Last week I suggested that for this bull market to continue beyond 2015 the economy is going to have to regain its momentum—creating increased revenues as well as inspiring the confidence among businesses to invest in productivity-enhancing capital. Therefore, the question has to be, what are the economy’s prospects going forward?
My view is that they’re pretty decent. But since my view doesn’t even begin to move the needle, we need to consider the views of some true needle-movers:
Here’s a snippet from the Institute for Supply Management (ISM)’s April Manufacturing Purchasing Managers Index (PMI), which is “based on data compiled from purchasing and supply executives nationwide”:
Of the 18 manufacturing industries, 15 are reporting growth in April in the following order: Nonmetallic Mineral Products; Plastics & Rubber Products; Wood Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Paper Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Textile Mills; Electrical Equipment, Appliances & Components; Chemical Products; and Primary Metals. The two industries reporting contraction in April are: Apparel, Leather & Allied Products; and Computer & Electronic Products.
WHAT RESPONDENTS ARE SAYING:
"Low energy costs continue to help the bottom line." (Food, Beverages and Tobacco Products)
"Automotive industry is still very strong." (Fabricated Metal Products)
"Business holding relatively flat in North America, softening a bit globally." (Transportation Equipment)
"Foreign Exchange is reducing revenue, but volume has remained consistent." (Chemical Products)
"International shipments still being delayed by the strikes at ports on the West Coast." (Computer & Electronic Products)
"Production and orders strong and steady." (Primary Metals)
"Business conditions are good, with slowly rising demand for our products." (Miscellaneous Manufacturing)
"Labor, both skilled and unskilled, remains difficult to find qualified individuals." (Furniture & Related Products)
"Continuing to expedite shipments through Vancouver due to ongoing port delays." (Machinery)
"Customers perceive raw materials prices have bottomed out so are now releasing orders." (Plastics and Rubber Products)
The ISM Non-Manufacturing (i.e., services) Index for April will be released next week. Generally, from what I gather from other national and regional surveys, players within the service s sector are quite optimistic about their future prospects. Here’s from the March release (and keep in mind how rough the first quarter was):
The 14 non-manufacturing industries reporting growth in March — listed in order — are: Management of Companies & Support Services; Real Estate, Rental & Leasing; Accommodation & Food Services; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Retail Trade; Finance & Insurance; Public Administration; Information; Wholesale Trade; Professional, Scientific & Technical Services; Health Care & Social Assistance; and Construction. The four industries reporting contraction in March are: Mining; Educational Services; Other Services; and Utilities.
WHAT RESPONDENTS ARE SAYING:
"Business remains strong this month." (Health Care & Social Assistance)
"Current business conditions are positive and the outlook for 2015 is on track this first quarter." (Finance & Insurance)
"See tremendous increase in business activities due to increase of capital investment, sales efforts and competition for human resources." (Professional, Scientific & Technical Services)
"Some increase in activity related to pre-construction season spending for budgeted capital projects." (Public Administration)
"Business slightly increasing year-over-year, but about the same as last month." (Retail Trade)
"Lower fuel prices improving overall profits, but do not appear to be lowering freight costs." (Transportation & Warehousing)
"Fuel costs continue to remain low; however, suppliers not willing to give back on fuel surcharges or to reduce fuel cost components of transportation." (Utilities)
"Overall business is continuing to expand for 2015." (Wholesale Trade)
So, not perfect, but, on balance, the major players on the supply side of the economy are optimistic about the future. And, considering the responses from the manufacturing sector, clearly, the headwinds I referenced at the top did a number on the economy in the first quarter (with the port strikes and the dollar effects lingering into April) . As for services, given the fact that the sector accounts for more than 80% of U.S. economic activity and provides more than 80% of U.S. jobs—based on the responses from service sector actors—one should feel pretty good about the economy’s prospects going forward.
To offset the growing optimism among producers, consumer sentiment has been waning a bit of late. Although, interestingly, not in every survey.
The Bloomberg Consumer Comfort Index, which I report to you weekly, has declined for three straight weeks. Here’s from last week’s release:
Consumer Comfort in U.S. Falls to Lowest Level in Six Weeks
The Bloomberg Consumer Comfort Index fell to 44.7 in the period ended April 26, the third consecutive drop, from 45.4 the prior week. Sentiment among men showed one of the biggest decreases in the past four years, while confidence in the Midwest slumped by the most in more than a decade.
