What I Saw Last Week
The Income & Spending report for March showed incomes rising by 0.2% (after a downwardly revised 0.3% increase in February) and spending unchanged for the second month in a row. These figures exactly matched my forecast.
The lackluster spending activity was already reflected in the advance estimate for Q1 GDP on Friday, so that isn’t a new headline shocker so to speak. Additionally, the personal income figures were also embedded in the GDP report and was not a surprise.
The key takeaway from the report is that it showed a deceleration in both the PCE (Personal Consumption Expenditures) Price Index and the core PCE Price Index year-over-year. That will temper concerns about the Fed being behind the curve in fighting inflation and it will quiet concerns about the Fed needing to be more aggressive in tightening monetary policy than is currently projected.
Total U.S. Construction Spending matched my forecast with a 0.2% decline in March.
Total private construction spending was unchanged in March as a 1.3% decline in non-residential spending offset a 1.2% increase in residential spending. The downturn in non-residential spending was led by educational (-7.8%), commercial (-3.2%), and office (-2.6%) spending.
On a year-over-year basis, total construction spending was up 3.6%, with total private construction spending up 7.0% and total public construction spending down 6.5%.
The key takeaway from the report is that the headline disappointment for March was more than offset by the upward revision to February, meaning the March miss wasn’t really a true miss!
The lead headlines from the April employment report were all encouraging. Payrolls increased more than expected, the unemployment rate dropped, average hourly earnings picked up and so did the average workweek.
April Non-Farm Payrolls rose by 211,000 (I had forecast an increase of 185,000 jobs). March non-farm payrolls were revised down to 79,000 from 98,000 while February payrolls were revised up to 232,000 from 219,000. I would add that, over the past three months, job gains have averaged 174,000 per month and are on track with my forecast for the country to add around 2 million jobs in 2017.
The key takeaway from the report for me is that there were some elements that left it a little out of sync with the view that the economy is poised to hit, and sustain, “escape velocity”. The asynchrony I am referring to is the drop in the labor force participation rate and the deceleration in average hourly earnings growth on a year-over-year basis. The former dipped to 62.9% from 63.0% while the latter slipped to 2.5% from 2.6%.
Why there hasn’t been a meaningful acceleration in average hourly earnings growth with the unemployment rate at 4.4% is one of the more perplexing questions, yet I think it does provide the answer for why consumer spending has not lived up to the reportedly high levels of consumer confidence.
Perhaps that changes in the months ahead, yet it remains a stark reality today that will be buried beneath the press headlines addressing the job gains and the lowest unemployment rate since May of 2007.
Given the increase in employment, the U.S. Unemployment Rate dropped to 4.4% from 4.5% – I had forecast it to have notched up to 4.6%.
The unemployment rate dropped even as the labor force participation rate edged lower to 62.9%. The employment-to-population ratio increased to 60.2%, its best showing of 2017 and the highest level since February 2009.
An alternative reading on the unemployment rate that includes those not actively looking for jobs as well as those working part-time for economic reasons dropped to 8.6% from 8.9% in March, the best reading since November 2007.
Consumer Credit rose by $16.4B in March – marginally above my forecast for an increase of $16B – after increasing a downwardly revised $13.8B (from $15.2B) in February.
The growth in March was driven mostly by an increase in non-revolving credit, which was up $14.5B to $2.805T. Revolving credit increased by $1.9B to $999.8B.
Consumer credit increased at a seasonally adjusted annual rate of 4.25% during the first quarter (and 5.25% in March), with revolving credit little changed and non-revolving credit increasing at an annual rate of 5.75%.
What to Watch for This Week
Inflation, as measured by the Consumer Price Index, dropped by 0.3% in March with the core rate 0.1% lower. I am expecting to see total and core inflation up by 0.2%.
U.S. Retail Sales contracted by 0.3% in March and the April figure should be a lot better. My call is for an increase of 0.6% and core sales up by 0.5%.
Consumer Sentiment in April was measured at 97.0 and the early May number should pull back a little to 96.5.