Economic Notes – May 5, 2014


Written by: Jon McGraw

  • It was a busy week for economic data, with several key releases including 1st Quarter GDP—which disappointed. The Friday release of job growth, however, was strong.
  • The Russia/Ukraine situation continues to simmer, but not yet boiling over, despite regional incidents and increasing sanctions against targeted Russian interests.

(-) First quarter GDP was forecasted to be poor, but not quite this poor—the advance figure showed a small gain of +0.1%, compared to expectations of +1.2%. The lackluster results were largely due to a combination of factors, including low business fixed investment in equipment, poor residential investment, weak exports and more typical inventory accumulation that normalized things somewhat. Of course, another overlay was the extreme weather during the winter (coldest calendar quarter in 30 years), which cast a tone of slower and delayed business activity for several months. Of course, revisions could go in either direction, and any downward moves (entirely possible) taking the quarter below zero in the next two data releases could be received negatively—other than the fact that they’ll be further and further in the past by that time.

While this quarter was disappointing, estimates for the 2nd quarter and beyond are higher, in the 3%+ range, but we’ve seen such optimistic early quotes before, only to see a ratcheting down later as the data is released. However, there does seem to be a general feeling that the latter part of 2014 is primed for business acceleration due to pent-up demand in a variety of industries.

(+) Speaking of starting off the 2nd quarter, the ISM manufacturing survey for April came in better than expected, rising 1.2 points on the month to 54.9 compared to an expected 54.3. The data under the hood showed production falling slightly, employment rising and new orders flat. Qualitative commentary was generally positive, particularly concerning demand for exports. Interestingly, looking back over the last 20 years, the ISM survey has bounced around between 40 and 60 (compared to the 30-70 in decades past), so the bands are a lot tighter in reality than we often think.

(+) The Chicago PMI for April came in better than expected, rising to 63.0, versus consensus estimates calling for 55.9. Production, new orders and employment gained several points each, so the report was well-rounded in its positivity and improvement on the lackluster winter.

(-) Factory orders for March were a little weaker than expected, up +1.1% compared to a consensus number of +1.5%. Core shipments were revised upward for February and March, which helped, however inventory investments were lower, and helped contribute to the weak Q1 GDP figure.

(-) Auto sales for April were a bit weaker than anticipated, coming in at an annualized rate of 16.0 mil. units, about 0.2 mil. under consensus. The domestic portion was 12.7 mil., which was just a shade under the figure expected. Much better than the winter figures, though.

(-) Construction spending for March rose +0.2%, which was three-tenths below forecast. The overall figure was helped by private residential, which rose almost a percent on the back of multi-family housing, while private non-residential rose in line with the index and commercial fell. Government spending was negative again, on the magnitude of just over a half-percent, continuing that trend relative to private spending.

(0) The S&P/Case-Shiller home price index for February rose +0.8%, which was right in line with forecast, and brought the one-year increase to +12.9%. The bulk of cities in the 20-item survey saw gains, with the strongest numbers on the West Coast (San Francisco, San Diego and Portland).

(+) Pending home sales for March rose more than expected, at a seasonally-adjusted rate of +3.4% versus a consensus figure of +1.0%—in fact, the first gain in nine months, and was coupled with a small upward revision for February. The pace is just below normal levels, in a recovery somewhat from winter, but not especially strong either. The West and South regions experienced the strongest gains.

(+) March’s personal income grew +0.5%, which was a tick higher than forecast and led by wage/salary income, but ‘transfer income,’ including Affordable Care Act payments, also grew. Consumer spending was also stronger than forecast for the month, growing +0.9%, with retail and auto sales being the catalysts, so that dropped the savings rate. The headline and core versions of the PCE price index both gained +0.2% for the month, bringing the year-over-year increases to +1.1% and +1.2%, respectively, so quite tame from an inflationary standpoint by those metrics.

(-) The Conference Board consumer confidence survey for April came in weaker than hoped, at 82.3 compared to an expected 83.2 reading. In the underlying data, consumer assessments of current conditions deteriorated somewhat, while future expectations were little changed and the labor differential (jobs being easy vs. hard to find) worsened a bit. But, overall, little change from the prior month.

(+) The April ADP employment report showed a gain of +220k jobs, which surpassed expectations by 10k and the March figure was revised up by 18k. The largest gains were in professional/business services, which added nearly 80k jobs, trade/transport/utilities up over 30k and construction, up almost 20k. This mid-week survey is looked to as a precursor of what might happen in the Friday government employment report, but isn’t always completely correlated.