While the Bloomberg comfort gauge cooled from an almost eight-year high reached earlier this month, it remains well above last year’s average of 36.7, which was the best since 2007.
All three components of the index retreated last week. The measure of personal finances fell to a seven-week low of 55.6 from 56 the prior period.
The gauge of Americans’ views on the state of the economy eased to 37.3 from 37.6, while the index of the buying climate, showing whether this is a good time to purchase goods and services, decreased to 41.2 from 42.5.
The Conference Board Consumer Confidence Index declined notably in April to 95.2, down from March’s 101.4. Here’s the CB’s Director of Economic Indicators:
“Consumer confidence, which had rebounded in March, gave back all of the gain and more in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “This month’s retreat was prompted by a softening in current conditions, likely sparked by the recent lackluster performance of the labor market, and apprehension about the short-term outlook. The Present Situation Index declined for the third consecutive month. Coupled with waning expectations, there is little to suggest that economic momentum will pick up in the months ahead.”
But then on Friday the University of Michigan Consumer Sentiment Index suggested that consumer optimism is actually on the rise. Here’s from the release:
Consumer Sentiment in April was at its second highest level since 2007, and recorded a higher average level during the last five months than anytime since May 2004. Consumer optimism has become increasingly dependent on the persistence of low inflation and low interest rates as well as slowly improving prospects for jobs and incomes.
Note the comment regarding sensitivity to inflation and interest rates. A sensitivity shared---I assure you---by investors and consumers alike. And, make no mistake, that’s what keeps Janet Yellen up at night. And that, in my view—as I’ve stressed now for months—is what may turn out to be the ultimate catalyst for a healthy, and long overdue, correction in stock prices. Stay tuned….
The Stock Market:
Non-US markets have measurably outperformed the U.S. year-to-date. Don’t be surprised if that remains the story throughout most of the year. That said, there are a number of potential international hot buttons that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!
Here’s a look at the year-to-date results for the major U.S. indices, and non-US indices using index ETFs as our proxies (according to Bloomberg):
Dow Jones Industrials: +1.81%
S&P 500: +3.03%
NASDAQ Comp: +6.13%
EFA (Europe, Australia and Far East): +10.54%
FEZ (Eurozone): +8.61%
VWO (Emerging Markets): +10.54%
Sector ETFs:
Here’s a look at the year-to-date results for a number of sector ETFs:
IYH (HEATHCARE): +6.95%
XLY (DISCRETIONARY): +6.17%
XLB (MATERIALS): +5.89%
XLE (ENERGY): +5.39%
XLK (TECH): +4.66%
XHB (HOMEBUILDERS): +3.43%
XLP (CONS STAPLES): +1.27%
XLI (INDUSTRIALS): +.01%
XLF (FINANCIALS): -1.22%
IYT (TRANSP): -4.32%
XLU (UTILITIES): -5.09%
Once again, the reminder on volatility I posted earlier in the year:
In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!
One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.11%. Which is quite the spike higher from last week’s 1.87%. TLT, an ETF that tracks an index of long-dated U.S. treasury bonds saw its share price decline 3.93% last week (off 5.15% over the past month).
So why the spike in rates after such an abysmal Q1 GDP report? As I suggested in last week’s TV spot, should the Employment Cost Index (ECI) for the first quarter (released last Thursday) come in higher than expected, we could be dealing with the threat of higher interest rates sooner than later. Sure enough, the ECI came in higher than expected, and bond prices tanked (yields rose) and the Dow gave up nearly 200 points on the news. Plus, market inflation indicators, like the TIPs spread (the difference in yields on Treasury Inflation Protected securities and regular treasury bonds) are signaling higher inflation expectations going forward.
As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk. The past month has been a prime example.
Here are last week's economic highlights:
APRIL 27, 2015
MARKIT’S FLASH SERVICES PMI FOR APRIL show growth continuing in the service sector, however, at a slower pace — coming in at 57.8 vs 59.2 in March. The consensus estimate was for a 59.5 April increase. Per the following commentary from Markit’s chief economist, the foreseeable future, according to this report, looks bright for the U.S. economy (note the comments re: input price inflation. I agree that the Fed will see added pressure to get off the dime before year-end):
“The service sector enjoyed strong growth at the start of the second quarter, adding to evidence that the economy remains in good health. Although the pace of expansion slowed compared to March, April saw the second-largest rise in business activity for seven months.
