Strong Jobs Report Came in the Wake of a Fed Policy Announcement

By | May 6, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

U.S. stocks rose in a broad-based rally on Friday as stronger than expected job growth in April and muted wage gains led investors upbeat about the economy and interest rates. The Dow Jones Industrial Average rose 0.75% on Friday to 26,504.95, while the S&P gained 0.96% to 2,945.64. For the week, the Dow Jones fell 0.2%, but the S&P gained 0.2%. Global equities rallied after the U.S. payroll report that showed 263,000 jobs were created in April a better than expected showing. MSCI’s index gained 0.78% on Friday and was heading for a sixth straight week of gains.

The strong jobs report came in the wake of a Fed policy announcement on Wednesday, when the Fed reiterates that it would remain patient on any changes in interest rates and indicated that no rate cuts were on tap for later this year, disappointing some investors and President Trump. Analysts say that continuing to get strong labor market reports and little inflation is a little “strange.” The Federal Reserve may have to cut interest rates if the economy softens, the president of the Chicago Fed, Charles Evens, said in recent remarks that focused on his concern over weak inflation. Meantime, St. Louis Fed President James Bullard said that the U.S. central bank’s policy is a “little-tight” and that current rates of inflation are uncomfortably low.

Next week will be light on economic data, inflation will be featured, as well as international trade.

Latest Data

The U.S. Economy:

Personal income increased 0.1% in March, following a 0.2% rise in February. Income growth slowed in the first quarter, but fundamentals remain positive. Personal spending rose 0.7% in March, after being unchanged in February. Consumer spending has clearly slowed in recent months, but the March report suggests that the consumer is not yet dead. There haves been some headwinds to spending in recent months, including the government shutdown, the volatility of the stock market and slower than usual and lower than expected tax refunds. However, income fundamentals do remain positive and should support decent spending. Inflation is not much of a restraining force as the PCE deflator rose 0.2% in March, following a 0.1% increase in February. The core PCE deflator was unchanged in March. On a year-ago basis, the headline PCE deflator was up 1.5% and the core 1.6%, well below the Fed’s target.

Construction spending fell 0.9% in March, reversing tree months of increasing outlays. The residential sector saw a 1.8% decline in construction spending, while non-residential spending increased 0.5% for the month. The public sector saw a 1.3% decline. Of the components of private residential construction, spending on single-family homes fell 1.5% m/m and remains down 8.2% year-over-year. The multi-family sector saw a 0.7% increase month-to-month and was up 11.1% higher over last year. On the non-residential construction sector spending on manufacturing facilities was up 2.5% m/m and was up 10.9% year-over-year. Spending on commercial buildings fell 2.6% in March and was down 8.6% from a year earlier. Spending on highway and street spending fell 1.9% but was up 13.3% y/y. Construction spending took a breather in March after three months of solid gains. Single-family construction remains weak, but the multifamily sector is making steady gains. The public sector is also making gains on trend.

U.S. manufacturing weakened in April as the ISM manufacturing index fell from 55.3 in March to 52.8 in April. Details were generally softer than in March. The new orders index fell from 57.4 to 51.7. 14 out of 18 industries reported growth in new orders, including nonmetallic mineral products, wood products and electrical equipment. There were three industries that reported a decline, primary metals, petroleum/coal products and transportation products. The production index dropped from 55.8 to 52.3. The inventory index rose 1.1 points to 52.9. Supplier deliveries inched higher, rising from 54.2 to 54.6. The ISM noted that the supplier delivery improvement did support inventory expansion during the month. Lead-time extensions and material shortages continued. The employment index dropped from 57.5 in March to 52.4 in April. The prices paid index rose from 54.3 to 50. Imports fell from 51.1 to 49.8 and exports dropped from 51.7 To 49.5.

