Caught Between the Push of Monetary Expansion and the Pull of Fiscal Tightening
- The ADP Employment Report for May showed a modest increase of 135,000 private sector jobs.
- The May ISM Manufacturing Survey PMI ticked down to a weak 49.0 percent.
- The May ISM Non-Manufacturing Survey PMI increased to 53.7 for the month.
- Auto sales for May improved to a 15.3 million unit annual rate as light truck sales increased.
- The May U.S. International Trade Gap widened to -$40.3 billion as non-petroleum imports rebounded.
- Total Construction Spending in the U.S. increased by 0.4 percent in April as public projects fell.
The basket of data released so far this week shows a U.S. economy that is caught between the push of highly expansive monetary policy and the pull of fiscal tightening. Job growth for May appears to be modest, with the ADP Report showing only 135,000 private sector jobs created for the month. So far this year, government sector employment has declined by an average of 7,500 jobs per month. This implies that Friday’s official Bureau of Labor Statistics job report will show about 125,000-130,000 total payroll jobs added for the month of May, well below expectations. In addition to the drag from reduced federal spending, we may also be seeing some reluctance on the part of small-to-medium sized businesses to hire as they face the ramp-up of the Affordable Healthcare Act this year. The ISM Manufacturing Index for May shows a decline to 49.0 from the previous 50.7, indicating a contraction in the manufacturing sector. Anecdotal comments were mixed, but one published comment did single out reduced government spending. The slight deterioration in manufacturing conditions is not fatal to the expansion, but it is a warning sign that the economy remains less than fully engaged. The ISM Non-Manufacturing index for May increased to 53.7, indicating growing momentum in the services sector. Thirteen industries reported growth in May, while 5 reported contraction.
Total light vehicle sales for May improved to a 15.3 million unit sales pace, up from the previous 14.9. This is good news, but when viewed from a broader perspective we can say that auto sales are still flat for the past seven months and remain below their November 2012 rate of 15.5 million units. Gains to residential construction, low interest rates and increasing consumer confidence are expected to be ongoing positives for auto sales for the remainder of this year; however, weak job growth could still be a challenge. The U.S. international trade gap widened in April to -$40.3 billion, from the previous -$37.1 billion. Exports gained $2.2 billion for the month while imports were up $5.3 billion. Non-petroleum imports dipped in March then rebounded in April. The real (price adjusted) balance of trade for goods widened in April, but was about at the 2013Q1 average. So international trade through the first month of the second quarter looks like it will not be a big factor in Q2 GDP growth. Total construction spending for April gained 0.4 percent, boosted by a 1.0 percent increase in private residential construction, and weighed down by a 1.2 percent decrease in public construction. Public construction is now clearly on a declining trend as fiscal stimulus winds down and the federal spending sequester engages.
Market Reaction: U.S. stock markets opened with losses. Treasury yields are down. NYMEX crude oil is up to $94.37/barrel. The dollar is down against the yen and up against the euro.