The economic data were great for months. And then came March. A string of less than stellar reports raised questions about the state of the economy. In particular, job growth slumped and housing starts cratered. But not all the data were bad, especially given that consumers are spending. Simply put, the economic numbers bounce around and we should not get too worked up over a few questionable reports.
For better or worse, it is still all about the labor market. From December through February, the private sector added nearly 250,000 employees per month. That was well above expectations but not sustainable in an economy growing only moderately. The payback occurred in March when businesses hired a mere 121,000 workers. So, should we be worried?
Nope. First, the report was not all bad. A whole slew of industries, including manufacturing, health care, finance, real estate, professional services and restaurants added lots of workers. The weakness was in construction and especially retail trade. Also, the unemployment rate dropped to 8.2%, the lowest level since January 2009. This was not a really negative report.
The other downer was March home construction. Housing starts fell sharply. With builder confidence easing, there is concern the sector is not coming back. But the details eased the worries. The volatile multi-family segment accounted for the entire drop. Also, the only region where total starts actually fell was the South. I would not make too much of a national decline that is limited to only one part of the country.
But critically, permit requests are jumping. For the last two months, builders were putting up homes at a 674,000 units pace while permits were being purchased at a 731,000 rate. Developers are not paying for permits just for the fun of it. Those tickets to build will turn into starts very soon and when that happens, watch out.
Meanwhile, the consumer is back. Strong payroll gains will come only if household spending picks up and if you believe the recent retail sales number, and I do, that is happening. I don’t expect people to “shop ‘till they drop” anymore. I will be happy if they simply “shop ‘till they’re tired” and that is happening.
The surge in retailing was across the board. A sharp increase in gasoline sales was price driven but even if you exclude that component, demand was still up strongly. We bought gardening supplies and clothes and appliances and electronics and furniture and motor vehicles and sporting goods and, well everything.
The one warning sign is that spending is rising faster than incomes, especially when you take into account inflation. The Consumer Price Index rose moderately in March and even excluding the minor necessities such as food and energy, inflation was still up faster than anyone would like to see. Every major category except electricity rose.
The consumer inflation rate is running above wage and salary increases. As long as spending power is being eroded, and inflation-adjusted wages fell in March, consumption will not stay strong. Unfortunately, the unemployment rate will have to drop a lot more before we reach the point where a bidding war for workers pushes salaries back up.
So, where do we stand? It is likely the weak job gains were nothing more than the normal ebb and flow of the data. The solid increases in consumer spending coupled with permits pointing to better construction ahead, indicate growth should accelerate through the spring. We could easily see a string of 3% or more GDP gains the rest of the year. While that may not be spectacular, it would indicate the economy has finally reached solid footing.