WHAT IT MEANS:
- INDICATOR: April Supply Managers’ Survey and March Construction
- KEY DATA: ISM (Manufacturing): -1 point; Orders: -2.5 points; Hiring: +1.1 points/ Construction: +0.3%; Private: +1.1%
- IN A NUTSHELL: “The manufacturing sector is expanding, but just barely.”
If you were hoping for a rebound in the manufacturing sector, well don’t hold your breath. While it looks like the sector is still expanding, it is not doing so at a rapid pace. The Institute for Supply Management reported that activity slowed a touch in April as order growth decelerated. It should be noted that demand remains quite solid. It’s just that the pace of gain was just not as rapid last month. There was a pick up in export orders, a possible indication that the problems in the rest of the world are easing. Or, it may be due to the declining dollar. Regardless, it was nice to see that export demand was accelerating. Production grew slower and order books expanded at a modest pace. In other words, the sector is moving forward but we have the tortoise, not the hare in this race. One sign that Friday’s employment report may be okay was the rise in the employment index. While it didn’t show that payrolls were increasing, it did hint that the large decline in manufacturing employment posted in March may not be repeated in the April data. Also, inventories shrank for the tenth consecutive month. It is not clear if the inventory rationalization process we have been seeing is over, but that is a fairly long time for inventories to contract. I suspect we are nearing the end of that process, which would help with second quarter growth.
Construction activity was up in March led by a solid rise in private sector residential and nonresidential building. On the other hand, the government did its best to slow the economy down as construction spending was off sharply during the month.
MARKETS AND FED POLICY IMPLICATIONS:
March was not a great month for the economy and April didn’t start off that well either. Still, this week we get a number of key labor market numbers. The biggie, of course, is Friday’s employment report. But I am very interested in Wednesday’s productivity and labor costs numbers, which could show that worker expenses accelerated sharply in the first quarter. Chair Yellen is a big believer in labor costs as an indicator of future inflation, so watch these data closely. If we see rising labor costs in the Friday’s hourly earnings numbers as well, that could be a warning to the Fed Chair that the slack in the labor market that she has talked about may be disappearing. Tomorrow’s vehicle sales numbers should tell us if the March decline was just an aberration or a sign of soft times ahead. I expect a sharp rebound in vehicle purchases and that could set us up for a very good second quarter consumption number. So today’s manufacturing report, though not a good one, shouldn’t worry the markets a whole lot.
Joel L. Naroff
is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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