 | Non-farm payrolls increased 115K in April |
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| Posted Under: Data Watch • Employment |
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Implications: The headline payroll numbers fell short of consensus expectations in April, rising 115,000 overall and 130,000 for the private sector. However, the Labor Department once again made large upward revisions to prior months. Including these revisions, nonfarm payrolls were up 168,000 and private payrolls were up 196,000, both beating consensus expectations. Some analysts ignore these revisions, but we think that’s a big mistake. Monthly revisions to the original payroll report have now been up for ten straight months and have averaged about 40,000 per month during this period. As a result, without revisions analysts have a systematically and downwardly biased impression about the job market. Meanwhile, some analysts may discount the drop in the unemployment rate to 8.1%, given that the drop was due to a decline in the labor force. However, in the past year, the unemployment rate has dropped 0.9 percentage points (from 9% in April 2011) while the labor force has grown 700,000. In other words, the trend decline in the jobless rate in the past year is not due to fewer people looking for work. Another piece of good news in today’s report is that the median duration of unemployment dropped to 19.4 weeks, the lowest level since 2009. Total hours worked increased 0.1% in April and are up 2.1% from a year ago. Although cash wages were unchanged in April, they are up 1.8% in the past year. Combining hours and wages, total cash wages are up 4% from a year ago, which is still outpacing inflation. The labor market is still far from where it was before the recession started. In the 20 years before the recession started, the unemployment rate averaged 5.5%. With the right set of public policies, we see no reason why we can’t get there again. But the fact that we’re not there yet should not prevent us from recognizing the progress that we’re making.
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| | Medium & Heavy Truck Sales Show a Double Dip Unlikely |
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| Posted Under: Autos • Double Dip |
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Earlier this week the Commerce Department released figures on vehicle sales. As usual, the big headlines went to sales of autos and light trucks, which were up 0.4% in April and up 9.4% from a year ago. These figures always get the most attention because it tells us what’s happening with consumers.
However, the report also included sales of medium and heavy trucks, which are almost all used by businesses. These vehicles were sold at a 325,000 annual rate in April. That’s down 5.5% from March (the series is very volatile from month to month) but still up 19.5% from a year ago. As the chart above shows, every recession in the past 40+ years (shaded areas in chart are recessions) has been preceded by a major decline in sales of medium and heavy trucks. Sometimes sales of these trucks decline a great deal and no recession follows, but if there is not a major decline, it looks like we are safe from recession.
As the chart above shows, we are nowhere near as large a decline as the ones that have preceded prior recessions. Moreover, with housing picking up, it’s unlikely we’ll see any significant downturn in medium and heavy truck sales anytime soon. Another reason to ignore the double-dippers.
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| | The ISM non-manufacturing composite index fell to 53.5 in April |
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| Posted Under: Data Watch • ISM Non-Manufacturing |
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Implications: Unlike the manufacturing sector, which showed acceleration in April, the service sector continued to grow in April, but not as quickly as it had been for the first three months of the year. While still above 50 for the 28th straight month – signaling growth – the ISM services index came in lower than the consensus expected in April. The business activity index, which has an even stronger correlation with real GDP growth than the overall index, also fell in April, but remains at a solid 54.6. The employment index followed the same pattern, dropping, but to a level still above 50. On the inflation front, the prices paid index fell to 53.6. This is consistent with other indicators showing a temporary moderation in inflation. However, given the loose stance of monetary policy, we don’t expect this lull to last. In other recent news, the ADP employment index, which measures private sector payrolls, increased 119,000 in April. New claims for unemployment insurance fell 27,000 last week to 365,000, while continuing claims for regular state benefits dropped 53,000 to 3.28 million. Plugging all these figures into our employment models suggests tomorrow’s official Labor Department report will show a 155,000 gain in private payrolls (145,000 nonfarm) and a jobless rate of 8.1%.
