The U.S. Economy:
New orders for durable goods increased 0.8% in March, rebounding from the 1.7% drop in February. Total durable goods orders were up 11.9% from a year ago. The March gain puts the level of total durable goods orders at $275.0 billion, the third-highest on record. New orders for nondefense capital goods, excluding aircraft or core capital goods, a proxy for business investment in equipment, jumped 1.0% in March after falling 0.3% in February. Orders had risen for 11 consecutive months from March. 2021 through January 2022 and have increased 21 out of the last 23 months since April 2020. This places the level at $80.8 billion a new record. However, accelerating price increases have an impact on capital goods in real terms. New orders for non-defense capital goods were $45.9 billion in February, measured in 1982 dollars, a high level by historical comparison, but well shy of the record high. Producer prices for consumer durable goods rose 0.7% in March, while producer prices for capital equipment rose 0.8%, suggesting that in real terms new orders for durable goods were roughly flat, while new orders for non-defense capital goods, excluding aircraft, rose at a modest 0.2%. Demand remains robust for the manufacturing sector and the tight labor market creates incentives to substitute capital for labor. The outlook remains uncertain for manufacturing. There is a sustained upward trend in price pressures, continuing with demand outpacing supply. Labor and material shortages continue to hamper production, and the Russian invasion of Ukraine unleashed a wave of volatility and disruptions to the global economy. Furthermore, Federal Reserve has begun to raise interest rates, boosting the probability of a policy mistake. Caution is warranted.
The April ISM manufacturing index fell 1.7 of a percentage point to equal 55.4%, the lowest reading since July 2020. The new orders index registered 53.5% in April, down 0.3 of a percentage point from Mrch’s level. 11 industries reported growth in new orders in April. The production index registered 53.6%, in April, down 0.9 percentage points from March. 14 industries reported growth in output in April. The Employment Index registered 50.9 in April, down 5.4 percentage points from March. The supplier deliveries index rose by 1.8 percentage points in April, to equal 67.2%. Of the 18 manufacturing industries. 16 industries reported slower deliveries in April. Among the supply delivery comments, 7.0% of respondents noted stable month-over-month improvement compared to March. However, further improvements in the index will likely be tepid for the rest of the second quarter due to continuing labor issues and the expected impact of China port lockdowns. Inventories fell by 3.9 percentage points In April to 51.6% and 11 Industries reported higher stocks in April. The backlog index registered 56% in April, down 0.4% of a percentage point compared to March. 10 Industries reported dropped in backlogs in April. The price index fell by 2.5 percentage points to 84.6%, with 16 out of 18 industries
The latest incoming data shows that manufacturing is caught in the cross-wind of strong demand and a weaker supply cycle, that has constrained production. In April, the progress in employment slowed, with a larger number of quits compared to previous months. Manufacturers continue to rate supply chain problems and employment issues are the two biggest problems facing manufacturers.
Quotes from respondents were illuminating. Transportation equipment executives said there was continued strong demand, but there was some improvement in the supply chains. Delay still exists, but supply issues are slowly improving and there were increases in multiple categories. In food, beverage, and tobacco products, supply chains are still constrained, and prices continue to rise. The machinery sector said that new orders are very strong. Fabricated metal said production is lower in Q1 because of supply chain issues and backlogs are growing.
Factory orders rose 2.2% in March after edging up 0.1% in February. The increase in March was across the board, with increases for machinery, primary metals and electrical equipment, appliances, and components. Orders for computers and electronic products also rose as well as orders for fabricated metal products. Shipments of manufactured goods increased 2.3% after rising 1.1% in February. Orders for motor vehicles and parts surged to a 14-month high in March. Inventories gained 1.3%. Unfilled orders rose 0.4% after climbing 0.5% the month before. Core capital goods orders rebounded by 1.3% and shipments rose 0.4% in March. Manufacturing accounts for about 12% of the economy and is facing some near-term supply chain shortages emanating from the closed ports in China. The supply chain shortages from China may affect U.S. production this summer.
The U.S. nominal trade deficit widened more than anticipated in March, rising from $89.8 billion in February to $109.8 billion. Nominal exports rose 5.6% to $241.7 billion, while nominal imports rose 10.3% to $351.5 million. Exports of goods increased from $11.6 billion to $170.7 billion. Imports of goods increased by $32.0 billion to $298.8 billion in March. Exports of goods were led by industrial supplies and materials, which increased by $7.4 billion. Other petroleum products saw exports grow by $2.0 billion in March. Automobiles and parts exports rose by $1.0 billion. Imports were led by industrial supplies and materials, which rose by $11.3 billion, and consumer goods imports which rose by $100 billion. The deficit with China increased by $7.4 billion to $48.6 billion in March. The deficit with the EU fell by $1.3 billion to $15.6 billion. Look for high amounts of imports in the short term as the U.S. economy still has a high demand for goods and is trying to rebuild inventories. As time passes, demand for exports will grow and U.S. demand for goods will slow under the weight of higher interest rates. Delays in China ports will add to a busy and crowded shipping season this year.
