Conflicting Signals on the Economy
The most recent indicators on the economy released over the first few days of April provide mixed signals about the pace of economic growth but do not suggest the expansion is at risk.
On the positive side, ADP, the global provider of cloud-based Human Capital Management solutions and best known for their payroll processing service, reported that based on activity among their clients, private payrolls in the U.S. likely added 263,000 jobs in March. That puts the average estimated gain over the past three months at 252,000, a very robust pace of growth. The official tally from the U.S. Bureau of Labor Statistics has reported an average of 224,000 for January and February. The March report is due out this Friday, April 7th. While the month-to-month data points for ADP and BLS can vary widely, the two do tend to follow similar trends. Such strong performance by the ADP data over the past three months is a positive sign for the upcoming national report on Friday.
Other signals for the upcoming employment report come from weekly initial claims for unemployment insurance. Claims have drifted up slightly with the four-week average rising to 254,250 from a low of 239,750 four weeks ago. Despite the small rise in initial claims, the overall level of claims remains at historically low levels.
Furthermore, the Institute for Supply Management (ISM) released its Report on Business surveys – the manufacturing report on Monday and the nonmanufacturing report today. The nonmanufacturing report represents the much-larger services portion of the economy. The employment index for nonmanufacturing fell 3.6 percentage points to 51.6 percent, where results above 50 suggest growth while results below 50 suggest contraction. The manufacturing report had a more favorable tally with the employment index jumping by 4.7 percentage points to 58.9 percent, the highest level since 2011.
Both ISM reports showed slight declines in the overall composite indexes as well as slight declines in the key new orders and production indices. However, all the key indices for new orders, production, new export orders, and the overall composite indexes remained well above the neutral 50 level suggesting continued expansion for both sectors and the economy overall.
The most disappointing piece of data came from auto makers who reported that unit sales of light vehicles, cars and light trucks such as SUVs, fell to an annualized pace of 16.5 million in March. While 16.5 million units is a strong pace historically, it is down sharply from the 18.3 million pace of December 2016. Among the components, cars sales fell to a 6.1 million pace, continuing a declining trend in place since 2014 (coinciding with the collapse in energy prices). The surprising result came from the light truck segment where the pace fell sharply from 11.2 million in February to 10.5 million in March.
Consumer spending remains the key support for the economy. Ebbs and flows in spending and economy activity overall are natural. A strong labor market, rising wages and incomes, and high levels of consumer confidence suggest a positive outlook. That view is confirmed by our business-cycle indicators as our Leaders index held at 75 in the latest month, well above the neutral 50 level. But a close eye should be kept on consumer spending and auto sales in particular just in case autos turn out to be the canary in the coal mine.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
