05 May Weekly Economic Vital Signs – If The Economy Is Great, Then…
The chart below does not depict a strong economy. Overall construction spending slumped 0.9% in March, and February’s increase of 1.0% was revised down to 0.7%. Spending has now declined for a second month in a row on a year-over-year basis (-0.8%), led by residential construction. Additionally, spending on home improvements declined 3.1% in March and 14.1% year-over-year, which doesn’t bode well for discretionary spending.
Public construction spending was still rising at an annualized 8.6% rate in March, but this was not enough to offset the weakness in private residential and non-residential spending.
Personal Income and Outlays
Personal income rose just 0.1% in March, but the wages and salaries component increased 0.4%, which reflects continued healthy gains in income. Personal spending rose a whopping 0.9%, led by durable goods, which was a major improvement from the weak readings we saw in January and February. The bottom line is that we continue to see a steady but slow rate of real growth in consumer spending.
This is keeping a lid on the Fed’s preferred rate of inflation. The Personal Consumption Expenditures Price Index (PCE) rose 0.2% in March, while the core rate (excludes food and energy) was unchanged. The PCE core is now up just 1.6% year-over-year, decelerating over the past four months from the Fed’s target of 2%.
Employment Cost Index
This measure of labor costs continues to rise, which has implications for profit margins and the rate of inflation. Employee costs increased 0.7% in the first quarter and 2.8% year-over-year. If we continue to see labor costs rise, this will pinch corporate profit margins, and it should lead to higher rates of inflation. This is not being reflected in the PCE Price Index today.
PMI and ISM Services Indices
IHS Markit’s (purchasing managers’ index) survey of service sector companies in April reflects a significant deceleration in economic activity to start the second quarter. The PMI services index fell from 55.3 to 53.0 as measurements of new orders, output and hiring fell to two-year lows, while business confidence fell to a three-year low. This is clearly a function of tariffs and trade tensions, and the weakness in hiring calls into question the strength in April’s employment report.
The Institute for Supply Management’s services index declined from 56.1 in March to 55.5 in April with employment also being the weakest component of the survey. Yet there was continued strength in new orders, backlogs and business activity, which reflects a stronger rate of growth than IHS Markit’s survey shows.
PMI and ISM Manufacturing Indices
Manufacturing activity continues to decelerate in 2019, as IHS Markit’s manufacturing index edged slightly higher to 52.6 in April from the March reading of 52.4, but production and employment growth both remain at two-year lows. There was an improvement in new orders, yet “the survey remains consistent with manufacturing activity acting as a drag on the economy at the start of the second quarter,” according to Chris Williamson, Chief Business Economist at HIS Markit.
The Institute for Supply Management’s manufacturing index fell to 52.8 in April from 55.3 in March, which is the weakest reading since October 2016. All of the sub-indices declined, and export orders contracted for the first time since February 2016.
April Jobs Report
The BEA estimated that April payrolls increased by 263,000, and the unemployment rate fell from 3.8% to 3.6%, but that was mostly due to the participation rate falling from 63% to 62.8%. I don’t think this report is as strong as the headline number. It is clearly not consistent with the PMI and ISM surveys for manufacturing and service sectors. It is highly probable that we are starting to see a surge in temporary hires for the U.S. Census Bureau’s 2020 count, which will lift payrolls over the next couple of months. The bureau received approximately 170,000 applications for positions in March.
Average hourly earnings increased 0.2%, resulting in a 3.2% increase year-over year, which is unchanged from the prior month. The average workweek declined from 34.5 to 34.4 hours, which modestly shrinks weekly take-home pay.
There are lots of conflicting economic data points right now. Still, the rate of economic growth is undeniably decelerating from the 3% rate we saw at the end of 2018. Real wage growth and gains in employment are continuing to support a very modest increase in real consumer spending, which is the predominate driver of our growth today. I don’t see any catalysts for an acceleration in the rate of growth moving forward.
The bulls seem conflicted when it comes to the economic data and Fed policy. On the one hand, they celebrate strong headline numbers, asserting they validate the recent surge in stock prices. On the other, they are perturbed by commentary from Chairman Powell that indicates a rate cut is not in the foreseeable future. You can’t have it both ways! Either the economy is strong and improving, in which case it no longer requires additional monetary stimulus, or it is weakening and requires more monetary easing.
The problem facing the Fed is that the pillar of this expansion is the bull market in stocks and bonds. This has created the illusion of economic strength, but it only runs 10% deep in terms of the consuming public. Most households are no better off today than they were a decade ago. Therefore, inflation can’t climb consistently above the Fed’s target of 2%, unless it is associated with goods and services consumed by the wealthiest households. This is also why the Fed is so protective of the bull market gains. It knows that if the stock market declines significantly for an extended period of time, it will undermine the wealth effect that has fueled this expansion.
The Portfolio Architect is a Marketplace service designed to optimize portfolio returns through a disciplined portfolio construction and management process that focuses on risk management. If you would like to see how I have put my investment strategy to work in model portfolios for stocks, bonds and commodities, then please consider a 2-week free trial of The Portfolio Architect.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.