United States April 2019 Economic Review
The April employment report was quite strong.
- The economy added +263k jobs, easily beating expectations of +180k.
- The unemployment rate dropped from 3.8% to 3.6%, setting a new record low in this cycle. It’s the lowest in over 49 years.
- Wage gains remained steady at 3.2% y/y.
- The very weak February report of +33k was revised upward to +55k. Combined with today’s report, the revision confirms that February was a statistical blip and not a sign of weakness in the economy
Now for the holes in the report:
- Maybe some of that job growth was just mean reversion. But to what mean? 3 month and 6 month averages are both down.
- The unemployment rate fell for the wrong reason… the labor force fell by a steep -490k, the fourth consecutive decline. That drove the participation rate down by 0.2% as a result.
- Manufacturing job growth was weak at only 4k after 0 last month, confirming the substantial deterioration in the ISM report earlier in the weak to a 2.5 year low.
- Wage growth was stagnant at +3.2%y/y, a bit softer than expectations of +3.3%.
- The work week shrank to a -0.3% y/y rate which drove weekly wages down to +2.9% y/y – it had been 3.5% just four months ago.
Despite the holes, it’s a very good report. And it is consistent with our scenario of strong growth for most of 2019, with real concerns late in the year and out into Q1-20.
It was a very busy week with a lot of data. Here’s a brief recap, much of which was in this week’s WERO
Real personal consumption expenditures rose a sharp +0.7% in March, pushing the y/y rate to a decent + 2.9%. Real income fell -0.2% however, driving the y/y rate down sharply from +2.9% to +2.3%. The culprit here is something we have been talking about which supports our case for a slowdown later - shrinking fiscal stimulus. We didn’t get a tax cut this year. So taxes are now growing in line with income, like they usually do.
Q1-19 GDP was stronger than expected at +3.2% q/q annualized, but the details were weak. Much of the gain was driven by the third consecutive increase in inventories, and a sharp decrease in imports, both indicating weak demand.
Manufacturing continues to suffer. The April ISM manufacturing report fell -2.5 points to its lowest level in 31 months. New orders fell a sharp -5.7 points to 51.7; a reading below 50 indicates contraction. Seven of the ten components fell, leaving only six above 50. Only 13 of 18 industries reported expansion, an unusually low number. And again this report confirms the weakness in the employment report.
Consumer confidence gained +5.0 points to 129.2, and while that’s below recent highs, it is still historically strong. The spread between the assessment of the present situation and future expectations widened back up 0.6 points and is still very wide at -65. That’s a level that’s lower than in five of the past six recessions.
Productivity surged at a +3.6% q/q annualized rate, the most in five years. That drove the y/y rate to +2.4%, and that’s the first time we’ve gotten a 2 handle for the entire recovery, almost nine years. Caution though - a lot of that may have been driven by that GDP report which had the strong headline but rotten details.
The ISM non-manufacturing index fell slightly losing -0.5 points to 55.5. But it was the fourth decline in five months. Six of the ten components fell, but they are all above 50.
The Federal Reserve left interest rates unchanged, but cited concerns that inflation measures “have declined and are running below 2 percent” (the Fed’s target). Inflation ran a cool +1.5% y/y in March. Chairman Powell described the situation as “transient”, a remark some interpreted to mean a rate cut this year was less likely, so the probability of a cut fell from 66% to 53%.
So the news is about evenly split, and as stated above, it is consistent with our scenario of strong growth in most of 2019, with real concerns late in the year and out into Q1-20.