The index remains in expansionary territory, but growth slowed in April. Manufacturing is facing headwinds, as the global economy is slowing, and tariffs and trade tensions are taking a toll. Also, there was a sizable build in inventories in the first quarter that will slow future production. Some of the notable comments include a respondent in the computer/electronics sector that said the U.S.-Mexico border crossing delays are slowing supplier deliveries. Tariffs are increasing prices on computer components, as well as manufacturers moving out of China to countries not impacted by the tariffs. Also, the Mexican border issue was raised by a respondent in the transportation/equipment and machinery sector.

The nominal goods deficit increased to $71.4 billion in March, up from $70.9 billion in February. Nominal goods exports rose 1% in March, after gaining 1.4% in February. Foods, feeds and beverages rose 2.7% in March, following a decline in February. Industrial supplies exports rose 2.7% in March. Nominal0.4% and imports are up 1.3%. March’s advance goods exports deficit was in line with January and February and supports the initial estimate that net exports will provide a substantial boost to first quarter GDP growth. Oil prices are up and that will support both exports and imports of industrial supplies. The strong U.S. economy will support demand for imports. Stabilization in the global economy will help support exports, although the strong dollar is a headwind.

The U.S. inventory build paused at the end of the first quarter. Wholesale inventories were unchanged in March but were up 6.4% on a year ago basis. Wholesalers have been a consistent source of inventory builds over most of the past year. The first quarter GDP report suggested that inventories grew at twice the normal rate in the first quarter, suggesting that either sales will have to pick up, or production slow to keep stocks in balance. This report suggests an inventory slowdown was starting at the end of the first quarter.

The U.S. non-manufacturing sector weakened in April, as respondents again noted concerns with available labor. The ISM non-manufacturing index fell from 56.1 in March to 55.5 in April. The business activity index increased from 57.4 in March to 59.5 in April. New orders fell from 59 to 58.1. Employment backtracked from 55.9 to 53.7. Supplier deliveries slipped from 52 in March to 50.5. Six industries showed slower supplier deliveries in April, including logistics, utilities, professional/scientific/technical services, construction, information and “other” services. The index remains elevated, but the breadth of growth narrowed in April. Labor shortages are among the strongest headwinds facing employers, whom are raising wages and retraining employees. The service sector continues to expand but lack of workers may be slowing progress. Inventory levels are likely excessive.

Payroll employment increased by a strong 263,000 in April, following an addition of 189,000 in March. So far this year, payrolls have averaged a respectable 205,000. While the usual sectors including healthcare (53,000), Professional/business services (76,000), and leisure/hospitality (34,000 added to payrolls, construction added 33,000 jobs. Retail trade lost 12,000. Average hourly earnings increased by 0.2%, or 3.2% y/y. The household survey was mixed. The notable factor was the unemployment rate fell to 3.6%, the lowest in 50 years. However, the labor force contracted by 49,000, pushing the participation rate down to 62.8%, the point where it was a year ago. The job machine will likely run out of steam within two years, pushing the unemployment rate down even further.

Important Data Releases This Week

U.S. stocks rose in a broad-based rally on Friday as stronger than expected job growth in April and muted wage gains led investors upbeat about the economy and interest rates. The Dow Jones Industrial Average rose 0.75% on Friday to 26,504.95, while the S&P gained 0.96% to 2,945.64. For the week, the Dow Jones fell 0.2%, but the S&P gained 0.2%. Global equities rallied after the U.S. payroll report that showed 263,000 jobs were created in April a better than expected showing. MSCI’s index gained 0.78% on Friday and was heading for a sixth straight week of gains.

The strong jobs report came in the wake of a Fed policy announcement on Wednesday, when the Fed reiterates that it would remain patient on any changes in interest rates and indicated that no rate cuts were on tap for later this year, disappointing some investors and President Trump. Analysts say that continuing to get strong labor market reports and little inflation is a little “strange.” The Federal Reserve may have to cut interest rates if the economy softens, the president of the Chicago Fed, Charles Evens, said in recent remarks that focused on his concern over weak inflation. Meantime, St. Louis Fed President James Bullard said that the U.S. central bank’s policy is a “little-tight” and that current rates of inflation are uncomfortably low.

Next week will be light on economic data, inflation will be featured, as well as international trade.


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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.