Recovery in the Labor Market is Still Very Modest

By | April 5, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Asian markets were set to open higher on Friday in a holiday-shortened trading session, riding a surge of strong factory data and falling bond yields that pushed U.S. and European benchmark stock indexes to record highs. U.S. President Joe Biden’s $2.3 trillion plan to rebuild America’s crumbling infrastructure assed to the enthusiasm for risk assets as did accelerating vaccine rollouts. The China Financial Futures Exchange CIS 300 Futures Index was up 1.76% and the Nikkei futures index was up 1.23%. New Zealand, Hong Kong and Singapore were among Asian countries observing the Good Friday holiday.

The dollar and the yield on the benchmark Treasury note edged higher on light trading Friday after data showing a surge in the hiring in March pointed to a U.S. economic recovery that is poised to be the strongest in decades. Equity markets were closed for Good Friday in the Americas, Europe and elsewhere, but it is not a U.S. government holiday and the Labor Department released the closely watched non-farm payrolls report. The U.S. economy added 916,000 jobs in March, more than expected and the unemployment rate fell to 6.0% from the previous month’s 6.2%. Despite the strong number’s the data is not likely to alter the Federal Reserve’s stance on monetary policy.

Improvements in the public health sector and the easing of restrictions has led to a pickup in economic activity in March. The daily vaccination rate continues to make strides and employers added an impressive number of new jobs and the ISM manufacturing index increased to the highest level. in nearly 40 years. This is boosting the equity markets, where the S&P 500 index reached a record high. The increased activity is not without problems, as the supply chain is finding itself constrained by lack of qualified labor and prices of raw material are going up if you can get them. The hard-pressed leisure and hospitality industry posted a solid gain of 280,000 as in-person activity continues to open up. Construction rebounded by 110,000 after severe winter weather weighed on activity in February. Nearly every industry reported gains in March.

The ISM manufacturing index registered 64.7 percent in March, an increase of 3.9 percentage points from February Despite the solid jobs report, factories are reporting it difficult to find labor. The surge in durable goods spending by consumers and core capital goods spending by businesses have resulted in a worsening shortage of key materials and goods. The inventory-to-sales ratio is at nearly 15-year low as a result. Delivery times have surged. The supply deliveries component of the ISM report jumped to 76.6, the highest level since 1974. Despite the roadblocks, manufacturing sentiment is strong and the ism manufacturing index, at 64.7 is the highest in nearly 37 years.

The combination of the creation of the most jobs in seven months, the impact of the government stimulus checks and the improvement in the public health sector is pushing the economy into what could be the strongest economic performance in nearly four decades. Ass of Friday, the United States had administrated 157.6 million doses of the COVID vaccines and distributed 204.7 million doses. The CDC said that fully vaccinated people could travel as “low risk.” That could help save the travel and hospitality industries. First quarter annualized growth rates are as high as 10.0% and the economy could top 7% this year, the fastest since 1984. We expect the surge in raw material prices to be sharp but temporary. If that is the case, the Fed can view the increased prices as transitory and not move for some time to take away the punch bowl. There are still a lot of unemployed people. Manufacturing is still short of pre-pandemic levels. However, the combination of a strong U.S. recovery on the industrial side and the impact of the global economy bouncing back, could lead t a very strong rebound in the U.S. manufacturing base.

Initial claims for unemployment insurance benefits increased by 61,000 to 719,000 in the week ending March 27. The gain was more than expected but reverses a little more than half of the prior week’s revised 107,000 decline. Those claiming Pandemic Unemployment Assistance decreased from 241,137 to 237,025 in the week ended March 27. Claims fell below a million for a second week since the pandemic started. Claims are slowly getting better but the speed of the recovery in the labor market is still very modest.

Next week we get a look at the ISM service index, factory orders, the trade deficit and the PPI.

