It was a very interesting week for U.S. economic data, a Dickensian tale of two data streams. For employment it was the best of times. For GDP, it was the worst of times (relatively speaking). Likewise, we have a spring of hope after a winter of despair. So what the Dickens is going on?
The first estimate of 2014Q1 real GDP growth was a clunker, as expected. Real GDP growth for the first three months of 2014 registered a barely positive 0.1 percent, essentially no growth. Four factors lined up to suppress first quarter GDP. (1) The severe winter weather shifted personal consumption patterns and restrained fixed investment; (2) Nonfarm inventories corrected after surging through the second half of last year; (3) Exports fell, so net trade was a drag; and (4) Government spending fell, exacerbated by the federal spending sequester. It is very important to note that all four negative factors are temporary and expected to abate soon. GDP is a backward looking report. Leading indicators for the U.S. economy are going in the right direction and we expect real GDP growth for the remainder of 2014 to show a significant improvement from the anemic first quarter.
Labor market conditions are improving significantly after a winter lull. Not only did April payroll job growth beat expectations at 288,000 jobs, but March and February job growth was revised up. The recent pattern in job growth reaffirms that December’s 84,000 net new jobs, and January’s 144,000 net new jobs, were anomalous on the down side. Average job growth for 5 out of the last 7 months (excluding December and January) is an impressive 245,000 jobs per month. The recent strong job growth is a very favorable forward-looking indicator that should give us comfort in looking past the weak Q1 GDP report. The unemployment rate for April dipped to 6.3 percent, breaking through the Federal Reserve’s now abandoned 6.5 percent threshold level. The average workweek for all employees was unchanged in April at 34.5 hours. Likewise, average hourly earnings were unchanged. Still, the significant gain in jobs for the month is supportive of solid income growth.
The Case-Shiller 20-City Composite House Price Index for February increased by 12.9 percent. On a monthly basis the index was unchanged for February. The weather-beaten housing market is expected to improve through the spring. Both mortgage applications for the end of March into early April, and the Pending Home Sale Index for March have firmed up.
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. Customers’ inventories was the only sub-index below 50. This is consistent with the correction from the 2013H2 surge in inventories that we saw in Q1 GDP. The inventory correction could spill over into the current second quarter as well, as suggested by the ISM-MF report for April.
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.
The Federal Reserve did as expected Wednesday and cut asset purchases by another $10 billion, to $45 billion per month. The near-zero fed funds rate was unchanged. We expected more of the same from the FOMC at their next meeting over June 17 and 18.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-02-14.