All's Well That Ends Well

The economic data reports were decidedly mixed last week. However, the April Employment Report exceeded expectations, which provided a good excuse for share prices to move higher. Bonds were whipsawed, encouraged by the view that the Fed was less likely to taper its asset purchases, but then hit hard by the better-than-expected payroll figures.

Nonfarm payrolls rose more than expected in April, while figures for February and March were revised higher. Results were mixed across sectors, suggesting that manufacturing has softened, but the consumer appears to be in relatively good shape. Temp-help employment rose, an encouraging sign, but average weekly hours fell, suggesting less of a need to increase hiring. Prior to seasonal adjustment, we added 932,000 payrolls in April. Unadjusted payrolls are trending about where they were in 2006. We still have a long way to go for a full recovery.

State and local tax receipts have improved. Job losses at the state and local levels of government appear to be bottoming. They may not increase much from here, but it’s good if they’ve stopped falling. Federal government payrolls are trending down, now down 3,000 since December 2008 (so much for the “massive” increase in government that we keep hearing about). Some of this reflects the contraction in the U.S. Postal Service, but there appear to be some sequester effects. Sequester cuts don’t happen all at once. In fact, some government agencies had trimmed payrolls in anticipation of the cutbacks. Other job cuts are likely to show up in the months ahead.

Consumer spending was stronger than expected in March, but that reflects an impact of colder weather, which boosted the consumption of household energy, and is unlikely to be repeated. Unit motor vehicle sales were up significantly year-over-year in April, but the seasonally adjusted pace appears to have slowed. That may reflect a lagged impact from the payroll tax hike. On the other hand, wealth gains in housing and equities are likely providing support to consumer spending at the upper end of the income scale.

The manufacturing data have been generally weak. Average weekly hours in manufacturing fell further in April and overtime hours declined. Factory orders fell. March trade figures continued to show a softening trend in imports and exports. The U.S. economy is not getting any help from the rest of the world.

The Federal Open Market Committee left monetary policy unchanged last week. The policy statement was a near photocopy of the previous one (from March 20). However, there were two notable changes. The first was that the Fed indicated more emphatically that tighter fiscal policy is restraining growth. The second was an added statement on the Large-Scale Asset Purchases (QE3). Much of the recent Fed debate has been about when to begin tapering the rate of asset purchases. Instead, the FOMC suggested that the pace could be increased as well as lowered, depending on what happens with inflation and the labor market. The PCE Price Index, the Fed’s chief inflation gauge, rose just 1.0% in the 12 months ending in March and lower gasoline prices should push the y/y increase below 1% in April. That’s against a Fed target rate of 2.0%. Deflation (a general decline in the price level) is still unlikely, but Fed officials fear it more than anything else. It’s a small chance of a big problem, one the Fed takes very seriously. The Fed is justified in keeping an increase in the rate of asset purchases on the table. However, the employment figures are consistent with a tapering in Fed asset purchases late this year.

In short, the economy remains firmly on the recovery path, although growth is likely to remain uneven over time and across sectors. We still have a difference in the economic outlooks between the stock market and the bond market, but this should clear up somewhat when the data roll in mid-May.

© Raymond James

© Raymond James

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