“Alongside a solid rise in output signalled by the sister manufacturing PMI survey, the robust growth signalled by the services survey points to the economy as a whole picking up speed again after a temporary soft patch at the start of the year. While GDP looks to have risen at a mere 1.0% annualised rate in the first quarter, the surveys are pointing to growth accelerating to around 3% in the second quarter.
“Although the manufacturing survey showed signs of exporters struggling in the face of the dollar’s appreciation, the resilient strength of domestic demand reflected in the services survey will help reassure policymakers that the economy remains buoyant.
“The surveys also indicated that inflationary pressures are reviving, with charges for goods and services rising at the fastest rate since last September.
“Meanwhile, having slowed sharply in earlier surveys, the rate of job creation has also improved, reaching a ten-month high in April, led by faster service sector hiring and robust factory payroll gains.
“The improvement in second quarter economic growth, rising price pressures and strong job creation signalled by the PMI surveys adds to pressure on the FOMC to consider starting the process of normalising monetary policy sooner rather than later at its meeting later this week.
THE DALLAS FED MANUFACTURING SURVEY continues to show weakness among manufacturers in the region. There’s no doubt that Texas’ huge oil complex, amid a crash in oil prices, his having a negative impact on the manufacturing sector. Here’s from the release:
Texas factory activity declined in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, posted a second negative reading in a row, coming in at -4.7.
Other measures of current manufacturing activity also reflected continued contraction in April. The new orders index edged up but remained negative at -14. The growth rate of orders index held steady at -15.5, posting its sixth consecutive negative reading. The capacity utilization index pushed further negative to -10.4, its lowest level since August 2009, and the shipments index edged up but stayed below zero at -5.6.
Perceptions of broader business conditions remained quite pessimistic for a fourth month in a row. The general business activity index stayed negative but ticked up to -16 in April, while the company outlook index moved down to -7.8, reaching its lowest reading in nearly two and a half years.
Labor market indicators reflected slight employment gains but shorter workweeks. The April employment index rebounded to 1.8 after dipping below zero last month. Nineteen percent of firms reported net hiring, compared with 17 percent reporting net layoffs. The hours worked index stayed at -5 in April, suggesting a fourth month in a row of slightly shorter workweeks.
Downward pressure on prices remained in April, while wages continued to rise. The raw materials prices index edged down to -11.2, and the finished goods prices index edged up to -7.7. The negative April readings for these indexes mark a fourth consecutive month of lower input costs and selling prices. Meanwhile, the wages and benefits index remained positive and held fairly steady at 16.5.
Measures of future business conditions weakened in April. The index of future general business activity fell 9 points to -5.9,while the index of future company outlook declined from 12.8 to 5.3. Indexes for future manufacturing activity also moved down but remained in solid positive territory.
APRIL 28, 2015
THE JOHNSON REDBOOK RETAIL REPORT, according to Econoday (per the below), remains destorted due to the timing of Easter.
It’s hard to make heads or tails of weekly retail sales data surrounding Easter and its shifting comparisons. Redbook’s same-store year-on-year sales tally came in at a very weak plus 1.4 percent in the April 25 week which however is up from plus 0.8 percent in the prior week but well down from the plus 3.0 to 3.5 percent underlying trend. This trend, or somewhere close to it, is likely to re-emerge in next week’s report when Easter calendar distortions are no longer in play. Behind the distortions, however, Redbook does note that the overall performance is below plan though warmer weather did help seasonal sales in the latest week.
THE CASE-SHILLER HOUSE PRICE INDEX rose a very strong .9% in February and 5.0% on a year-over-year basis. This is a major plus in terms of what it says about the prospects for the housing sector going forward.
THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX declined notably in April to 95.2, down from March’s 101.4. I expect this index to regain its traction as we move further into 2015, as—contrary to the commentary below (which speaks to consumer expectations) I’m expecting a noticeable economic rebound from a weak Q1… Here’s CB’s Director of Economic Indicators:
“Consumer confidence, which had rebounded in March, gave back all of the gain and more in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “This month’s retreat was prompted by a softening in current conditions, likely sparked by the recent lackluster performance of the labor market, and apprehension about the short-term outlook. The Present Situation Index declined for the third consecutive month. Coupled with waning expectations, there is little to suggest that economic momentum will pick up in the months ahead.”
