April 9, 2012

There are mixed signals from the U.S. economy, but the manufacturing sector remains strong. Last week’s data releases showed that factory orders, especially for durable goods, were robust in February; the manufacturing Purchasing Managers Index (PMI) improved in March; and despite the weaker than expected employment report, manufacturing contributed nearly one-third of the net job gains. Light motor vehicle sales disappointed, but that was only because expectations got ahead of themselves. Year over year, expectations were up a healthy 10 percent. Globally, China’s economy continues to glide toward a soft landing – a slowdown in growth, rather than a crash. The European Union outside of Germany is most likely already in a mild recession.

Minutes of the March Federal Open Market Committee meeting released last week revealed a cautiously optimistic outlook at the Fed. It is concerned by the rise in energy prices but expects their impact on inflation to be transitory. Inflation expectations continue to be well anchored, and the Fed expects to be able to hold short-term rates at historically low levels until late 2014. However, it does not anticipate any further quantitative easing at this time. This week will be important for Fed watchers. Wednesday, the Fed releases its Beige Book on economic activity around the country. Thursday and Friday will bring the latest read on the Producer Price Index and Consumer Price Index, respectively.

U.S. PMI for manufacturing improved in March. The overall index as well as the new orders and production subcomponents indicated faster growth than in February. The non-manufacturing PMI showed growth continuing, but at a slower pace. Outside the U.S., there are signs of both softness and strength. In Europe, new orders weakened across the continent with few exceptions. However Asia, excluding China, continued to see faster growth.

Light motor vehicle sales in March were 14.3 million units (at seasonally adjusted annual rates), as the quarter closed out averaging 14.5 million units a month (at seasonally adjusted annual rates). Elevated gasoline prices have affected the mix of vehicles sold, with consumers showing a preference for vehicles with better gas mileage. Gas prices also disproportionately affect consumer sentiment, which affects consumer spending. Consumers, however, continue to spend. Chain-store sales rose by 4.1 percent year over year in March. Friday will bring the April mid-month reading for the University of Michigan’s Consumer Sentiment Index, and it will provide another window into whether high gas prices have eroded confidence to the point where consumers might start retrenching.

Friday’s employment report disappointed, but manufacturing did all right. According to the establishment survey, the U.S. economy added 120,000 net new jobs in March, well below the consensus expectation of 203,000 jobs. Manufacturing contributed 37,000 jobs, close to one-third of the total gains. The biggest decline was in the retail trade sector, which lost 34,000 jobs. The manufacturing workweek fell by 0.3 hours to 40.7 hours, but factory overtime was unchanged at 3.4 hours. Average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents, or 0.2 percent, to $23.39. January and February’s job gains were revised upward by 22,000 jobs. The unemployment rate, obtained by a separate survey of U.S. households, ticked down one-tenth of a percentage point to 8.2 percent. The drop was due in part to fewer Americans seeking work, and not entirely to more workers getting jobs.

Arun Raha
Director, Economic Analysis
Eaton Corporation

Editor's Note: Many thanks to Arun Raha, director of economic analysis at Eaton Corporation, for compiling this week's Monday Economic Report.

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