(-) Initial jobless claims for the Apr. 26 ending week rose by 14k to 344k, higher than the 320k estimate. Continuing claims for the Apr. 19 week also rose by almost 100k to 2,771k, compared to the 2,700k number expected. The Department of Labor noted a few seasonal issues with Easter and spring break that may have affected the numbers slightly, but it’s difficult to say how much this really mattered.

(0) The employment cost index of compensation costs rose +0.3% for the first quarter, two-tenths below the expected rate and from the last quarter of 2013 and the slowest pace in five years. The wage/salary segment grew at the same rate for the period, which was the slowest change in the three decade history of the index, surprisingly enough, bringing the year-over-year change to +1.7%. This is low, but on par with other inflation measures we see.

(+) Nonfarm payrolls for April were up much more than expected, up +288k, compared to a forecast of +218k. The prior two months were also revised higher by +36k jobs. This was the best report in about four years, and strong results were seen in a variety of areas: business services gained +75k, education/health +40k, retail +35k and construction +32k. Weather was better in April than in March and definitely the winter in general, so this was a likely factor in hiring activity. However, before we get too enthused, this is only one month and these payroll reports are subject to a high degree of error in either direction over shorter periods (multi-month moving averages tend to have a more consistent story; these are also improving).

The unemployment rate fell as well from 6.7% to 6.3% (beating the 6.6% forecast). However, a fair amount of this originated from falling labor force participation—0.4% lower (equating to a labor force that’s 806k smaller), to 62.8%, which matches what it was at the start of the year and a 36-year low point. Why? Economists and academics continue to debate the topic, and it’s not a simple answer. The best guesses seem to be a combination of baby boomer retirements, disability rolls, more school enrollments (particularly younger workers) and the broad group of discouraged workers—although there is little agreement as to how much overlap there is between the categories. Naturally, some of them are related and have the potential of reversing should employment prospects continue to slowly improve.

The household employment component of this survey fell 73k, but rose 267k on a payroll-consistent basis (basically, a standardization of the two methodologies, but a long story). The peripheral data was also largely unchanged. Average hourly earnings were flat, despite hopes for a few tenths increase, and gained just short of 2% for the trailing year, similar to other inflation benchmarks. The average workweek was flat at 34.5 hours. Long-term unemployment also fell from 35.8% the prior month to 35.3%. Finally, the U-6 measure of underemployment fell to 12.3%, the lowest since the end of 2008. So, net-net, with all the definitional differences and adjustments and caveats, the employment result was quite good. Job growth is happening, although we know taking one month and extrapolating forward is never wise due to the volatility of the data and large standard of error.

(0) Per our earlier note this week, the Fed announced a continuation of their taper, of an additional $10 bill./mo., now taking purchases down to $45 bil./mo. The first signs of any rate increase at the current pace appear to be in early to mid-2015. This will depend on economic growth, inflation and various unemployment measures, as usual.

Market Notes

U.S. stocks experienced another up week with M&A activity picking up and decent economic news. From an earnings standpoint, three-quarters of firms in the S&P have reported, and three-quarters of those topped estimates (of course, on lowered expectations), with growth of 4% over a year ago. From a sector standpoint, telecom and technology stocks outperformed, while utilities and energy lagged. Small caps again showed weakness versus the larger-cap group.

In foreign markets, U.K. gained 2.5%, outperforming Europe and Japan—all outperforming the U.S. on the week. Mario Draghi of the ECB had apparently mentioned in a meeting that quantitative easing could be a policy option, but was unlikely—offering a mixed message. Interestingly, EU consumer confidence has now reached its highest point since 2007, although it remains negative in the majority of countries (U.K. and Germany being the exceptions among the larger nations). The problem children of the emerging markets, such as Russia and Turkey, were interestingly the best performing stocks on the week. China was one of the few losing regions on the week.

Bonds had a good week, with rates falling following a weak GDP report and Ukrainian concerns. Long-term bonds experienced the best returns, in both treasuries and corporates. Emerging market bonds also performed well, outperforming developed market issues, especially those of Japan.

Real estate returns were led by strong showings in Asia and U.S. residential, while European and U.S. mortgage REITs lagged. Year-to-date, however, the 15% return for the Wilshire REIT index remains the best of any asset class.

Commodities were generally down on the week, despite the help of a weaker dollar. Wheat rose several percent on supply issues caused by drought conditions. Oil prices fell a percent to just under $100/barrel, as did industrial metals with a drop in aluminum—both due to overcapacity issues.

Have a great week!