By Don Kaufman
The non-manufacturing PMI missed expectations as it came in at 58.8 while the Street expected it to be 59. It was also below the prior report which was 59.5. It still wasn't a bad one as it was higher than the 12-month average which is 57.7.
As you can see from the table below, there is a mixture of indexes which grew at a quicker and a slower pace. The new orders index decreased 5.3 points to 59.3. That's a bad indicator for future growth. Unsurprisingly, the price index increased 0.5 to 61.5. This adds to the list of survey reports which say inflation is increasing.
Clearly, the heightened survey reports aren't consistent with actual data which shows a modest acceleration in inflation. I expect the core PCE to stay below the Fed's target of 2% this year.
This report is consistent with 3.6% GDP growth which surprisingly isn't unrealistic. However, the other two months had higher PMIs, so really the GDP growth is implied to be above 4%. Let's see if the slight weakening in the ISM corresponds with a weaker economy or if the hard data comes more in line with the soft data.
If the economy actually weakens further in March, it would be very disappointing.
I'm expecting stability.
Let's look at the anecdotal quotes taken from businesses. A professional, scientific, and technical services company states, "As the first quarter end approaches, business outlook is steady, but not nearing growth forecast in Q4 2017." This makes sense because the optimism about 2018 economic growth was very high after the tax cuts were passed in December.
There's no question the tax cuts are a positive, but they are only one aspect affecting the economy. Other catalysts are the global economy and the effect of the hangover related to the post-hurricane period where demand was pulled from Q1.
A transportation and warehousing company stated, "Q1 was positive, despite weather conditions that affected operations on the East Coast. The outlook remains positive going into Q2." This is the only reference to the East Coast storms I've seen in the economic data so far. There were multiple heavy snowstorms in March. I'm interested if other data points reference them.
Clearly, they won't have the same impact as the two hurricanes that hit America last autumn.
Nowcast lowers Q1 GDP growth estimate
The optimism out of the GDP Nowcast model from the Atlanta Fed was temporary as the GDP estimate fell from 2.8% to 2.3%. It's very close to the blue-chip forecast as you can see from the chart below. I was expecting the estimate to increase because of the non-manufacturing PMI, but there were other economic reports which brought it down.
The factory orders and auto sales reports hurt the estimate for inventory investment. The factory orders report showed 1.2% month-over-month growth in February. The consensus was for 1.7% growth. It was better than the prior month which saw a 1.4% decline.
This report was in the period before the tariffs were implemented. The aircraft orders helped growth in February and hurt it in January. The growth excluding aircraft and other transportation equipment was 0.1% which was below January's 0.4% growth. Primary metals orders were up 2.8% and inventories were up 0.5%.
It's interesting that the vehicle sales hurt growth projections in the model because the report was actually really good. The total vehicle sales were 17.5 million which was better than the consensus which was 16.9 million. It was better than the highest estimate which was 17.3 million. The prior month showed 17.1 million in sales which means this breaks a two-month decline streak. Sales have been weak since the big report in September which occurred because of the hurricanes.
This stabilization bodes well for Q2 GDP growth. I'm not expecting the sales level from September to be re-visited, but stabilization is important. The domestic vehicle sales were 13.7 million which beat the consensus for 12.9 million and the highest estimate which was 13.2 million. The last month saw 13.2 million. This is a positive indicator that the consumer is healthy.
The international trade report also affected the GDP Nowcast. As you can see from the chart below, the U.S. had a $57.6 billion trade deficit in February. The deficit was up by $1 billion from last month. The consensus was nearly met as the estimate was for a $56.7 billion deficit.
I think any large deficit is bad news because it might push Trump to implement new tariffs. The deficit with China was $29.3 billion.
Modest spike in jobless claims
The jobless claims for last week was 242,000 which was a 24,000 increase in the total and 12,000 higher than the highest estimate. There were no special factors behind the increase, but you have to assume the Good Friday holiday had some impact on the report. We'll see if the holiday had an impact by looking at next week's result.
I'm expecting a decline from this mini-spike. This report was in the week ending March 31, but it is outside of the sample period for the monthly jobs report which will be released on Friday. The prior week's report of 215,000 claims was included in the monthly jobs survey which implies the report will be very strong.
I expect a strong report because of the jobless claims, ADP report, and general economic reports.
The economy appears mixed with some reports like the auto sales report and most labor reports coming in strong and others such as factory orders and retail sales coming in below estimates. This is consistent with an economy growing between 2% and 2.5% and a range-bound stock market. Some bears may claim this is the start of a recession because they focus on rate of change, but I don't see it.
Growth may not have even peaked for the cycle as I expect a rebound in the second half of the year.
Originally published on MoneyShow.com