. But is bad economic news good news for the markets or bad news? And what about the bond market? The 10-year Treasury rose above 2.10% for the first time in six weeks. Huh? I guess with the dollar seemingly on a downward trend, there is concern that inflation could accelerate and the Fed may be able to raise rates. As I said, the data are showing no strong pattern and with the FOMC members saying they are focusing on the data, this is not a good time for confusion.

First Quarter Employment Costs, March Consumer Spending and Income and Weekly Jobless Claims

KEY DATA: ECI (Year-over-Year): 2.6%; Wages: 2.6%; Benefits: 2.7%/ Consumption: 0.4%; Disposable Income: 0.0%/ Claims: 262,000 (down 34,000)

IN A NUTSHELL: “Firms are hanging on to their workers and one of the ways they are doing that is by increasing compensation.”

WHAT IT MEANS: Yesterday we saw that the economy stalled in the first quarter. Was the slowdown a one-quarter wonder or whether it was a portent of more weakness to come? The telling data is income. Yes, personal income was flat in March, but the gains had been strong and there is every reason to think that they will get even better going forward. Adjusting for the size of the labor force, unemployment claims are at record low levels. Job openings are nearing record highs and I suspect we will see the numbers continue to rise all year. That is turning into rising costs for employers. The Employment Cost Index jumped again in the first quarter and most of that increase is coming from the private sector. Wages and salaries at companies rose by 2.8% rate over the year compared to 1.8% in the public sector. One year ago, the rise in private sector wages and salaries was only 1.7%, so it is quite clear that the labor shortages are hitting home. Indeed, during the last expansion, private sector wages rose at about a 2.9% pace, so we are just about at a normal rate of increase already – and the real impacts of the growing labor shortages have yet to hit. With incomes rising, it is likely that we will see continued solid increases in consumer spending that we got in March. Indeed, the somewhat modest consumption growth that we saw in yesterday’s first quarter GDP is not likely to be repeated this quarter or for quite a while.

MARKETS AND FED POLICY IMPLICATIONS: When will the Fed raise rates? Yesterday’s statement made it clear that it will do so “… when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”. Read that sentence closely. To me, “further improvement” means additional declines in the unemployment rate and the number underemployed. The two, though, go together. Firms having trouble finding workers will eventually start hiring those that they didn’t want when there were plenty of job candidates. The necessary improvement could occur within the next few months, especially if the low claims and high openings numbers have any predictive value. As for inflation, the Fed will be watching not just consumer prices but employment costs. That is why today’s ECI is eye-opening. Private sector firms have been holding the line on wage increases yet we are already at normal rates of increases. Within a quarter or two at the most, we should be back above 3% and I suspect that will be a very clear red flag for the Fed. And let’s not forget benefits. They have been well contained but how long can firms continue to push benefits costs back on workers when they cannot get or keep employees? The conditions seem to be in place for labor costs to start breaking out on the upside, if they haven’t already, and that would be enough to provide the FOMC with the confidence that the inflation target will be reached, especially since the target is not right now but “over the medium term”.

First Quarter GDP and March Pending Home Sales

KEY DATA: GDP: +0.2%; Consumption: +1.9%; Structures: -23.1%/ Pending Sales (Month): +1.1%; Year-over-Year: +11.1%

IN A NUTSHELL: “The slowdown in growth was a little greater than expected and it raises the question whether this was just a normal first quarter pause or a real slowing in activity.”

WHAT IT MEANS: We knew the economy didn’t do a whole lot during the first three months of the year and now we know it did even less. Growth managed to stay positive, but not by much and the details reflected that weakness. And as usual, there were some results that raise questions. Consumers spent at a less than ebullient pace but why purchases of nondurable goods actually fell is anyone’s guess. The services component had been problematic, but that is now doing well. Since this is the largest single element in the GDP, that is good news. As the flow of spendable income from lower energy costs builds further, we should see that money being spent, so consumption is expected to rebound in the coming quarters. As for investment, a collapse in the energy sector led to a huge decline in structure spending that reduced growth by 0.75 percentage point. While the rig count is expected to decline further, the negative impact from energy investment should moderate. Residential investment was also soft, but if we believe the permit data, construction should already be picking up. There was also a major widening in the trade gap. A stronger dollar has started to slow exports but the West Coast port strike has made understanding this component impossible. The deficit may continue widening, but not at the pace we experienced this winter. We also saw that state and local government spending was down. That seems to fly in the face of almost all other reports as most governors are proposing bigger, not smaller budgets. While all of those factors argue for a lot better growth in the second quarter, there is one that could cause growth to moderate. Inventories rose much more than expected and that should turnaround this quarter. On the inflation side, consumer prices declined overall and were up only modestly even when food and energy were excluded.

