Employers added 196,000 jobs in March, offsetting the weak February report

By | April 8, 2019

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Cautious optimism over U.S.-China trade underpinned global stocks on Friday and benchmark bond yields ground higher and the U.S. dollar made a three-week high against the yen before the important U.S. jobs report data is released. U.S. President Donald Trump said that a trade deal with China might be announced within four weeks. Chinese President Xi Jinping reportedly said progress was being and called for an early conclusion of talks. The pan-European STOXX 600 nudged higher on Friday, heading for its best performance in three weeks. MSCI’s All-Country World Index, which tracks stocks in 47 countries, edged up on Frida ad was heading for a second week of gains. German industrial output rose by 0.7% in February as mild weather helped boost construction. However, manufacturing output slipped as Germany is suffering from trade tensions and Brexit angst helped keep Germany in the slow lane, narrowly avoiding recession last year. The German 10-year yield, a benchmark for the euro-zone, climbed to a two-week high, the latter to a level just above zero.

U.S. stocks rose on Friday, with the Dow Jones Industrial Average up 0.15% for the day and just 1.5% shy of its record close of 26,828.39 set on October 3. That all-time high gave way to a global equity rout widely blamed on worries about the pace of interest rate increases by the Federal Reserve and the still unresolved tariff conflict with China. Stocks have increased widely during the week, with the S&P up for seven straight secessions. Global stocks have also advanced on positive readings from China. The Chinese March manufacturing PMI showed a return to expansion after six months of mild contraction, signaling that the tax cuts and other policies are producing modestly faster growth. In the U.S., the jobs report showed hiring rebounded strongly in March after a weak February.

Weaker economic data have sparked fears of recession and the recent, but temporary inversion of the yield curve deepened fears the recession might be closer than many forecasters anticipated. The recent yield curve inversion, often regarded as a potential indicator of a recession, receded recently as the yield curve promptly steepened and stocks have seen the first positive seven days of 2019. Another chief concern is the consumer, where consumer spending accounts for 70% of GDP. Consumption has been choppy lately, with retail sales increasing just 0.2% in February and the latest affirmation that the first quarter was indeed a soft-patch. However, January was revised up significantly but not enough to cover December’s fall. We think the pause in spending is temporary and the strong job gains in March support that view.

Equipment spending is also shaping up to be a weak spot in the first quarter and the manufacturing sector is under pressure from slower domestic demand and the still uncertain trade environment. Durable goods orders fell 1.6% in February, while nondefense capital goods shipments rose 0.6%, the 1.5% drop in January underscored a weak trend for manufacturing. However, the ISM manufacturing and non-manufacturing indexes are still firmly in expansion mode, consistent with an economy that continues to grow but at a slower pace than last year.

The employment picture remains positive. Employers added 196,000 jobs in March, offsetting the weak February report. It still suggests that employment growth on trend is moderating from the robust pace of last year. With the moderation in employment growth and signs that wage growth is not accelerating, it remains unlikely the Fed will alter its “patient” policy anytime soon. Generally, the economy remains solid and after the weak first quarter, GDP growth should return to trend growth in the second quarter. We think fears of recession are misplaced. The greatest fear is now that “we might talk ourselves into a recession. However, the economy has slowed and loss of momentum could affect business and consumer confidence and spending habits.

Next week, we will see factory orders, which will come in weak following the advance durable goods report. Inflation will also be revealed as both producer prices and consumer prices will be released.

Latest Data

The U.S. Economy:

Retail sales disappointed in February, falling 0.2%. However, January sales were revised up to 0.7%, compared with 0.2% previously reported February declines were widespread, led by building-supply stores, miscellaneous store retailers, electronics retailers, appliance stores and grocery stores. Bright spots were gasoline stations, vehicle dealers and drug stores. Sales excluding autos, fell 0.4% I February and excluding autos and gasoline -0.6%. Sales were up just 2.2% from a year earlier, down from 2.8% in January. Sales continue to disappoint, although the January revision did take some of the sting away. The fact is sales are now barely below the level; of last summer and core sales barely above the level of last summer. The weakness in the stock market in December and the lingering effect of the government shutdown, late tax refunds and weather all likely paid some role in weak February sales. Growth should rebound going forward. Important fundamentals remain solid. Job creation remains decent and incomes are rising. Energy prices are up but are still at relatively low levels. Although we do look for moderating consumption, the consumer will still be a vital support for the economy for the remainder of the year.

Business inventories expanded in January by 0.8%, following an addition of the sale level in December. All three categories added to stocks. Wholesale stocks increased by 1.2%, while retail saw a 0.8% increase and manufacturers saw inventories rise by 0.8%. Business sales reversed course in January and rose 0.3%, not offsetting the 0.9% decline in December. The inventory-to-sales ratio increased to 1.39 months in January, up from 1.38 in December and well above the year ago reading of 1.36. The increase in the I/S ratio is worrisome and so is the weakness in sales. We do see stronger sales over the next couple of quarters, that will help control stocks, but some slowdown in inventory build will be needed in coming months to lower the I/S ratio.

