Mixed Bag of Data Mostly Positive, Consistent With Ongoing Moderate Expansion
- The ADP Employment Report for May showed a moderate increase of 179,000 private-sector jobs.
- The ISM Manufacturing Index for May improved to 55.4 percent, indicative of healthy conditions.
- The ISM Non-Manufacturing Index for May increased to a solid 56.3 percent.
- May Auto Sales were better than expected, increasing to a 16.8 million unit annual rate.
- The U.S. International Trade Gap for April widened to -$47.2 billion, implying a drag to Q2 GDP.
- Nonfarm Business Productivity declined at a 3.2 percent annual rate in 2014Q1.
After a strong bounce-back from the weather-induced winter lull, it looks like job growth moderated in May. Last month, we saw a very strong 288,000 net job gain in the official Bureau of Labor Statistics report for April. Today, we see a more moderate gain of 179,000 net new private-sector jobs tallied in the unofficial ADP employment report. This is consistent with our expectation for Friday’s official BLS job numbers for May of about 190,000 net new jobs. This level would be close to the average monthly gain for 2013. So we view the likelihood of a step-down in job creation for May as a normal correction following the very strong post-winter rebound. According to ADP, small businesses (less than 50 employees) added the lion’s share of private-sector jobs, +82,000 for May. Medium-sized businesses (50-499 employees) added 61,000 net new jobs. Large business added 37,000 jobs.
The May ISM reports for manufacturing and non-manufacturing industries both point to a solid second quarter. After revision, the ISM Manufacturing Index for May increased to 55.4, showing that manufacturing conditions are generally improving. There are some exceptions. U.S. Steel announced yesterday that it would temporarily close plants in Texas and Pennsylvania, blaming unfair competition from illegally priced imports of tubular steel. The ISM Non-Manufacturing Index for May increased to 56.3 percent. Seventeen out of 18 industries reported expansion in both the MF and the Non-MF surveys.
Light vehicle sales for May were better than expected, increasing to a 16.8 million unit annual pace with help from both cars and light trucks. This was the strongest reading for auto sales since July 2006. Upside potential for both private and commercial vehicles looks good. Although we expect to see a correction in the June sales data, the trend for light vehicle sales for the remainder of this year looks positive.
The U.S. international trade gap for April widened unexpectedly to -$47.2 billion. Net exports decreased marginally by $0.3 billion for the month. Net imports gained $2.7 billion in April. Trade data can be volatile on a month-to-month basis. We expect to see a smaller trade gap as a percentage of GDP going forward, supported by a more favorable balance for energy, in particular, and also for some manufactured goods. Nonetheless, the weak start to Q2 trade data suggests that we could see a net drag from trade on Q2 GDP. However, we still have two months of trade data left for Q2 so the negative outlook could potentially diminish.
Nonfarm business productivity growth for the first quarter of 2014 decreased at a 3.2 percent annual rate. We know that both output and employment data for Q1 were influenced by the unusually bad winter weather, so the Q1 productivity and unit labor cast data come with an asterisk. The noticeable decline in Q1 productivity was accompanied by a symmetrically large increase in unit labor costs. ULC for Q1 increased at a 5.7 percent annual rate, also influenced by the weather. On a year-ago basis ULC was up a tame 1.2 percent in Q1 so that does not look like a big push to inflation.
Market Reaction: U.S. stock markets are improving after opening losses. Long-term Treasury yields are up with the 10-Year T-bond rate at 2.60 percent. NYMEX crude oil is up to $102.76/barrel. Natural gas futures are down to $4.63/mmbtu.
For a PDF version of this Comerica Economic Alert click here: ADP 06-04-14.