Soft Data Says U.S. Still Under the Weather in February
- The ADP Employment Report for February showed a tepid gain of 139,000 private-sector jobs.
- The ISM Non-Manufacturing Index for February dipped to a still-positive 51.6 percent.
- February Auto Sales increased by less than expected, to a 15.4 million unit annual rate.
- Financial markets responded positively to signs of détente in Ukraine.
The U.S. continued to suffer from extreme winter weather conditions through February, weighing on economic data. The February ADP report was weaker than expected, showing a net gain of 139,000 private-sector payroll jobs for the month. Also, January and December job gains were revised down. The average miss in the ADP report relative to the official Bureau of Labor Statistics data is +/- 40,000 over the last 16 months since Moody’s Analytics revamped the methodology for the ADP numbers. The ISM Non-Manufacturing Index for February decreased to a still-positive 51.6 percent. The employment sub-index receded sharply to 47.5, indicating weak hiring for the month. Anecdotal comments cited weather as a negative factor. Today’s weak ADP and ISM Non-MF reports suggest that there is significant downside risk for our expectation of an increase of 160,000 payroll jobs in the official BLS data for February. The BLS numbers are scheduled to be released this Friday morning. If we do get a soft jobs report for February from the BLS, that raises the question of how the Fed will interpret the numbers. The Federal Open Market Committee meets again on March 18/19. We expect the Fed to announce at the upcoming meeting that it will continue to taper its asset purchase program by another $10 billion. If we get a clunker of a jobs report on Friday, that expectation may change.
Auto sales for February increased to a 15.4 million unit rate, better than the 15.2 for January, but not as good as expected earlier in the month. Auto sales tend to be concentrated toward the end of the month, and that is when the weather got bad again in the Midwest and along the East Coast. We remain hopeful that consumer spending and hiring will re-engage as the weather improves. Obviously, there is some risk that the winter soft patch is due to more than just bad weather and represents a downshift in hiring and consumer spending that will have longer-term implications.
Adding to the sense of economic uncertainty is the Ukraine situation. The direct transmission mechanism from the Ukraine situation to the U.S. economy is potentially through two channels. One channel is through the real economy, i.e. production, trade, employment. The other channel is through financial markets. Both channels could potentially increase overall uncertainty, adding to an indirect negative impact. There appears to be little prospect for a direct negative impact to the real economy of the U.S. from the conflict in the Ukraine. There is some risk to Europe that Russia might temporarily curtail natural gas deliveries as a retaliatory measure. However, that would be self-defeating for the Russian economy. They will not want to give up the revenue. An energy-starved Europe would be weaker in the near-term, weighing on U.S. exports (about 20 percent of U.S. merchandise exports flow to Europe), but it would also open the door for increased shipments of natural gas to Europe from the U.S. over the long-term. Ukraine is an important, but small, trading partner for the European Union. According to the European Commission, Ukraine accounted for 1.4 percent of exports from the EU in 2012 and 0.8 percent of imports. Financial markets appear to be renormalizing after a weekend spasm. The prospects for military conflict in the region appear to be limited and receding. Global financial markets will quickly look past the events of the weekend as long as there is a peaceful resolution to the conflict.
Market Reaction: U.S. stock markets opened with gains. Treasury yields are down with the 10-Year T-bond rate at 2.69 percent. NYMEX crude oil is down to $102.59/barrel. Natural gas futures are down to $4.63/mmbtu. The dollar is stable against the euro.
For a PDF version of this Comerica Economic Alert click here: ADP 03-05-14.