Morning Commentary: The U.S. Economy: Springing Forward
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The U.S. Economy: Springing Forward
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Andrew Kositkun Senior FX Advisor
This morning’s initial jobless claims disappointed markets at 744,000 versus expectations for a 680,000 print. Additionally, last week’s number was revised up to 728,000 from 719,000. On the state level, California and New York had the biggest increases in jobless claims.
While initial jobless claims show a hiccup in the labor market recovery, the overall trend remains positive. Last week’s jobs report delivered a strong result, with payrolls increasing by 916,000 jobs versus expectations for 660,000 new positions. Adding to this beat was the 156,000 upward revision to prior months. The unemployment rate also fell as expected, with the U-6 unemployment rate — which takes into account marginally attached workers and involuntary part-timers — dropping to just a hair above its historical average of 10.5%. This is notable because many Federal Reserve officials view the U-6 rate as a better gauge of “true” unemployment than the official U-3 measure.
Positive data surprises were not just limited to payrolls. All four national purchasing manager indices also beat consensus in March and are running in the 59–65 range. The Michigan consumer sentiment index was only slightly stronger than expected, but the Conference Board measure of consumer confidence jumped by a record 19.3 points on the month.
While current U.S. economic data is strong, the next few months should bring even more strength. The past three businesses cycles have conditioned investors to expect flattish recoveries, but this cycle should bring gross domestic product (GDP) growth that is more in line with earlier, stronger recoveries.
As such, payroll growth likely hasn’t peaked, and the various purchasing manager indexes have room to run. Based on historical data, the ISM manufacturing index typically peaks in the 65–70 range early in the business cycle. The upshot is that the risk to consensus GDP growth estimates are to the upside, as the U.S. economy continues to pick up steam.
This point was illustrated by yesterday’s Federal Open Market Committee minutes, which listed upside and downside risks to the outlook. Technically, the Fed listed three different downside risks, but they all pertain to the virus. With the U.S. opening up vaccine eligibility to all adults by April 19, the country is well on its way toward herd immunity, mitigating downside risks. Conversely, upside risks — such as fiscal policy being more expansionary than expected or consumer willingness to spend greater than expected — seem more plausible. By extension, the Fed removing accommodation earlier as opposed to later than expected is also more plausible.
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