The U.S. services industry unexpectedly slowed in April, with employment contracting for the second time this year, while the measure of input prices raced to a record high. The ISM services index decreased from 58.3 in March to 57.1. The business activity index fell by 3.6 of a percentage point to equal 59.1%, with 14 industries reporting higher business activity, The new orders index fell 5.5 percentage points to 54.6, with 13 out of 18 industries reporting higher orders. The employment index decreased by 4.5 percentage points to 49.5%. Only ten industries reported higher employment in April. The supplier delivery index increased by 1.7 percentage points to 65.1%, with 16 industries reporting slower deliveries. The prices paid index rose by 0.6 of a percentage point to 84.6%, with all industries reporting higher prices. The index still indicates growth for the service industries. The index fell on a month-to-month basis mainly on a restricted labor pool and a slowing in new orders. Business activity remains high, despite high inflation, tight capacity for transporting input commodities, and the war in Europe. Rising prices and supply chain shortfalls are listed as the two biggest problems facing service companies. Despite the challenges, confidence is still high.
Non-farm payrolls increased more than expected in April, as manufacturers boosted hiring, underscoring the economy’s strong fundamentals despite a decline in output in the first quarter. Jobs increased by 428,000 in April. The April strength was partly offset by a downward revised loss of 38,000 jobs in February and March. The April gain brought the economy 1.2 million jobs short of its pre-pandemic peak and just 500,000 short in the private sector. Leading the April charge was leisure/hospitality, with 78,000 jobs, including restaurants and bars, which added 44,000 to those gains. Manufacturing payrolls rose by 55,000, after increasing by 43,000 in March, Transportation and warehousing increased by 52,000 jobs, pushing its 674,000 total above the February 2020 level. Average hourly earnings rose 0.3% in April, after advancing 0.5% in March. That brought a year-over-year increase to 5.5% from 5.6%. The household survey revealed that household employment fell by 353.000, the first decline since April 2020. A total of 722,000 entered the workforce the previous months, the labor participation rate fell to 62.2% from s yeo year high of 63.4% in March. The report suggests the consumer is still supported very well for spending in the near term, the future may be more volatile.
Important Data Releases This Week
- The April NFIB small business optimism index report is scheduled for release on Tuesday, May 10 at 6:00 AM. The small business index has slipped lately under the current environment of tight labor, rising costs cists and the war in Europe, March was the lowest reading of the index since April 2020. The readings have been in line with the 20210-2015 average and the aftermath of 2008-09. 47% of firms in March had trouble hiring at keas tine employee and 49% reported increasing compensation in the last few months. The index will likely retreat by half a percent in April.
- The April CPI report is scheduled to be released on Wednesday, May 11, at 8:30 AM. The CPI report will be watched carefully this week for signs of rolling over after a 1,2% advance We expect the CPI to increase 0.4% in April, making it 8.3% for the year. That would be the first y/y decline since 2020. Energy costs accounted for 70% of March’s advance and food prices increased. Goods inflation is starting to slow and labor will follow later. Still, the inflation rate will be uncomfortably high for the remainder of the year.
- The April factory orders report is scheduled to be released on Tuesday, May 3, at 10:00 AM. Already released data showed that durable goods orders increased 0.8% in March and the carefully watch core capital goods orders increased a solid 1.0% in March. Business investment in equipment made an impressive jump in the first quarter, rising over 17%, as companies try to meet strong demand in a labor short market. A strong trend will continue in manufacturing. Factory orders are projected to have increased 0.9% for March, up from the 0.5% decline seen in February.
- The March trade deficit report is scheduled to be released on Tuesday, May 3, at 10:00 AM. The war in Ukraine has disrupted global trade both Russia and Ukraine are largely shut out of the global market because of the war, or sanctions. The already released goods deficit report showed imports exploding in the first quarter as suppliers scrambled to replace commodities cut off by the war. The goods deficit hit a record in March, on the strength of imports to help build inventory levels. Over time, demand for imports will cool and exports will perk up, and imports cool. The $89.2 billion deficit for February is projected to rise to $106.7 billion.
- The April U.S. new vehicles sales report is scheduled to be released on Tuesday, May 3, at varying times. Auto sales came in at a weak 13.6 million units in March and an even weaker pattern may follow in April. U.S. new-vehicle demand could fall 23.8% to 1.1 million units in April from a year earlier, according to JD Powers and the LMC Automotive. The seasonally adjusted sales would translate into a 14.5 million pace for April, which is still down by 3.9 million from last year. Demand remains strong but with only 900,000 inventories at dealerships, sales will be well below year-earlier levels. The average transition price is expected to equal $45,252 in April, a 19.7% increase from a year ago and the second-highest ever.
- The April ISM services index report is scheduled for release on Wednesday, May 4, at 10:00 AM. The service economy continues to open after a delay caused by COVID early in the first quarter. Spending is shifting to services as more businesses resume activity and more consumers get out and mingle. Higher prices and lack of inputs have constrained service industrial activity over the last few months, but the overall trend is upwards. The index, which came in at 58.3 in March, will rise to 58.9 for April.
- The April payroll report is scheduled to be released on Friday, May 6, at 8:30 AM. Payroll growth has been on a roll and the 431,000 addition to March’s payrolls is reflective of an economy still in need of workers. The low unemployment rate will keep upward pressure on the need for workers in the near-term term. As demand slows down under the weight of higher interest rates, employment growth will slow to more closely match growth in the labor force. Payrolls are forecast to have increased by 400,000 in April.