A month ago we stressed that bad weather was likely to play havoc with several economic readings including the upcoming employment, housing, and consumer spending statistics…. However, if history is a guide, the softer data should be followed by an offsetting rebound in the economic readings when weather returns to normal in the upcoming months. (Commonfund InSite March 3, 2010). Accordingly, bad weather did adversely impact several economic readings that were released for the month of February. In recent weeks, weather was still challenging for many parts of the country, as witnessed by the heavy flooding in the Northeast. However, on a relative basis, weather conditions were somewhat improved in most areas in March, setting the stage for what is likely to be a series of stronger statistics for the bulk of this month fueled by organic economic activity rather than merely better weather conditions. The latest employment and purchasing managers’ reports represent the start of a more positive tone that should continue to surface in the next round of manufacturing output, industrial production, consumer spending, personal income, and possibly even housing reports. Moreover, the favorable weather conditions in early April may provide positive surprises as better weather fuels better economic data.
Household Employment—A Major Step in the Right Direction
Nonfarm payroll employment rebounded by 162,000 workers in March. Structurally, the report was even stronger than the headline print. The data revealed a smaller than expected contribution from temporary government hiring to conduct the 2010 Census (48,000, versus market consensus estimates for this component in the +100,000 to +125,000 range). However, excluding the census workers, net private sector hiring was +123,000, about 25,000 greater than market consensus estimates and the strongest private sector hiring in several years. Solid job gains were reported in the service sector (+82,000), as well as the previously weak factory (+17,000) and construction (+15,000) sectors. The monthly revisions to the payroll series raised the level of payroll employment for January and February by 62,000. Moreover, the pattern of the revisions, combined with the household labor market data, suggests that the government is now underestimating payroll employment. Although the unemployment rate held steady at 9.7 percent, household employment posted a solid 264,000 increase in March. Interestingly, since the start of 2010, household employment has increased by more than 1.1 million workers (a +371,000 per month pace)--a major step in the right direction. This is an excellent sign that a structural improvement in labor market conditions has begun as the household employment data has historically been more accurate than the payroll employment survey in capturing the start of major turning points in labor market conditions.
The Background Labor Data--Impressive
The background labor market readings were also impressive as the hours worked index for the factory sector rebounded 1.5 percent in March, more than offsetting the weather-induced -1.0 percent reading in February. This increase, combined with a similar-sized gain in the hours worked index for the construction sector, helped to provide the catalyst for a 0.4 percent gain in the aggregate hours worked index for all private sector workers last month. Accordingly, the bounce back in the aggregate hours worked index suggests that despite the challenging weather conditions in 2010:Q1, economic activity picked up as the quarter came to a close. This should also set the stage for a reacceleration in economic activity at the start of 2010:Q2.
The Factory Sector Drives the Economy
The employment report, combined with the recent purchasing managers’ and auto sales readings, shows that as weather conditions normalized production activity rebounded in March. The National Purchasing Managers Index, now called the Inventory for Supply Management (ISM) report, surged 3.1 points to a new cycle high of 59.6 percent in March. The report revealed a sharp gain in the suppliers’ delivery index to 64.9 in March, from 61.1 in February (its highest reading in almost six years) and solid 61.5 prints for both the new orders and export orders components, which suggest that the strong global demand for U.S. manufacturing goods is supporting manufacturing activity and real GDP growth.
Industrial production is projected to post a solid rebound in March, fueled by what could be a close to 1.0 percent gain in manufacturing output, reflecting the benefits of a solid gain in factory employment last month, a sharp rise in export orders, the strong ISM component readings, and a weather-related bounce back in output from depressed weather conditions in February. These gains should more than offset a weather-related decline in utility output. On a year-over-year basis, industrial production is projected to advance from 1.7 percent in February to more than 4 percent in March. This will represent the strongest annual increase in industrial production since a 4.4 percent advance in the year ended June 2005 and will provide one of the best examples that the factory sector is back driving economic activity.
The Consumer Sector
Lost in the excitement of the upturn in labor market conditions last week was a further sign that consumer spending improved in March. Domestic vehicle sales jumped to an 8.9 million unit annualized pace in March, a solid improvement from the 7.9 million unit sales pace registered in February. Although incentives and fleet sales accounted for a portion of the domestic vehicle sales gain last month, it still looks like the domestic auto sector is on the road to recovery, especially when the robust foreign sales readings are incorporated into the mix. Likewise, the chain store sales data revealed strength in late March and early April which should provide support for the next round of retail sales and consumer spending data. Finally, a sharp rebound in pending home sales, combined with the gain in construction employment, could be an early indication that the housing readings will improve over the next several months.
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