U.S. manufacturing conditions improved in March. The ISM manufacturing index increased to 55.3 in March, up from 54.2 in February. Details were mostly upbeat. New orders rose from 55.5 to 57.4. Production rose from 544.8 to 55.8. Inventories fell from 53.4 to 51.8. Supplier deliveries fell slightly from 54.9 to 54.2. Employment increased from 52.3 to 57.5. New export orders fell from 52.8 to 51.7. Imports fell from 55.3 to 51.1. The ISM index suggest growth in manufacturing broadened in March. The increase helped alleviate fears that the slowdown in the economy is turning into something worse. Trade uncertainty is a headwind and the impact of the slowing global economy is a headwind for manufacturing. Weather was a negative for manufacturing in February, but a temporary impact. Anecdotes were mixed. A respondent from textiles said that customer orders were strong. A respondent from chemicals said that Brexit is an issue. Transportations respondents said business was decent. There were negative statements concerning cost from tariffs and uncertainty over U.S. trade policy. One respondent said that steel tariffs are adding to costs. Weather was cited as an issue in wood products with too much rain in the South, but a growing backlog should add to activity in May and June. Manufacturing should remain positive, but we do expect bumps in the road from the slowing global economy and the slower U.S. one.

The ISM non-manufacturing index rose in March for the 10th consecutive month but the breadth of growth narrowed moderately. The total index fell from 59.7 to 56.1. The business activity index decreased from 64.7 to 57.4. New orders fell from 64.7 to 57.4. Supplier deliveries fell from 53.5 to 52. Employment increased from 55.2 to 55.9. The non-manufacturing component of the economy is still at an elevated level but most of the subcomponents saw declines. The retreat in the index does reflect the slowdown in the U.S. economy. Trade remains an issue, but we do expect a deal with China. However, how that affects tariffs and trade volumes is a separate concern. We expect some rollbacks in tariffs but a significant increase in trade volumes in the near term is unlikely. The report suggests the economy remains positive but is slowing.

Following two months of disappointing sales caused by the government shutdown and bad winter weather, U.S. vehicle sales rebounded in March. U.S. vehicle sales jumped to 1n annual pace of 17.5 million in March, up from 16.6 million in February. Nevertheless, sales were down 3% year-over-year and the first quarter rate of 16.8 million suggests a downward trend of a cyclical easing. Light truck sales kept the industry afloat coming in at a 12.2 million sales pace, up from 11.6 million in February. Car sales increased to 5.2 million from 5.0 million. Low gas prices are helping truck sales. Consumer fundamentals are solid, and incomes are rising, factors that will keep sales near the 17 million pace this year.

Durable goods orders fell 1.6% in February after three consecutive months of increases. The February decline was largely driven by the volatile transportation sector. Excluding transportation, orders increased 0.1%. Nondefense capital goods orders excluding aircraft fell 0.1% in February, following a 0.9% rise in January. New orders for motor vehicles and parts fell 0.1%. Transportation orders fell 4.8% and were down 4.7% from a year earlier. Boeing orders totaled 5 in February, down from 46 in January. The soft patch in manufacturing did extend into February. The rise in the ISM manufacturing index suggests a slightly better March. Core capital goods orders have decreased three out of the last four months and trend growth has decelerated since late-2017. The slowdown in the U.S. economy and weaker global growth are headwinds for manufacturing. Trade is also a headwind. A trade deal with China would help, but don’t expect immediate relief. Manufacturing should remain positive, but very modest going forward.

The U.S. labor market posted a convincing rebound in March. Payrolls increased by 196,000 and gains in February were revised to 33,000, following the initial 20,000. As a result, the first quarter averaged 180,000, a modest but expected deceleration from the impressive growth rate in 2018. Goods producers only added 12,000 in March, leaving the heavy lifting to private service providers. Among the sectors that drove gains were education/healthcare, which added 70,000. Leisure/hospitality added 33,000. Other data was positive. The average workweek improved to 34.5 ours from 34.4. Average hourly earnings inched up 4 cents, bringing the year-over-year growth to 3.2%. The household survey painted a weaker picture, with the labor force falling by 224,000, which brought the participation rate down to 63%, wiping out February’s gains. The unemployment rate held steady at 3.8%. Average monthly payroll gains should average about 170,00 for the remainder of the ear.


Chinese factory activity in China unexpectedly grew for the first time in four months, suggesting that government stimulus measures may be starting to take hold in the world’s second largest economy. The official PMI manufacturing index rose to 50.5 from February’s three-year low of 49.2. The index measuring factory output increased to 52.7 from February’s 49.5, the highest level since September 2018. Total new orders also grew at a faster pace, driving factory prices to a five-month high of 51.4, ending four months of contraction. Export demand shrank for a 10th month, suggesting external demand remains sluggish. If sustained, the improvement in business conditions might suggest that manufacturing is on the road to recovery. Growth in the services industry, accounting for half the economy picked up n March as new orders rose more quickly. The official non-manufacturing index rose to 54.8 from 54.3.

Important Data Releases This Week

February factory orders will be released on Monday, April 8 at 10:00 AM EDT. The advance headline for durable goods showed al 1.6% decline, but ex-transportation orders managed a 0.1% advance. Core capital goods orders were down 0.1%. We see factory orders falling 0.5%.

The March NFIB small business optimism index will be released on Tuesday, April 9 at 6:00 AM EDT. After a lower than expected February, we see the NIB index advancing to 102.0, up from the 101.7 reading for February. Employment plans have retreated the last two reports but the economic outlook did brighten in February.

March producer prices for final demand will be released on Thursday, April 11 at 8:30 AM EDT. We see the index advancing by 0.3% for March, up from the 0.1% advance in February. Core PPI will advance 0.2%. This brings the headline index up 1.9% year-over-year and the core up 2.5%.

March consumer prices will be released on Friday, April 12 at 8:30 AM EDT. We see the index advancing by 0.3% for March, up from the 0.2% advance in February. Core CPI will advance 0.2%. This brings the headline index up 1.8% year-over-year and the core up 2.1%.

March import and export prices will be released on Friday, April 12 at 10:00 AM EDT. We see import prices increasing by 0.4% in March, following the 0.6% advance in February.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.