Click here for a PDF version
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| | Nonfarm productivity (output per hour) declined at a 0.5% annual rate in the first quarter |
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| Posted Under: Data Watch • Productivity |
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Implications: Nonfarm productivity declined at a 0.5% annual rate in the first quarter. This wasn’t due to falling production; output increased at a 2.7% annual rate. Instead, productivity declined because the number of hours worked increased even faster than output, which means output per hour declined. As we have mentioned before, it is not unusual for productivity growth to slow temporarily after the initial stages of an economic recovery, as firms hire more workers and give their workers more hours. However, on the manufacturing side, where output is measured more accurately, productivity absolutely boomed in Q1 rising at a 5.9% annual rate. Output rose at a 10.8% annual rate, the second fastest quarterly increase since 1987. Over the past few years, manufacturers have gotten very lean, being able to produce more with fewer workers. Now hours are rising consistently as well, up at a 4.6% annual rate in Q1 after climbing at a 4.8% rate in Q4. While “real” (inflation-adjusted) compensation per hour declined among both manufacturing workers and in the nonfarm sector as a whole, it’s important to recognize that this does not mean workers are earning less or have less money to spend. Because of the increase in the number of hours worked, workers are earning more than before, they’re just earning slightly less per hour. We believe the long-term upward trend in productivity growth will ultimately re-assert itself, reflecting the technological revolution we have been experiencing since the early-1980s. In other recent news, Americans bought cars and light trucks at a 14.4 million annual rate in April, exactly as the consensus expected. That’s up 0.4% from March and up 9.4% from a year ago. Looks like retail sales were up again in April, for the 21st time in the past 22 months. Given improving sales and low dealer inventories, expect more gains in auto production ahead.
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| | Diamond/Saez’s Op-Ed Review |
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| Posted Under: Government |
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In my continued role as contributor to the George W. Bush Presidential Center’s 4% Growth Project, I recently reviewed Peter Diamond and Emmanuel Saez’s published Op-Ed in the Wall Street Journal titled “High Tax Rates Won’t Slow Growth.” They argue that when it comes to tax revenue, the US is not close to the top of the Laffer Curve, and raising tax rates to 50%, or even 70%, would boost revenue and reduce the deficit. Click here to see why I gave this proposal a solid, and well earned, F.
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| | Great Speech by Paul Ryan at Georgetown University |
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| Posted Under: Government |
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Rep. Paul Ryan gave a great speech at Georgetown University last week. Below is a link to his remarks. We definitely recommend reading them. Here are a few excerpts:
The overarching threat to our whole society today is the exploding federal debt. The Holy Father, Pope Benedict, has charged that governments, communities, and individuals running up high debt levels are “living at the expense of future generations” and “living in untruth.”
As I go around Southern Wisconsin and visit with Americans across the country explaining that our debt is on track to cripple the economy – and showing people charts and graphs to back it up – they often ask, is it too late to save America from a diminished future? Is the American Experiment over?
It’s a difficult question. It’s one that gives me pause. Frankly, it’s one that keeps me up at night.
But the honest answer is the one I’m about to give to you: Nobody ever got rich betting against the United States of America, and I’m not about to start.
Click here for a link to Rep. Paul Ryan’s Remarks
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| | Vehicle Sales Rise in April |
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| Posted Under: Autos |
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Sales of autos and light trucks rose in April to a 14.4 million annual rate, up 0.4% from March and up 9.5% from a year ago. The results matched the consensus expected pace and is the second highest reading since 2008. Higher gas prices do not seem to be deterring the consumer. Auto sales are clearly trending higher, but still have a way to go to get back to normal levels of about 15.5 million autos a year.
Warm weather may have encouraged some buyers to purchase a vehicle now, rather than waiting. But the bottom line is that consumers would not be buying vehicles if they lacked confidence about the future.
With dealer inventories still low, automakers will continue to ramp up production. This is good news for the economy and means the Federal Reserve has no justification for another round of quantitative easing.
