Solid U.S. economic data this week adds to our confidence that Q2 GDP growth will rebound from the weak first quarter.
May payroll job growth came in slightly-better-than expected at +217,000. The May jobs numbers are a double shot-in-the-arm for the U.S. economy. First, they confirm a durable rebound from this winter’s weather-induced poor performance. Second, May’s job growth puts U.S. payroll employment at a new all-time high. May’s total payroll employment of 138,463,000 is 98,000 jobs higher than the January 2008 pre-recession peak. The May unemployment rate was steady at 6.3 percent.
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 this week 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.
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. 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.
The most disappointing numbers of the week came from the Q1 productivity and unit labor cost report (ULC). Nonfarm business productivity 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 ULC data come with an asterisk. ULC for Q1 increased at a 5.7 percent annual rate. On a year-ago basis, ULC was up a tamer 1.2 percent in Q1. So, that does not look like a big push to inflation.
The European Central Bank expanded their monetary policy tool bag by dropping the interest rate it charges on overnight bank deposits to –0.1 percent on Thursday, with the goal of encouraging lending. That, and other policy measures are designed to work in concert with a reduction in its main lending rate to 0.15 percent. The recovery in Europe is uneven and inflation is too low.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-06-14.