THE RICHMOND FED MANUFACTURING SURVEY came in soft, however the employment and expectations components show promise going forward. Here’s the overview:
Manufacturing activity remained soft in April, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments, order backlogs, and the volume of new orders declined, although at a slower pace compared to last month. Manufacturing employment grew mildly, while the average workweek increased and wages rose slightly.
Manufacturers looked for better business conditions in the next six months. Survey participants expected faster growth in shipments and in the volume of new orders in the six months ahead. Producers also looked for increased capacity utilization and anticipated rising backlogs. Expectations were for somewhat longer vendor lead times.
Survey participants planned more hiring, along with moderate growth in wages and a pickup in the average workweek during the next six months.
Prices of finished goods rose more rapidly in April compared to last month. Additionally, prices of raw materials grew slightly faster than a month ago. Firms looked for faster growth in prices paid and prices received over the next six months, although their outlook was below March’s expectations.
THE RICHMOND SERVICE SECTOR SURVEY grew modestly in April. Like the manufacturing survey results employment and outlook are encouraging. Note the higher prices reported in both surveys! Here’s the overview:
Service sector activity varied in April, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues were nearly flat at non-retail firms. In contrast, retail sales strengthened as big-ticket sales rebounded and shopper traffic grew. Survey respondents were upbeat about business prospects for the six months ahead.
Employment in the service sector rose modestly. Average wages increased at a faster pace compared to a month ago.
Prices rose slightly faster in the overall service sector as non-retail prices accelerated moderately, outweighing slower retail price growth. Compared to the month-ago outlook, expectations were for prices to rise more rapidly in the next six months.
THE DALLAS FED SERVICE SECTOR SURVEY, unlike Texas’s manufacturing sector, is picking up. Here are the releases for both the service sector survey and the retail survey:
Texas service sector activity increased in April, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, rose from 10.7 to 14.6, its highest reading so far this year.
Labor market indicators improved this month. The employment index moved up from 4.2 to 7.9, indicating employment rose at a faster pace than in March. The hours worked index advanced from negative territory last month to 4.7 in April.
Perceptions of broader economic conditions were mixed in April. The general business activity index remained negative for the second month in a row but rose slightly from -4.6 to -1. The company outlook index rose from a near-zero reading last month to 4.5 in April, indicating outlooks turned optimistic. About 17 percent of respondents reported that their outlook improved from last month, while 13 percent noted that it worsened.
Price and wage pressures increased this month. The selling prices index rose slightly from 1.7 to 3.4. The wages and benefits index inched up 1 point to 16.2, although the great majority of firms continued to note no change in compensation costs.
Respondents’ expectations regarding future business conditions reflected more optimism in April. The index of future general business activity rose from 2.7 to 6.2. The index of future company outlook was relatively unchanged at 10.2. Indexes of future service sector activity, such as future revenue and employment, remained in solid positive territory this month.
April 28, 2015
Retail sales improved notably in April, according to business executives responding to the Texas Retail Outlook Survey. The sales index surged back into positive territory, gaining 27 points to reach 20.5, its highest reading so far this year.Inventories increased.
Labor market indicators recovered in April. The employment index bounced back to positive territory, up 9 points to 2.4, indicating retail jobs increased this month. The hours worked index also climbed back to positive territory to a reading of 6.4, suggesting workweek length increased.
Retailers’ perceptions of broader economic conditions were mixed this month. The general business activity index shot up 20 points to a reading near zero, indicating views were unchanged from March. After a negative reading last month, the company outlook index jumped from -12 to 11.4 in April, with 23 percent of respondents noting an improved company outlook over the prior month, compared with 11 percent reporting their outlook had worsened.
Retail price and wage pressures increased in April. The selling prices index rose from 0 to 5.7. The wages and benefits index edged up from 9.4 to 12.7, although the great majority of firms noted no change in labor costs.
Retailers’ perceptions of future broader economic conditions reflected more optimism in April. The index of future general business activity advanced from -4.2 to 13.3, its highest reading so far this year. The index of future company outlook rose from 5.3 to 12.1. Indexes of future retail sector activity also reflected more optimism this month.