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| | The ISM manufacturing index increased to 54.8 in April |
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| Posted Under: Data Watch • ISM |
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Implications: Manufacturing was much stronger than expected in April, with the ISM report beating the estimate of every single one of the 79 forecasting groups polled by Bloomberg. At 54.8, April’s reading was the highest in ten months and has now remained above 50 for 33 straight months. And just in case you still think a double-dip is possible, the new orders index, came in at a stellar 58.2, the highest in a year, suggesting more growth in production ahead. The employment index rose to 57.3, the highest level since June last year, and is consistent with our view of private payrolls rising 175,000 in April. The index level for inventories dropped to 48.5 and is once again contracting. The reluctance of manufacturers to accumulate inventories may hold back GDP in the short term, but we view this reluctance as temporary and indicative of better future growth. On the inflation front, the prices paid index remained at an elevated 61.0 in April. Given the loose stance of monetary policy, this index should move higher in the year ahead. In other news this morning, the Census Bureau reported that construction spending increased 0.1% in March, although it dipped 0.1% including revisions to prior months. The slight increase in March itself was a combination of a 0.7% increase in private construction, while government projects fell 1.1%. The rise in private construction was a due to single-family homes and office buildings; the drop in government projects was led by public colleges.
Click here for a PDF version.
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| | Here We Go Again |
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| Posted Under: Monday Morning Outlook |
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Here we go again. For the third year in a row, some economic data have begun to raise red flags.
Initial claims for jobless benefits have drifted back above 380,000, after bottoming at 361,000 in February. Private payroll growth slowed to 121,000 in March. Industrial production was unchanged the past two months. The Empire State, Philly Fed and Chicago manufacturing indices all dipped in April. And on Friday, we all heard real GDP grew at a modest 2.2% annual rate in Q1.
As a result, the economic vultures are circling again. Some are concerned about a relapse into recession, while others fret about a collapse in the dollar if the Fed does QE3. In other words, here we go again. It’s the same message we heard in 2010 and 2011 when the data softened. Maybe the third time will be the charm, but as we said in both previous years, we don’t think so. The economy is more robust than commonly believed.
In 2010, unemployment claims jumped, but the economy kept its forward momentum. In 2011, after Japan’s disasters, jobless claims shot up 25,000 in a month, but the economy kept growing. Right now, even with initial claims elevated in recent weeks, they are still running 9-10% below year ago levels. True, payroll growth slowed in March, but that’s after an average increase of 231,000 private sector jobs per month in the prior four months.
And while overall industrial production was flat in February/March, that’s largely due to a slowdown in the volatile mining sector. But manufacturing alone increased at a solid 3.9% annual rate in those two months. Like last year, the Empire, Philly, and Chicago reports showing slower growth also show faster hiring, which suggests any slowdown is likely temporary.
We are not saying the negative data is meaningless. It’s not. But some of the reaction is, once again, overdone. For example, in Q1, real GDP was pulled down by significant weakness in government spending. Excluding purchases by government, “private” real GDP expanded at a solid 3.4% annual rate. Meanwhile, housing is clearly starting to rebound, with sales and construction up from a year ago and prices up in February, while private wages and salaries are up 5.3% YOY.
Debating the worry-warts has become a full-time job and we can’t prove them wrong until the future becomes the present. So, let’s look back to last year when we said “in a few months we will be looking back at recent reports as just statistical noise.” Sounded good then, so let’s not mess with success. The more things change, the more they stay the same.
Click here for a PDF version.
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| | Personal income increased 0.4% in March |
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| Posted Under: Data Watch • PIC |
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Implications: Despite what you may hear, the American consumer keeps buying. In fact, spending has accelerated of late. Personal consumption is up 4% from a year ago, but up at a 6.8% annual rate in the past three months. Some analysts may question how this can keep going. Spending is up faster than income in the past year. What they’re missing is that households’ financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – are now the smallest share of income since 1984. As these obligations diminish consumers can lift spending faster than income. Meanwhile, government transfers have become only a minor factor behind consumption growth. Private sector wages and salaries are up 5.3% in the past year, while transfer payments are up only 0.9%. Continued job gains and wage increases should support further gains in consumer spending from here. On the inflation front, overall consumption prices are up 2.1% in the past year, slightly above the Fed’s supposed target of 2%. The Fed’s favorite gauge of inflation – core PCE, which excludes food and energy – is up 2% from a year ago, the first time at 2% or more since late 2008. Given healthy spending patterns and inflation already at their target, the Federal Reserve has no justification for another round of quantitative easing. In other news this morning, the Chicago PMI, a measure of manufacturing activity in that region, slipped to a 56.2 in April from 62.2 in March, mirroring the weakness seen in the Empire State index and Philly Fed index. However, in all three surveys the sub-index for employment increased in April.
Click here for a PDF version
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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