Strong corporate earnings kept all three indexes in the black for the month of April despite weak GDP news and geopolitical unrest. The tech-heavy NASDAQ has now recorded six consecutive monthly gains for the first time in more than four years. The DOW rose 1.3% to close at 20,941, the NASDAQ rose 2.3% to close at 6,048 and the S&P, the index most closely followed by economists, rose 0.9% to close at 2,384.
CONSUMER CONFIDENCE FALLS TO 120.3
The New York-based Conference Board's Consumer Confidence Index dropped to 120.3 in April after rising to 124.9 in March. The Present Situation Index fell from 143.9 to 140.6 and the Expectations Index declined to 106.7 after rising to 112.3 in March. The Conference Board said that despite the decline, consumers remain confident that the economy will continue to expand in the months ahead. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
CONSUMER SPENDING FLAT
Consumer spending was unchanged for the second consecutive month. Consumer spending rose a modest 0.2% in January. Incomes grew a modest 0.2% after stronger increases of 0.3% in February and 0.4% in January. The combination of weak spending growth and stronger income growth pushed the saving rate to 5.9% of after-tax income in March, up from 5.7% in February. A key inflation gauge closely watched by the Federal Reserve showed a 0.2% decline in March while core inflation, which excludes food and energy, fell 0.1%, the first decline in core inflation since September 2001. For the 12 months ending in March, core inflation has risen 1.6%, down from a 1.8% increase in February. Core inflation is now running further behind the Fed's goal of 2%. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES FALL 0.3%
The Consumer Price Index (CPI) fell 0.3% in March after rising 0.1% in February, the first monthly decline in 13 months. The CPI was up 2.4% from March 2016. Core inflation, which excludes food and energy, fell 0.1% in March but was up 2.0% year-over-year. It was the first monthly decline for core prices since January 2010 and the steepest drop for overall prices since January 2015. Core inflation has been in a range between 2.1% and 2.3% since December 2015.
UNEMPLOYMENT FALLS TO 4.4%
The unemployment rate fell to a decade-low of 4.4% in April after falling to 4.5% in March and the economy added 211,000 new jobs after adding a downwardly revised 79,000 jobs in March. After two months of declines, the retail sector added 6,300 jobs in March. However, roughly 3,500 stores are expected to close over the next few months with retail giants including Macy's and JCPenney shuttering locations. Employment in construction was relatively unchanged. Wage growth slowed in April with average hourly earnings increasing by 2.5% year-on-year, down from 2.6% in March. Fed Chair Janet Yellen has said that the economy needs to create just under 100,000 jobs a month to keep up with growth in the working-age population.
DURABLE GOODS ORDERS RISE 0.7%
Durable goods orders rose 0.7% in March after jumping an upwardly revised 2.3% in February. Economists had expected orders to rise 1.2%. The increase was due in part to a 2.4% increase in orders for transportation equipment. Orders excluding transportation, which can be a highly volatile category, dropped 0.2% in March after climbing 0.7% in February. Economists had expected
orders ex transportation to rise 0.4%. Orders for non-defense capital goods excluding aircraft, which are seen as a proxy for business spending, rose 0.2% after rising 0.1% in February. Shipments in the same category, which factor into GDP, rose 0.4% in March after rising 1.1% in February. So far this year total durable goods orders are up 3.4% compared to the first three months of 2016. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI RISES TO 58.3
The Chicago Purchasing Managers’ index (PMI) rose to 58.3 in April from 57.7 in March, hitting its highest level since January 2015 and beating expectations for a decline to 56.5. It was the third consecutive monthly increase for the PMI. New orders increased 5.5 points to a near three-year high. Order backlogs contracted for the fifth consecutive month, although at a much faster rate than in recent months. Demand for labor picked up, with the employment indicator moving back into positive territory. Prices Paid rose nearly 14% year-over-year and continues to trend upwards, although the rate of increase has slowed recently. April's special question asked firms about the impact of expected increases in interest rates over the next six months. More than half of respondents expected to remain unaffected, with only 22% expecting a negative impact.
WHOLESALE PRICES FALL 0.1%
The Producer Price Index (PPI) fell 0.1% in March after rising 0.3% in February and 0.6% in January. It was the first drop in the PPI since last August. Wholesale prices were up 2.3% from March 2016, the sharpest annual increase in five years. Excluding energy, food and services for wholesaling and retailing, producer prices were unchanged in March and up just 1.6% over the past year. The PPI for inputs to construction was up 3.5% year-over-year in March. Prices slid in March due to falling energy prices, which dropped 2.9%, including an 8.3% decline in gasoline. Steady consumer demand and more stable commodity costs are expected to keep producer prices moving upwards; the strong dollar could moderate increases.