THE STATE STREET INVESTOR CONFIDENCE INDEX shows institutional investors remaining bullish on North America and Europe… not so much for Asia… Although the forward sentiment questions North America and shows further optimism over Europe and cites the potential for more gains from China. Here’s Econoday:
Confidence among institutional investors remains strong, well over 100 at 114.3 in April. North America continues to lead the report, at 122.1, followed by Europe at 109.7. Asia, however, is in the negative column at a sub-100 reading of 91.5.
But the report questions whether strength in North America can continue given the negative effect that the strong dollar will have on overseas earnings of US multinationals. In Europe, it notes that ECB stimulus is offsetting concerns over Greece, while in Asia, where growth has been slow, it points to new stimulus in China as a positive factor.
APRIL 29, 2015
THE FIRST ESTIMATE OF Q1 GDP came in very soft at 0.2%. Bad weather, port strikes and rapidly rising dollar get the blame. Of course this is testable as future data comes in. I suspect it is indeed the case that Q1′s detractors were essentially transient. The underlying positives (personal consumption and inventories) and negatives (net exports [strong dollar], government spending, and non-residential fixed investment) make sense:
PENDING HOME SALES increased in March for the third straight month, remaining at their highest level since June 2013. The following commentary by NAR’s chief economist speaks to my optimism for housing, plus his legitimate concerns over lack of inventory… which has to be improving as prices rise (i.e., inspiring sellers to market). I’ll add that this week’s concerns over interest rates are posing a headwind for our XHB position:
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, climbed 1.1 percent to 108.6 in March from an upward revision of 107.4 in February and is now 11.1 percent above March 2014 (97.7). The index has now increased year-over-year for seven consecutive months and is at its highest level since June 2013 (109.4).
Lawrence Yun, NAR chief economist, says contract signings picked up in March as more buyers than usual entered this year’s competitive spring market. “Demand appears to be stronger in several parts of the country, especially in metro areas that have seen solid job gains and firmer economic growth over the past year,” he said. “While contract activity being up convincingly compared to a year ago is certainly good news, the increased number of traditional buyers who appear to be replacing investors paying in cash is even better news. It indicates this year’s activity is being driven by more long-term homeowners.”
Yun expects a gradual improvement in home sales in the months ahead but says insufficient supply and accelerating prices could be a drawback to sales reaching their full potential.
“Demand in many markets is far exceeding supply, and properties in March sold at a faster rate than any month since last summer,” he said. “This in turn has pushed home prices to unhealthy levels — nearly four or more times above the pace of wage growth in some parts of the country. Simply put, housing inventory for new and existing homes needs to improve measurably to improve affordability.”
THE EIA PETROLEUM STATUS REPORT shows inventories rising for the 15th straight week, albeit at a slower rate than of late, 1.09 million barrels. I remain skeptical that the recent surge in the oil price is legit based on the fundamentals. GASOLINE INVENTORIES rose by 1.7 mbs and DISTILLATES declined .1 mbs last week…
THE FOMC MEETING was adjourned today and, as expected, the Fed offered nothing new in terms of rate outlook. Although they did away with any time reference and stressed their data dependence.
APRIL 30, 2015
WEEKLY JOBLESS CLAIMS plunged 34,000 last week to a very low 262k, the lowest level in 15 years. The 4-week average rests at a very comfortable 283.8k. Look for measurably better April employment report than we saw for March. Continuing claims, from two weeks ago, are also near 15-year lows. The Fed, from an employment standpoint (despite last month’s number), has the green light to start the tightening process..
THE CORE PERSONAL CONSUMPTION EXPENDITURES PRICE INDEX (or PCE deflator), came in a notch lower than the last read at 1.3%. I suspect that this will market the bottom of this indicator for 2015, and that we’ll begin to see it rise steadily going forward. The critical question, in terms of Fed action, will be the rate of change.
PERSONAL SPENDING rebounded in March by .4% while REAL PERSONAL INCOME was essentially flat.
THE CHICAGO PURCHASING MANAGERS INDEX for April, having rebounded from March, jibes with the notion that the first quarter’s weakness was due to transitory factors, and with my view that things are indeed looking up going forward. Here’s Econoday’s report:
Always volatile, the Chicago PMI jumped back into the expansion column in April, at 52.3 vs a badly depressed 46.3 in March. Strength in April is centered where it is best centered, in new orders which surged 12.8 points to 55.1 for the highest reading since January. This is the largest month-to-month increase for this reading in more than 30 years. Backlog orders are also up as are production and employment. The inflation gauge in this report, as it is many reports, is at multi-year lows.