Pending home sales continued its rise in March, with contract signings up solidly. With a double-digit rise over the year, it looks like sales should be increasing strongly as we go through the spring. While these are existing home data, to the extent that the new home market follows, this report buttresses the belief that housing starts will rise going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is finishing its two-day meeting and this report will likely cause a downgrade in the economy’s condition. But first quarter growth has been much less that the rest of the year for quite some time now. For the 2010 to 2014 period, the economy expanded at an average of 2.2% while the first quarter increases averaged only 0.6%. So before anyone panics, keep in mind that what happens in the first quarter doesn’t tell us anything about what happens in the rest of the year. But a weak first quarter allows the Fed to hold the fort, at least for another meeting. Let’s see the April and May jobs and spending numbers before we decide how further out this report pushes the Fed. June looks out, but July cannot be excluded, even if there is no scheduled press conference.

March New Home Sales and Weekly Jobless Claims

KEY DATA: Sales: -11.4%; Prices (Year-over-Year): -1.7%/ Claims: up 1,000

IN A NUTSHELL: “I guess few people could visit the construction sites earlier in the year, which may explain why new home sales tanked in March.”

WHAT IT MEANS: Sometimes, the data have odd patterns. New home sales rose solidly in January and February, though how anyone in certain parts of the country could get to where the homes were being built is anyone’s guess. But those increases were unwound in March as demand cratered to its lowest level since November of last year. Sales largely disappeared in the Northeast, fell sharply in the South and were down moderately in the West. Only the Midwest reported a gain. About the only explanation I have for this surprisingly large drop was that the snow and ice in January and February prevented visits to the developments, so fewer people were prepared to sign contracts in March. Since builder confidence soared in late March and early April, I am guessing all those missing buyers have started showing back up. What is also strange is the decline in prices. Prices had been rising in the 5% to 8% range for a couple of years and there seems little explanation for the sudden decline other than the data are volatile. We have seen this type of up and down before, so don’t be surprised if we get a large rise in prices when the April numbers are released.

The labor market remains quite firm as new claims for unemployment insurance were essentially flat last week. The level remains below 300,000 and that points to a pretty solid April jobs report.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday we learned that existing home sales surged in March but today we found out that new home demand tanked. What should we make of this contradictory pattern? First, these are two distinctly different samples, especially in the way they are counted. Existing home sales are closings while new home sales are signed contracts. Thus, an existing home sale in March may have come from a deal made in December or January. That would argue for a slowdown in sales in the next few months as the winter probably limited house visits. On the other hand, the inability to get to the construction sites should have slowed demand in January and February for new construction, yet it didn’t. In other words, I am somewhat confused, a not uncommon but very uncomfortable state for me. All that said, new home sales in the first quarter were at the highest pace in seven years. We are still way below a normal market, but the healing process continues, despite the relatively weak March numbers. Also, the number of homes on the market is rising and that should help sales. So taken together, this is a disappointing report but not one that points to any sudden weakness in the housing market. That should be the takeaway for investors, though with earnings coming out, who knows if these data will matter? But a less than stellar March should temper the Fed’s view of the housing market and the members were concerned about it the last statement.

March Existing Home Sales and February FHFA Housing Prices

KEY DATA: Home Sales: +6.1%; Median Prices (Year-over-Year): +7.8%; FHFA Prices (Monthly): +0.7%; FHFA Prices (Year-over-Year): 5.4%

IN A NUTSHELL: “Spring has sprung and so have home sales and prices, further indications that the economic slowdown was largely weather driven.”

WHAT IT MEANS: March is the transition month from winter to spring and as such, we should start getting indications of the extent to which the weather whacked the economy. It looks like it was a lot. The National Association of Realtors reported that existing home sales soared in March. The increases were across the nation but were led by large rebounds in the winter-battered Midwest and Northeast. Both single-family and condo purchases rose strongly, with condo demand up double-digits. As for prices, they are starting to rise faster and were up sharply over the year. The deceleration in home price gains looks like it is over, driven in part by limited supply. While the number of homes on the market rose, given the jump in the sales pace, the number of months it would take to sell all those available homes dropped. The inventory level is about ten percent where it should be for a healthy market.

