Economic Notes – May 6, 2013


Written by: Jon McGraw

It was a busy week from an economic standpoint.

(+) The ISM index for April was a bit better than expected, despite a decline from March’s 51.3 to 50.7 (consensus called for 50.5). The employment component fell 4 points; however, the look-ahead new orders and production segments rose. Inventories also declined a bit, which could signify a smaller contribution to this component in Q2 GDP. This particular ISM isn’t a dramatic change for the month, but the underlying data isn’t terrible, which bucks the fears of a springtime slowdown to some extent (a fear that’s come to pass over the past several years).

(-) Non-manufacturing ISM, by contrast, was a bit weaker than expected, falling from 54.4 in March to 53.1 in April—compared to a consensus estimate of 54.0. Like the above-mentioned manufacturing ISM, employment declined as did overall business activity. The inventory component rose, which may temper the need for future production a bit. Despite the disappointment for the single month, both the manufacturing and non-manuf. ISM’s are solidly above 50—suggesting expansionary territory.

(-) The Chicago PMI came in weaker than anticipated, at 49.0 versus the forecasted 52.5—much in line with other recent regional survey declines. Employment here, too, by the largest amount, while other components were weaker, albeit less so. The new orders component was higher, which is a positive from a future perspective.

(+) The Conference Board’s consumer confidence survey posted sharper improvement than expected, with a 68.1 reading, relative to the anticipated 61.0. The primary catalyst was a higher reading in consumer expectations about the future, which rose by 10%; assessments of current conditions rose by only a percent. The employment segment that depicts the ease of job market conditions deteriorated a bit.

(-) Factory orders fell -4.0% for March, which disappointed slightly relative to expectations of a -2.9% decline. On the positive side, there were several small upward revisions for core capital goods for Feb. and March. Data is consistent with other manufacturing numbers that have weakened during the past few weeks.

(-) Construction spending for March fell -1.7%, which was a disappointment relative to the +0.6% gain expected. The weaker results were concentrated in non-residential construction, which fell almost 3%, largely as a result in lower spending in public highway/street expenditures (down $4 billion on the single month). Residential actually grew just under a percent on the month. While the public road construction drop could be partially blamed on budget/sequester effects, especially in 2013, this segment has actually been in decline for the past four years.

(0) Personal income grew +0.2% in March, which was about half the +0.4% expected, so a bit of a letdown. This corresponded directly with a similar rise in wages/salaries, so it represented a fairly ‘clean’ report, as opposed to the usual year-end tax-related issues that can convolute this number. Consumer spending also rose +0.2%, in line with income and matched analyst expectations. The savings rate has remained steady at 2.7% for the past several months (the lowest since 2007). The PCE price index, which tracks CPI inflation quite closely, fell -0.1% on a headline level on par with expectations, while the ‘core’ index rose +0.03%, which was slower than expected. Lower gasoline prices represented the primary difference and catalyst, as they often do.

(+/0) Pending home sales gained +1.5% for March, which slightly surpassed the forecasted +1.0%. At the same time, February sales were revised downward by about a half-percent. From a regional basis, sales in the Southern and Western U.S. gained a few percent, while the Midwest and Northeast were generally flat. This indicator generally continues to point to a trend of stronger final sales for the next few months—the critical summer months are obviously prime time for real estate sales activity, so this will be critical to watch.

(+) The Case-Shiller Home Price Index rose +1.25% for February, which surpassed the expected rise of +0.90%. The year-over-year index level stands at a robust 9.3%—the largest level since 2006 and again demonstrating signs of increasingly persistent recovery. Prices rose in all 20 cities in the index, with the largest gains coming from Las Vegas, Phoenix, San Francisco and Los Angeles.

(+) The trade deficit (exports minus imports) for March narrowed more than anticipated to -$38.8 billion, which was better than the -$42.3 billion forecast. It was the consumer goods imports that dropped off (down -7.5% for the month) and petroleum imports increased a bit.

On to employment…

(+) Initial jobless claims for the Apr. 27 week dropped more than expected and 18k from the prior week, to 324k, compared to the forecasted 345k. Notably, this is the lowest level of initial claims since early 2008. Continuing claims for the Apr. 20 week came in at 3,019k, which was a bit lower than the 3,030k expected. While noisy, these figures have been improving as of late but continued progress is needed for the economy to operate at a level closer to ‘potential’ and for the Fed to back off on easing.

In other data, non-farm productivity increased by +0.7% on an annualized basis, which fell a bit short of the +1.0% expected and reflected an increase in hours worked. Unit labor costs (compensation/hour to output/hour) rose by +0.5%, and lagged the expected increase by two-tenths of a percent.

(+) Lastly, the employment cost index for the first quarter rose at a moderate pace, up +0.3% for the three-month period compared to an expected half-percent increase. This is another indicator of potential inflation we watch, as some of these pressures can begin to manifest themselves through wages. The low growth levels are positive on that front, but continues to indicate a weak job market

(-) The ADP private employment report disappointed for April with job gains of +119k compared to an expected +150k. Manufacturing represented the biggest detractor (with a loss of -10k jobs) and professional/business services job growth slowed from a recent average of +43k to +20k. On the positive side, construction jobs gained +15k, which may be a rebound effect from poor March weather. From a company size perspective, jobs were spread equally among large- and smaller-sized firms, which is an improvement (as it took time, and still is taking time, for smaller employers to feel comfortable with hiring additional workers).