This report is often very jumpy but it does fit in with Federal Reserve expectations that first-quarter slowing in the economy was due to one-time factors and that the second quarter will see a return to underlying growth rates. This report offers a full view of economic activity, covering all segments of the Chicago economy.
THE BLOOMBERG CONSUMER COMFORT INDEX declined yet again last week. This one will be interesting to watch as the economy meanders its way out of a rough first quarter. If what I suspect is true—that the economy is about to pick up steam—we should see consumers cheer up going forward. Here’s from the release:
Consumer Comfort in U.S. Falls to Lowest Level in Six Weeks
By Shobhana Chandra
(Bloomberg) — Consumer confidence declined to a six-week low as Americans took a less favorable view of their finances and the slowdowns at factories and oilfields soured attitudes among men.
The Bloomberg Consumer Comfort Index fell to 44.7 in the period ended April 26, the third consecutive drop, from 45.4 the prior week. Sentiment among men showed one of the biggest decreases in the past four years, while confidence in the Midwest slumped by the most in more than a decade.
“The CCI’s decline among men was accompanied by softening growth in the traditionally male-dominated manufacturing sector, with export orders declining,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. “Jobs in manufacturing have languished for two months, with mining down significantly this year.”
The results come on the heels of government data Wednesday that showed the economy came to a near-halt in the first quarter as business investment and exports slumped. Hopes for a strong rebound have also dimmed as the plunge in oil prices may keep depressing energy-related capital spending and hiring, while the stronger dollar will hurt overseas sales of U.S.-made goods.
Gross domestic product rose at a 0.2 percent annualized rate from January through March, after advancing 2.2 percent the prior quarter, according to the Commerce Department. Corporate investment declined the most since the end of 2009. Spending on nonresidential structures including office buildings and plants dropped by the most in four years, reflecting weakness in petroleum exploration.
Last Year
While the Bloomberg comfort gauge cooled from an almost eight-year high reached earlier this month, it remains well above last year’s average of 36.7, which was the best since 2007.
All three components of the index retreated last week. The measure of personal finances fell to a seven-week low of 55.6 from 56 the prior period.
The gauge of Americans’ views on the state of the economy eased to 37.3 from 37.6, while the index of the buying climate, showing whether this is a good time to purchase goods and services, decreased to 41.2 from 42.5.
Sentiment among males deteriorated for a third week, with the gauge declining to 46.7 from 50.3. The 3.6-point drop matched the second-biggest decrease since 2011. In contrast, confidence among women rose, helping to narrow the gender gap.
The report also showed the comfort index fell to an eight-week low of 47.8 among Americans between 35 and 44 years.
NATURAL GAS INVENTORIES rose last week by 90 billion cubic feet.
THE EMPLOYMENT COST INDEX (ECI), a telling inflation indicator, rose noticeably in Q1. This one will surely create angst in the bond market as it’s widely known, and logical, that the Fed takes this one very seriously. Here’s Econoday:
Compensation costs, which are scrutinized for pressure and considered strictly unwanted by the Federal Reserve, are moving higher. The employment cost index rose 0.7 percent in the first quarter vs a revised 0.5 percent in the fourth quarter. Year-on-year, the index is up 2.6 percent which significantly exceeds the fourth-quarter rate of 2.2 percent and, very importantly, significantly exceeds the Fed’s general inflation limit of 2.0 percent.
The first-quarter gain is split evenly between wages & salaries, up 0.7 percent on the quarter, and benefits, up 0.6 percent. Year-on-year, wages & salaries are up 2.6 percent with benefits up 2.7 percent.
The Fed is ready now to raise interest rates at a drop of the hat and today’s ECI, though not widely followed by the public, is very closely followed by policy makers. Yesterday’s FOMC statement described compensation inflation as remaining low, but these numbers may not fit with that description.
FARM PRICES, per the Dept of Agriculture, rose 3.0% in April… Year-over-year prices are off 6.5%.
THE FED BALANCE SHEET declined $18.2 billion (entirely mortgage backed securities) last week to $4.472 trillion. RESERVE BANK CREDIT decreased $3.2 billion, after dropping by $1.4 billion the week prior.
M2 MONEY SUPPLY declined by $1.9 billion last week, after declining by $40.6 billion the week prior.