The Federal Housing Finance Agency’s House Price Index rose solidly in February, supporting the view that home price increases are accelerating once again. There was a slowdown in the second half of 2014, but that appears to be behind us.

MARKETS AND FED POLICY IMPLICATIONS: It looks like the end of winter is leading to a housing rebound. But there are a large number of factors at play that will affect the housing market over the next year or so. With prices rising, the number of underwater/marginally positive homes is falling while the delinquent home overhang is moderating rapidly. That should provide for more homes coming on the market. On the other side, continued unease about relocating for job reasons is limiting the willingness to move and therefor supply. A better job market, improving balance sheets and time, which is allowing households to eliminate bankruptcies on their records, is increasing potential demand as more households can qualify for mortgages. Rising prices have yet to make a large impact on new home buyers but they raise a warning flag that reduced demand from this group is possible. The sector is coming back from its winter doldrums and most of the factors argue for even more improvement going forward. That should buoy investors, who are uncertain about future profits. As for the Fed, the FOMC commented in its March 18th statement that the housing market recovery remains slow. That may no longer be the case. The Committee meets next (April 28-29), so we will see what the thinking is soon enough, but the really important meeting is June. With two jobs reports, first quarter GDP and a variety of inflation indicators to be released, the run up to that meeting will help determine the timing of the first rate hike. It may not happen in June, but it is coming and the housing data only add to that belief.

March Consumer Prices, Real Earnings and Leading Indicators


Joel L. Naroff

President and Chief Economist


KEY DATA: CPI: +0.2%; Excluding Food and Energy: +0.2%/ Real Hourly Earnings: +0.1%/ Leading Indicators: +0.2%

IN A NUTSHELL: “Inflation and earnings are rising moderately, not minimally, but I am not sure the Fed members want to admit that.”

WHAT IT MEANS: As long as inflation remains well below the Fed’s target, the members can be patient, even if they don’t use that word anymore. Well, we don’t have high inflation, but neither do we have low inflation. Consumer prices rose moderately in March, led by rising energy costs. But it wasn’t all oil, by any means. Vehicle costs jumped and there were moderate increases in clothing, medical care and shelter expenses. The only major categories where prices went down were food and utilities. Services inflation is stabilizing somewhat but that is being offset by a pick up in commodity inflation. Over the year, consumer costs excluding energy are nearing the Fed’s 2% target.

The battle over who should get what share of earnings is raging and with the number unemployed and underemployed falling, the pendulum is swinging. In March, for the fourth time in five months, real average hourly earnings for all workers rose and the gain over the year remains above 2%. While that is nothing great, it is enough to allow consumers to spend at a decent pace.

Will the economy continue to grow at a solid pace? The Conference Board’s Leading Economic Index rose moderately in March, but the gains have been smaller than we saw for much of the past year. That is not a positive sign for strong growth. Indeed, it implies only an average expansion going forward. However, the University of Michigan’s mid-month reading on consumer confidence rose to its second highest level in eight years. With incomes growing, that bodes well for future spending.    

MARKETS AND FED POLICY IMPLICATIONS: The FOMC starts its next two-day meeting in eleven days and there is little in the data to cause the members to stop believing that patience is still a virtue. As long as they continue to believe that, they can leave us in the dark about when rate hikes will come. But the music will likely stop playing sometime soon, and the monetary authorities and investors will have to face reality. Right now, the worries are foreign, with Greece and China once again at the top of the list. It’s not as if the problems in those countries had gone away, it’s just that they were put on the back burner. What those concerns remind us is that the Fed’s ability to return to normal interest rates faces an awful lot of hurdles even if the U.S. economy is not one of them.


March Housing Starts, April Manufacturing Surveys and Weekly Jobless Claims

KEY DATA: Starts: +2%; 1-Family: +4.4%; Permits: -5.7%; 1-Family: +2.1%/ Phila. Fed: +2.5 points; Employees: +8 points/ MAPI: -2 points/ Jobless Claims: up 12,000

IN A NUTSHELL: “While builders are still slow in getting more shovels in the ground, the signs point to a lot more activity in the next few months.”