Q1 GDP GROWS 0.7%
GDP grew just 0.7% in the first quarter, down from 2.1% growth in the fourth quarter of 2016, according to the Commerce Department’s first estimate. Weakness was primarily centered on a much slower pace of consumer spending, which grew just 0.3% in the first quarter after advancing a robust 3.5% in the fourth quarter of last year. There were also downturns in private inventory investment and state and local government spending. It was the weakest annualized pace of growth since the fourth quarter of 2009, and below expectations of 1.2% growth. However, the milder-than-usual winter that blanketed much of the country during the first two months of the year resulted in a big drop in utility spending. Consumers seemed to have banked their savings, as the saving rate has been steadily rising. On a positive front, business fixed investment (BFI) was up a strong 9.4%. While weak, Q1 growth was largely as expected, and analysts expect a rebound in the second quarter. First quarter GDP is traditionally hampered by residential seasonality items and other one-time items, according to Wells Fargo. Since 2000, Q1 GDP has averaged 1.0%, followed by an average growth of 2.6% in the second quarter. Many analysts are looking for a second quarter surge to growth of 3% or better and they are forecasting growth for the entire year of around 2.3%, up from 1.6% GDP growth in 2016, which was the poorest showing in five years. Analysts believe the bounce back in the current quarter will be helped by job gains, rising wages and increased consumer confidence.
JOB OPENINGS LITTLE CHANGED
The number of job openings was little changed at 5.7 million in February, up slightly from a downwardly revised 5.625 million in January. according to the latest Jobs Opening and Labor Turnover Survey (JOLTS). The job openings rate was 3.8%. Over the month, hires (5.3 million) and separations (5.1 million) were also little changed. The total separations rate was 3.5%. The hires rate was 3.6%. Total separations, or turnover , includes quits, layoffs and discharges, and other separations. There were 5.1 million total separations in February, little changed from January. The number of quits was essentially unchanged at 3.1 million in February. The quits rate was 2.1%. There were 1.6 million layoffs and discharges in February, little changed from January, with a discharge rate of 1.1%. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. On the other hand, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising. Over the 12 months ending in February, hires totaled 63.0 million and separations totaled 60.6 million, yielding a net employment gain of 2.4 million. These totals include workers who may have been hired and separated more than once during the year. A federal hiring freeze was implemented in late January, and in February the gross number of workers hired fell to 33,000, about 20% below the prior 12-month average. The share of workers leaving their job voluntarily is above the highs of last cycle and indicates that workers feel increasingly confident about their job prospects. A rising quits rate signals increasing worker confidence in the labor market and generally leads to faster wage growth. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
PRESIDENT RELEASES PROPOSED TAX PLAN
President Trump released a one-page summary of his proposed overhaul of the tax system. His plan would reduce the current seven tax brackets to three: 10%, 25% and 35%, with the top rate dropping to 35%. The release did not say which income ranges would apply to each bracket. The plan proposes to double the standard deduction, and eliminate all other deductions except for mortgage interest and charitable contributions. Trump's plan would also lower corporate tax rates to 15% from the current 35%. Analysts say the plan would almost certainly ensure that no one pays a higher rate than they do now on the same income. However, the elimination of most deductions could nudge some wealthier Americans into higher brackets. The Tax Policy Center has estimated the top 1% of households would see a 14% increase in after-tax income, while low and middle-class Americans would see gains of just 1.2% to 1.8%.
POLICY REVERSALS ON CHINA AND THE FED
President Trump appeared to reverse his positions on several key campaign pledges, telling the Wall Street Journal that China is no longer a currency manipulator, that he respects Janet Yellen and perhaps could nominate her to another term leading the Fed and that NATO is no longer obsolete since it is fighting terrorism. In the same interview, Trump's comments that the dollar was too strong sent the dollar lower and gold higher; Treasury Secretary Steven Mnuchin quickly released a statement saying that President Trump was in no way trying to “talk down” the dollar. Toward the end of the month the President agreed not to include funding for the proposed border wall in the 11th-hour bill needed to fund the government and keep it running. Analysts say President Trump is demonstrating flexibility and coming to grips with the complexities of actually governing the country.
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