Inverting Charles Dickens, we can say that it is not the best of times nor the worst of times for the U.S. economy. This week’s crop of data are consistent with an economy that downshifted this winter, but still maintains some momentum at the start of the new year.
Payroll job gains for January were below expectations of 185,000, hitting 151,000 for the month. The household employment survey posted a very strong gain of 615,000 jobs in January, enough to bring the unemployment rate down to 4.9 percent. The average workweek increased by 0.1 hour to 34.6 hours and average hourly earnings increased by 12 cents to finish up 2.5 percent over the previous 12 months. Job gains times longer workweek times pay gains equals income growth.
U.S. equity markets sold off on the news. The lower unemployment rate, increase in workweek and increase in average earnings all imply more pressure on wages to come. This slightly lifts expectations for Federal Reserve interest rate increases this year.
Initial claims for unemployment insurance increased by 8,000 for the week ending January 30, to reach 285,000. Initial claims have lifted off the lows from last October, but remain favorable. Continuing claims dropped by 18,000 for the week ending January 23, to hit 2,255,000, a good number.
The U.S. international trade gap widened in December to -$43.4 billion. The strong dollar is a headwind on exports. They were down by $0.5 billion for the month. Imports were up $0.6 billion. The December trade data looks close to the estimate used for 2015Q4 GDP, so there is no implication for a revision to Q4 GDP when the second estimate comes out on February 26.
With hiring strong and real GDP growth weak in the fourth quarter at 0.7 percent annualized, productivity growth in fourth quarter was weak. Nonfarm labor productivity decreased at a 3.0 percent annual rate in Q4. This brought unit labor costs up at a 4.5 percent annual rate. Unit labor cost tends to bounce around, but increasing ULC highlights the potential for a squeeze on corporate profits over the year ahead as labor markets tighten, putting pressure on wages.
Bolstered by ongoing job creation and low gasoline prices, consumers were undeterred in January from their pursuit of new wheels. Despite the bad weather, light vehicle sales in January increased to a 17.6 million unit rate. According to AAA, the national average price of regular gasoline fell to $1.76 per gallon as of February 5.
The ISM Non-Manufacturing Index for January dropped from 55.8 to 53.5, showing that services and construction are expanding at the start of the year, but at a slower pace. Most components, including business activity, new orders and employment are still growing.
The ISM Manufacturing Index for January was slightly less bad than it was in December. The index gained two-tenths to hit 48.2 percent, still a contractionary number. On a positive note, the production sub-index increased from 49.9 in December, to 50.2 in January, indicating a slight expansion of activity.
China’s official manufacturing purchasing manager’s index for January ticked down to 49.4 for January. The China Caixin Manufacturing Index improved to a slightly less bad 48.4 in January.
Construction spending increased by 0.1 percent in December, well within the margin of error for the report.
We still believe that the Federal Reserve will not raise rates again at the next FOMC meeting over March 15/16. The April 26/27 FOMC meeting remains in play. Stronger financial and economic data over the next two-and-half months would increase the odds of a rate hike at the end of April. Right now, we place the odds of a fed funds rate hike in April in the neighborhood of 25 percent. The fed funds futures market responded to today’s employment data by increasing the odds of an end-of-April fed funds rate hike from 16 to 20 percent.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-05-2016.