WHAT IT MEANS: While builders are becoming more positive about conditions, they are not doing that much about it. Housing starts rose in March, but the rise did not unwind the large February decline. First quarter activity was nearly 9% below the fourth quarter 2014 average. That is hardly a surprise given the winter weather. The data were all over the place. Better weather led to a more than doubling of construction in the Northeast and a 31% surge in the Midwest. In contrast, starts fell by nearly 20% in the West and by over 3% in the South. No pattern there. What caused only a limited rise in construction activity was a major downturn in multi-family activity, especially in the West. That is likely the result of normal volatility in the data, implying we really shouldn’t be too worried that starts didn’t rebound more in March. Indeed, there is every reason to believe that the April report will be quite strong. First, single-family construction is not faltering. Second, and more fundamentally, there were roughly 300,000 more permits taken out during the first quarter than there were starts – and almost all of them were for multi-family dwellings. As I always note, builders are not paying for permits for the fun of it. Those permits are going to be used in the spring.

The manufacturing sector took a big hit this winter as both weather and a strong dollar slowed the sector down. The latest data don’t indicate any major improvement. The Philadelphia Fed’s manufacturing survey rose modestly in early April. Firms are hiring a lot more people but how long that will last is uncertain as new orders are growing more slowly. Expectations rose, but minimally. A second survey, one done quarterly by the Manufacturers Alliance for Productivity and Innovation (MAPI), indicated that activity also eased modestly in the first quarter. Despite a rise in current orders, capacity utilization and investment, most other indicators declined. My take away is that conditions moderated but didn’t fall greatly.

Jobless claims rose a touch, but they remain at levels consistent with solid to strong job gains.

MARKETS AND FED POLICY IMPLICATIONS: The headline housing numbers didn’t tell the full story. While construction failed to rebound sharply in March, I would be shocked if the April numbers were not robust. Sharp declines in multi-family starts often are followed by large increases, and the gap between permits and starts in that segment points to that happening. The strong dollar is taking a toll on manufacturing and that is likely to be an issue for a while. But the sector is holding in, even if it is not leading the way. All in all, the first quarter was a disappointment but there is reason to expect conditions to improve as we go forward. But we need data to show that is happening before the Fed does anything.

August Industrial Production

KEY DATA: IP: -0.1%; Manufacturing: -0.4%; Vehicles: -7.6%

IN A NUTSHELL:   “If you believe that vehicle production is crashing, I have a bridge for sale and you can buy as much of it as you like.”

WHAT IT MEANS:  One of my more common warnings is that the headline number hides what is truly going on and the devil is in the details.  Well, welcome to the August industrial production report.  Output fell in August for the first time since January, and we know what the weather did to everything that month.  Worse, manufacturing production was down sharply.  So, has the industrial sector finally come to a grinding halt?  Yeah, right.  The biggest decline was in vehicles, where assembly rates dropped by nearly 12%.  Of course, the pace of new vehicle construction had surged by almost 13% in July, highlighting the problem with seasonal adjustments when trends change.  The important point is that vehicle sales in August hit their highest level in 8½ years, so output is likely to expand further.  It is clearly not shrinking.  Indeed, the 3-month assembly rate average was the highest since early 2006, when the housing bubble was funding everything that moved and didn’t move.  Meanwhile, the rest of the economy was doing just fine.  Production of high tech products, consumer products, business equipment and business and construction supplies were all up. 

Adding to the belief that the manufacturing sector is in great shape was the September Empire State Manufacturing Survey, a product of the New York Federal Reserve Bank.   The index hit its highest level in almost five years as new orders surged, hiring jumped and backlogs built.  Enough said.

MARKETS AND FED POLICY IMPLICATIONS:  It is sometimes good to get a headline that is so obviously misleading as today’s industrial production number.  It is not that the data are wrong; it is just that sometimes the marquee number is not reflective of what is actually going on.  The data are often volatile and the seasonal adjustments sometimes don’t work right if conditions change.  That was true with today’s industrial production decline and was likely the case with the weak August employment report.  Basically, the manufacturing sector is strong and should continue to lead the way.  The FOMC starts its 2-day meeting tomorrow and on Wednesday Janet Yellen will hold a press conference.  I expect the statement and the discussion to focus on changing the thinking from rates staying low an extended period to the strategy that the data will drive decisions.  If the numbers are stronger than projected, the Fed will be prepared to move sooner than expected.  This report changes nothing and investors will have to start getting used to the reality that the Fed is going to raise rates, most likely during the first half of next year.