Latest Data

The U.S. Economy:

The ISM manufacturing index registered 64.7 percent in March, an increase of 3.9 percentage points from February. The increase in the index was the 10th consecutive rise and corresponds to a 6.2% increase in real GDP. The new orders index rose 3.2 percentage points to 68 percent, the highest reading since January 2004. Of 18 manufacturing industries, 15 reported stronger new orders. The production index rose 4.9 percentage points to 68.1 percent, the highest since January 2004. 14 industries reported stronger production in March. The employment index rose by 5.2 percentage points to 59.5, the fourth consecutive increase. Inventories increased by 1.1 percentage points to 50.8 after contracting last month. Prices increased by 0.4precentage points to 85.6, the highest level since July 2008. Backlogs increased by 3.5 percentage points to 67.5, the highest since the sub0series began January 1993. New export orders fell 2.7 percentage points to 54.5%, while imports increased by 0.6 to 56.7.

The ISM reported that manufacturing continues to grow but are facing constraints due to coronavirus impacts that are limiting parts and materials. Worker absenteeism is another roadblock to manufacturing. Respondents noted that the severe winter storms in February caused problems with supply chains and that while improving in March, production struggled to make up for some of the downtimes. The shortfall in inputs is likely to last through the summer in some industries. The future looks bright for manufacturing, but supply chain problems will not fade very fast.

U.S. construction spending fell 0.8% in February but were up 5.3% above their level a year earlier. Construction spending had advanced 1.2% in January. The decline was largely driven by lower spending on apartments, hotels, hospitals and educational facilities. Nonresidential spending declined 1.3% and residential construction spending dropped 0.2%. Public construction spending plunged 1.7% and were slightly negative year-over-year. Home building has been a bright spot for construction in the pandemic as people wanted larger living space to work at home from. Residential construction slipped 0.1%, while multi-family construction dipped but the residential sector rose slightly. Severe winter weather hurt activity in February. Rising mortgage rates are likely to cool the single-family sector in coming months, but only slightly.

U.S. new vehicle sales smashed through the 17 million seasonally adjusted annualized rate in March, coming in at 17.7 million annualized units. March’s sales made up for the February slowdown and more. Total vehicles sold represent a monthly increase of 12.6% and were 56.2% above March 2020. Both cars and light trucks saw significant gains. Light trucks sales were up 12.4% from February. Passenger cars sales rose 13.1% from February. Passenger cars sales were up 33.5% from a year earlier. February sales were just 15.7 million. The outlook for sales is decent and sales will likely track near 16.7 million for the year.

Payroll employment surged by 916,000 in March and February was revised up to 379,000. Loosening COVID-19 restrictions and the reverses in February’s weather-related losses in some sectors, helped boost the March total. Payrolls, in the leisure/hospitality sector increased by 280,000. Nearly-two-thirds of that total were in food services and drinking places. Construction added 110,000, following a weather-related loss of 55,000 in February. Transportation and warehousing added 48,000 jobs. Retail trade added 23,000. The unemployment rate fell to 6.0% from 6.2% in February. Despite the improvement in job creation in recent months, the number of unemployed persons is 9.7 million, 4.0 million higher than in February 2020. Growth should average near 700,000 per month in the second and third quarters. A full recovery will take some time.

Important Data Releases This Week

The March ISM services report will be released on Monday, April 5 at 10:00 AM.  The ISM services index was not immune to the slowdown in the economy in February. The index slipped 3.4 points to the slowest pace of expansion since May 2020. While all the sub-indexes remained in expansion territory, it was disappointing to see the service economy stumble, while it has remained decent all winter. We think the index will recover to 60 for March. Supplier deliveries will continue to signal slowness and difficulty in finding labor.

The February factory orders report will be released on Monday, April 5 at 10:00 AM. Already released advance durable goods orders fell 1.1% in February, the first decline after nine increases. The report suggest that total factory orders will fall 1.0% for February. That month will prove to be just a temporary blip, as the factory demand is strong, and production limited by labor and limited ability to get key inputs.

U.S. February trade numbers will be released on Wednesday, April 7 at 8:30 AM. Trade is coming back after falling off a cliff last spring. Given that the U.S. is ahead of many parts of the world in its economic rebound, this has favored imports over exports. We figure the trade deficit will widen further, rising from $68.2 billion to $70 billion for February. The March PPI report will be released on Friday, April 2 at 8:30 AM. February’s PPI increased 0.5% and has seen increases, largely driven by energy the last few months. Most commodities are seeing price increases, including the price of gasoline. However, the ramp-up in energy did slow a bit in March and the PPI should rise 0.4%.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.

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