Let's start with the latest economic data, including the ISM reports and the March nonfarm payrolls. Both came in stronger than expected, showing the US economy remains robust. How will this affect the path for rate cuts?
The March ISM manufacturing PMI came in at 50.3% The data showed manufacturing PMI returned to expansion territory in March, at 50.3, above the 48.5 expected and February's 47.8.
- New orders: +2.2 to 51.4
- Production: +6.2 to 54.6
- Employment: continued to contract, rising from 45.9 to 47.4
- Prices: rose from 52.5 to 55.8
- Backlog of orders: unchanged at 46.3
- Supplier deliveries: slightly down
The manufacturing sector's return to expansion reflects the resilience of the US economy. Generally, a contraction in manufacturing PMI is a leading indicator of an economic recession. This surprising outperformance can ease recession fears for now, but we need to watch subsequent data—risks remain.
ISM Services PMI came in at 51.4% The services PMI was 51.4, below the 52.7 expected and February's 52.6.
- Business activity index (services output): +0.2 to 57.4
- New orders index: -1.7 to 54.4
- Employment index: +0.5 to 48.5
- Inventories: -1.5 to 45.6
- Prices index: -5.2 to 53.4
The decline in March services PMI was more due to a slowdown in new orders, faster supplier deliveries, and shrinking employment. Whether the services sector will continue to slow needs further observation. For now, businesses remain relatively optimistic.
March Nonfarm Payrolls
- March added 303,000 jobs, vs. 200,000 expected and 270,000 in February.
- Unemployment rate: 3.8%, in line with expectations. Labor force participation rate: 62.7%.
- Wages: +0.3% month-over-month, +4.1% year-over-year, in line with expectations.
March job growth was driven by healthcare (+72,300), government (+71,000), leisure and hospitality (+49,000), and construction (+39,000). According to the Bureau of Labor Statistics, the US labor market is one of the strongest on record: the economy has added jobs for 39 consecutive months, the fifth-longest expansion on record. The unemployment rate has been below 4% for 26 consecutive months, the longest streak since the late 1960s. Immigration is also a factor: more immigrants are boosting labor supply while keeping wages in check. They are more efficient and produce more, which is good for both the economy and inflation. The Congressional Budget Office reports that illegal immigration is nearly 2.5 million, accounting for 0.2% of labor supply.
Greg Daco, chief economist at EY-Parthenon, told CNN Business on Thursday that the March employment report was expected to be the first "less noisy" report of 2024 and a good gauge of underlying labor market dynamics. "The first two reports were very noisy, affected by weather and seasonal factors," he said of the January and February reports. "We saw wild swings in the underlying data. We also saw crazy revisions." Initial monthly estimates are revised twice as more comprehensive data becomes available. Last month, the initially recorded stunning growth for December and January was revised down by 167,000 jobs. "After the revisions, an entire month of jobs disappeared," Daco said. This time, revisions were more modest: January's net gain was revised up by 27,000 to 256,000, and February's total was revised down by 5,000 to 270,000.
The Fed will get key data next week when the latest CPI and PPI reports reveal the inflation trajectory at the retail and wholesale levels.
Inflation data was a bit bumpy early this year, as more expensive and still-high housing costs pushed price increases above expectations. However, data shows that core inflation (excluding volatile components like energy and food) has slowed slightly.
Before the data release, according to CME data, the probability of a rate cut in June was 55.8%. After the data, that probability fell to 50.8%, indicating nearly a 50-50 chance of no cut. The probability of the FOMC holding rates steady at its July meeting is also as high as 27.4%. The market has pushed back expectations for the first rate cut from July to September this year.
Risk warning: The views in this article are for reference only and do not represent any investment advice. Market risk exists; invest with caution.