MAY 1, 2015
AUTOMOBILE SALES came in at a healthy 16.5 million in April. Although that’s lower than March’s total sales. Consumer preference currently points strongly at light trucks and SUVs, across most of the automakers.
MARKIT’S MANUFACTURING PMI FOR APRIL came in at a solid 54.1. Although it was lower than March’s 55.7—marking its weakest number this year. While, again, 54.1 is solidly in expansion territory, it denotes a loss of momentum. Here’s from the release:
The seasonally adjusted final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered above the 50.0 no-change threshold in April, thereby signalling an overall upturn in business conditions. The index fell to a threemonth low of 54.1, from March’s 55.7, but still signalled a solid rate of improvement and was above its long-run trend level of 52.2. Weighing most on the PMI in April was a slower rise in production.
The rate of growth moderated to the weakest in 2015 so far, although it remained strong overall. Similarly, firms continued to increase their purchasing activity at a robust, albeit slower, pace. Suppliers’ delivery times lengthened further as a result, with ongoing mention of delays associated with the recent West Coast port shutdowns. The other main factor contributing to the fall in the headline index during April was a slower rise in incoming new business. New order growth eased to a three-month low, but remained strong in the context of historic survey data. Weaker international demand linked to the strong dollar was evident as new export business declined for the first time since November.
Other survey indicators suggested the underlying health of the manufacturing sector remained firm. Employment rose for the twenty-second consecutive month, and at a robust pace. Meanwhile, backlogs of work rose for the fifth month running, while stocks of inputs also expanded as firms addressed order book requirements.
THE ISM MANUFACTURING REPORT FOR APRIL came in at a modest 51.5. However, on balance, the report offers room for optimism going forward.
Of the 18 manufacturing industries, 15 are reporting growth in April in the following order: Nonmetallic Mineral Products; Plastics & Rubber Products; Wood Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Paper Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Textile Mills; Electrical Equipment, Appliances & Components; Chemical Products; and Primary Metals. The two industries reporting contraction in April are: Apparel, Leather & Allied Products; and Computer & Electronic Products.
WHAT RESPONDENTS ARE SAYING:
"Low energy costs continue to help the bottom line." (Food, Beverages and Tobacco Products)
"Automotive industry is still very strong." (Fabricated Metal Products)
"Business holding relatively flat in North America, softening a bit globally." (Transportation Equipment)
"Foreign Exchange is reducing revenue, but volume has remained consistent." (Chemical Products)
"International shipments still being delayed by the strikes at ports on the West Coast." (Computer & Electronic Products)
"Production and orders strong and steady." (Primary Metals)
"Business conditions are good, with slowly rising demand for our products." (Miscellaneous Manufacturing)
"Labor, both skilled and unskilled, remains difficult to find qualified individuals." (Furniture & Related Products)
"Continuing to expedite shipments through Vancouver due to ongoing port delays." (Machinery)
"Customers perceive raw materials prices have bottomed out so are now releasing orders." (Plastics and Rubber Products)
THE UNIVERSITY OF MICHIGAN’S CONSUMER SENTIMENT INDEX came in at a strong 95.9 in April. Here’s Econoday’s summary:
The Federal Reserve in Wednesday’s FOMC statement described consumer confidence as strong, confirmed by today’s consumer sentiment index which came in at 95.9 for final April, unchanged from mid-month April and noticeably higher from 93.0 in final March.
The headline’s two components both show gains with current conditions at 107.0, up 2.0 points from March, and with expectations at 88.8, up 3.5 points. The former points to month-to-month strength for consumer activity while the latter points to confidence in the income outlook, specifically the jobs market.
Inflation readings are very weak in this report, reflecting no doubt the low level of gas prices which however have been on the rise in recent weeks. The 1-year outlook is at 2.6 percent, down from 3.0 percent in March, with the 5-year outlook also at 2.6 percent, down from 2.8 percent.
Fed policy makers are keeping a close eye on inflation expectations and today’s report won’t offer anything to the hawks who want to begin raising rates. And despite the strength in the overall reading, strength in sentiment has yet to translate to strength in spending.
CONSTRUCTION SPENDING declined in March by .6%. For now we can chalk it up to weather, although non-residential construction (offices, manufacturing, etc.) did increase 1.0%. If I’m right on the housing sector going forward, we’ll see the residential component pick up in the months to come.
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