Newest economic reports are a mixed bag

INDICATOR >> March Manufacturing Activity and February Construction KEY DATA >> ISM (Manufacturing): -0.5 point; Orders: -0.6 point; Hiring: +4.7 points/ Construction: +0.8 percent; Residential: +1.8 percent IN A NUTSHELL >> “The manufacturing sector remains quite solid, helped along by rebounding construction but the consumer continues to drag things down.” WHAT IT MEANS >> The last set of numbers for the first quarter are beginning to trickle in and they are mixed. The rebounding manufacturing sector continues to rebound. The Institute for Supply Management’s index of activity eased a touch in March, but it remains at a very high level. The small decline in new order growth isn’t a worry given that order books are still filling, a consequence of more moderate production levels. The large rise in hiring points is good news and may indicate that manufacturing will add significantly to the jobs number that comes out on Friday.

Construction activity rebounded from its January slump to post a solid, but less than expected rise in February. The warm weather that followed a cold January helped the residential segment of the market but didn’t do much for commercial activity. Office construction was up minimally, but it has soared over the past year, as employment gains have remained solid.

Early estimates of March auto sales were disappointing, pointing to a sales pace of roughly 17 million units annualized. That may be a little above the March 2016 level, but it is well below the 17.5 million rate posted in January and February. MARKETS AND FED POLICY IMPLICATIONS >> If the Fed is to continue raising rates, something more that exuberance in the stock markets will be needed to convince the members to move. They need solid economic growth and that does not look like it happened in the first quarter. Consumers may be ebullient but they didn’t buy vehicles early this year at anything near the 18 million pace posted in the last quarter of 2016. That points to a major decline in durable goods consumption this quarter and a pretty soft GDP growth number. (First quarter GDP will be released on April 28th.)

Friday we get the March employment data and given what I believe to be over-sized increases in January and February, don’t be surprised if the number of new positions created disappoints. I think that something in the 150,000 to 175,000 range is reasonable. That is not bad, but given the 237,000 average for the previous two months, that will not look strong.

The key data in Friday’s report, though, should be the wage numbers. Anecdotal reports point to an acceleration in wage gains but they still have not shown up in the government data. Indeed, wages, adjusted for inflation, has been flat to down lately. That hardly makes consumers feel good and obviously limits their ability to spend. It should also create some concern on the part of investors. If the tax reform bill doesn’t pass until August or early fall, the impact on growth this year will be minimal.

Given that first quarter growth should be less than 2 percent, it is hard to see how we could get anything better than about 2.25 percent to 2.50 percent growth this year, even with growth averaging about 3 percent for the final three quarters of the year. And that is probably optimistic. That moderate growth scenario has implications for earnings and stock prices and it is doubtful it has been fully factored into equity prices.

Joel L. Naroff is president and chief economist of Naroff Economic Advisors. He can be reached at 215-497-9050 or joel@naroffeconomics. com. On the Web: www. naroffeconomics.com