April ISM Manufacturing, FOMC, March Construction, Income/Spending

Grab Bag of Data Consistent with Ongoing Expansion 

  • The ISM Manufacturing Index for April increased to a solid 54.9 percent, boosted by employment.
  • The Federal Reserve tapered asset purchases as expected. No change to the fed funds rate.
  • March Construction Spending increased by 0.2 percent, held back by public projects.
  • Personal Income climbed by 0.5 percent in March. Consumer Spending rose 0.9 percent, unsustainable.
  • Initial Claims for Unemployment insurance gained 14,000 to hit 344,000 for the week ending April 26.
  • Rental Vacancies were stable at a low 8.3 percent in 2014Q1.
  • The Homeownership Rate continued its downward trend, hitting 64.8 percent in 2014Q1.

Manufacturing conditions improved in April, according to the Institute for Supply Management. The ISM Manufacturing Index increased to 54.9 percent for the month, indicating good and improving overall manufacturing conditions. Nine out of 10 sub-indexes were above the break-even 50 mark for the month. The employment sub-index improved by a strong 3.6 percentage points to 54.7, indicating ongoing plans for hiring. Customers’ inventories were the only sub-index below 50. This is consistent with the correction from the 2013H2 surge in inventories that we saw yesterday in the first quarter GDP report. The inventory correction could spill over into the current second quarter as well, as suggested by today’s ISM-MF report for April.

Yesterday afternoon, the Federal Open Market Committee released a monetary policy announcement following their regularly scheduled April 29/30 meeting. There were no surprises. The Fed is reducing its asset purchase program by another $10 billion, for a total of $45 billion per month. They remain on track to wind down quantitative easing by the end of this year. Also, there was no change to the near-zero fed funds rate. We are sticking with our mid-year 2015 target date for fed funds lift-off.

March construction spending was a little weaker than expected, increasing by 0.2 percent for the month. Private residential construction spending increased by a moderately-strong 0.8 percent for the month. We expect to see ongoing gains there, consistent with renormalizing weather. Private non-residential construction spending gained 0.2 percent for the month, but the level remains well below its recent peak from last December. Total public construction declined by 0.6 percent, in line with tightening federal spending. Personal income for March increased by 0.5 percent, in line with the rebound in job growth through February and March.  Rental income increased by 0.8 percent, consistent with reports of rising rental rates and tight vacancies. Nominal consumer spending increased strongly, by 0.9 percent in March. The combination of a rebound in auto sales, high home heating bills and the ramp-up of federal health insurance enrollments supported an unsustainable surge in consumer spending in March. The personal saving rate dipped from 4.2 percent in February to 3.8 percent in March. Initial claims for unemployment insurance increased by 14,000 to hit 344,000 for the week ending April 26. This time of year, the Easter seasonal adjustment factors wreak havoc with the claims numbers. We expect to see the noticeable increase in initial claims over the last two weeks fade as we get into May. Rental vacancy rates for the first quarter of 2014 stayed low at 8.3 percent according to the Census Bureau. The rental vacancy rate series is about where it was through the duration of 2013. Ongoing gains in multifamily construction, plus renewed interest on the part of households in traditional single-family homes may keep the overall rental vacancy rate from dropping below current levels. The U.S. homeownership rate is still dropping, down to 64.8 percent in 2014Q1. This is well below the peak of 69.2 percent at the end of 2004. The rate of decline appears to be getting shallower, suggesting some repair to the collective housing market psyche after the epic housing market meltdown.

Market Reaction: U.S. equity prices are climbing. The yield on 10-Year Treasury bonds is down to 2.62 percent. NYMEX crude oil is down to $99.40/barrel. Natural gas futures are down to $4.72/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ISM-MF 05-01-14.

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