Posturing between the U.S. and China over trade tariffs dominated business news this week. The economic data was reasonably good and consistent with an ongoing moderate GDP expansion through 2018H1. However, the employment report for March fell flat.
The official jobs data for March was eye-catching, as firms increased employment by just 103,000 jobs on net, well below consensus expectations of about +185,000 for the month. The miss in March payrolls comes on the heels of a robust 326,000 job gain in February. The March slump looks like mean reversion right now. If it is followed by a weak April, that is another story, but other indicators point to ongoing moderate job growth this spring. The unemployment rate stayed at 4.1 percent for the sixth consecutive month. We still expect it to edge lower, but the rate of decline has clearly eased. Average hourly earnings increased by 0.3 percent for the month and are up 2.7 percent over the previous year.
The Fed will be watching both employment numbers and the wage data carefully over the next few months. We expect Jay Powell & Company to keep the fed funds rate unchanged at the next FOMC meeting over May 1-2. We look for the second fed funds rate hike this year to come at the conclusion of the June 12-13 FOMC meeting. The CME Group’s implied odds of a June 13 rate hike have eased to a still-high 77.8 percent.
The U.S. international trade gap widened modestly in February, to -$57.6 billion, from -$56.7 billion in January. Some of the push on the trade gap came from TV royalties paid out for the Winter Olympics. Through February, trade looks like it will be a neutral factor for 2018Q1 GDP. Trade was a big drag in 2017Q4, subtracting 1.2 percent from real GDP growth for the quarter.
Initial claims for unemployment insurance increased by a larger-than-expected 24,000 for the final week of March, to hit 242,000. This is still a very low level. The UI claims weekly data can be jumpy this time of year because of weather, seasonal adjustment factors and the timing of the Easter holiday.
The ISM Non-Manufacturing Index for March eased to 58.8, down from 59.5 in February. This is still a positive number indicating improving conditions for the bulk of the U.S. economy. Some survey respondents were concerned that interest rate increases and tariffs could add to price pressures. Volatility in construction materials prices was also noted.
The ISM Manufacturing Index for March eased to a still-strong 59.3, down slightly from February’s 60.8. The production, new orders and employment sub-indexes were all strong. The prices sub-index was elevated at 78.1, indicating increasing pricing pressure.
The value of construction put in place was little changed in February, gaining 0.1 percent. Over the previous 12 months, the total nominal value of U.S. construction put in place has increased by 3.0 percent, well off the double-digit gains from 2014-2015.
Auto sales were a surprise positive in March, increasing to a 17.5 million unit rate. This is supportive of overall consumer spending for the first quarter, which is the largest part of GDP. Forecasting auto sales is now a two-handed argument. On the one hand, strong economic conditions are supportive of ongoing auto sales. On the other hand, sales were declining through the first eight months of 2017, then came the surge in sales in September as a result of hurricane damage along Gulf Coast. We expect to see gradually easing auto sales this year.
For a PDF version of this report click here: Comerica-Economic-Weekly-04062018.
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