(+) The monthly April employment situation report came in better than expected, with payrolls up +165k compared to a forecasted +140k, and data for previous months was revised up by 114k jobs (significant). The largest gains were a 70k move in business services, while construction jobs actually lost ground a bit. Federal government jobs fell by 8k, which was half that of the previous month (and about 4k was the post office—a non-sequester issue). The unemployment rate dropped a tenth of a point to 7.5%, which was a tick lower than the expected flat 7.6%. The good news this month was that improvement originated from job growth as opposed to labor force participation declines, as measured by the household survey (+247k jobs gained). Average hourly earnings rose +0.2% for April, which were generally in line with forecast, and the average workweek length dropped by 0.2 hours to 34.4 hours.

What to make of all this? Better, but still not great. While this last month and revisions boosted average monthly job growth to +150k or so, that is down from the +200k pace experienced from Sept.-Feb.

Some economists have also attributed current enrollment in the social security disability program (SSDI) as a potential contributor to higher levels of unemployment. Over the last five years, SSDI levels have grown by 0.6% while labor force participation has fallen by almost 3%. This has led to a bit of uncertainty about whether or not the ‘uncounted’ unemployed are languishing on disability, but this effect doesn’t seem to be as extreme as feared. Largely, increases in disability participation are due to demographic trends and expansion of the program itself over the last four decades, bringing total workers on the SSDI to nearly 6% of the total labor force and almost 4% of the 16 and over adult population (a quarter of these are ‘qualifying family members’ of a primary recipient).

This is ironic somewhat, since workforce injuries/illnesses have fallen exponentially over the past few decades, but as baby boomers are working longer, there is more time for injury to occur and now there’s a larger pool of possible beneficiaries. Long-story short, this doesn’t appear to have played a huge role in the size of the labor pool or unemployment rate in recent years (perhaps one-tenth of the total). Unfortunately, however, few SSDI recipients appear to leave the program voluntarily to re-enter the labor force, even in good times.

(0) As we noted earlier in the week, the FOMC revised their policy and message by very little. One thing they did mention was an emphasis on additional flexibility to increase or reduce the pace of Treasury/MBS bond purchases as needed based on economic conditions. This provides some room for maneuvering in terms of timing should additional firepower be needed to combat a sudden pause in economic growth or inflation that falls too low, or, alternatively, fewer easing purchases are needed. In their world, having more options is much better than fewer.

In other government activity, the Treasury Dept. issued more information about bill/note/bond auction sizes, mentioning that these may need to be reduced due to current fiscal conditions (larger revenue received on the incoming end and budgets cuts on the outflow end, so a lessened need for borrowing). It also gave a bit more color on its new floating rate note program—which is expected to be launched later in 2013 or early 2014. In preliminary form, these are likely to have a maturity of about two years and will be indexed to the auction rate for 13-week bills. An interesting new security for sure, and one we’ll likely hear much more about in coming months.

In Europe, the ECB decided enough was enough and cut rates for the first time in 10 months (by 0.25% to a record low 0.50%). Interestingly, it left deposit rates unchanged for banks at zero, although it considered the possibility of a negative interest rate of -0.25% (meaning it would have charged banks for holding their overnight money). Based on analysis of where the European interest rate ‘should’ be, using criteria such as the Taylor Rule, officials may not have gone far enough.

Market Notes

Stock gains continued, largely with a boost on Friday from a stronger employment report that calmed fears about another annual spring slowdown. From an industry perspective, technology and energy led the way, gaining 4.5% and 4% respectively, while defensive utilities and telecom lagged, posting the only negative returns on the week.

In foreign equities, larger emerging markets provided the biggest gains in the week, which included South Africa, Russia, Turkey and India—all up 4-5%. Several larger European nations weren’t far behind with the ECB’s decision to lower rates prompting stronger sentiment about conditions for growth improving.

U.S. bond indexes were down slightly with higher long government rates and a strong week for equities. The best performing bond asset classes included high yield and floating rate, while long treasuries and TIPs lagged and lost ground by -1% in some cases. In international markets, emerging markets fared well on tighter spreads, but developed Europe also experienced a good week with the ECB rate news.

Real estate securities were led by U.S. REITs, which gained strongly, while developed Asia and Europe weren’t far behind. In fact, all REITs were in the black except for mortgages.

Commodity markets regained some ground on the week, led by corn and wheat, which each gained in the 5% range. Composite crude was also up around 2%. Natural gas corrected about 4% on the week.

So what about ‘sell in May and go away’ (presumably until fall)? This is the debate that goes on year after year around this time. The answer is: there is no clear and easy answer. The last three summers weren’t great, but the several prior to that weren’t all that bad. In fact, in the 1990’s, May was the second best performing month of the decade (after December).

In terms of seasonal patterns, the winter months do tend to be the best-performing, with Nov., Dec. and Jan. providing the strongest returns over the decades. There are several possible reasons for this, but the primary ones might be the most obvious—a retail upswing near Christmas and the Holidays, in which a large bulk of annual consumer activity is condensed, which translates into company earnings; fewer vacations, so corporate productivity is more focused; as well as higher volume levels in most investment markets. The summertime (in many regions) is less productive with more downtime, including in markets, where trading volumes tend to be quite a bit lower (however, with lower volume, the trading that does happen can be more volatile). There also tend to be fewer governmental policy decisions made that sway sentiment.

Have a great week!