US: Encouraging Signs of Economic Growth - ING
James Smith, Economist at ING, suggests that an encouraging labour report, coupled with an increase in the ISM Manufacturing Index, will give the FOMC more confidence about the direction of the economy.
“After a couple of mixed US labour reports, Friday’s data was fairly encouraging. Wage growth provided a pleasant surprise to markets, coming in at 0.3% MoM vs 0.2% expectations and taking the year-on-year change up to 2.3%. Based on other wage indicators, the previous month’s reading of 2.2% (since revised up) looked low compared to the trend in other datasets (more like 2.5%). With that in mind, there is the potential for some more encouraging wage growth figures over the next few months, as pent-up demand in the labour market starts to translate into more rapid pay rises.
The rest of the report was fairly in line with expectations. Non-farm payrolls came in a touch above consensus at 215k, roughly around what we believe to be the current underlying trend (around 200k). The unemployment rate ticked back up to 5%, in line with our forecast, although not because of a correction in the household survey measure of employment. By this measure, almost 1.9 million jobs have been created in the past 4 months which, in our view is a bit improbable (when compared to the payroll-based measure) and is due a correction. If it does trend lower for a couple of months, this could temporarily keep the unemployment rate at or above 5% – ultimately though, this is just statistical noise. What matters the most here is the wage number.
Later in the day, the ISM manufacturing index provided another positive surprise. Having been below 50 since October last year (a level indicative of negative growth in the industry), the index posted a strong rebound back into positive territory (51.8 vs 49.5 in February), adding further weight to the idea that the industry may be turning a corner.
The underlying details show that the new orders component soared, and posted the strongest value since 2014. Much of this rise appears to be attributable to orders for exports, which is encouraging, given the concerns about the effects of weaker external demand on manufacturing. Ultimately, the index is still only tentatively in positive growth territory and we will need to see a sustained improvement before concluding that the industry is out of the woods.
But taken as an aggregate, Friday’s US data was fairly encouraging and crucially, will give the data-dependent FOMC more confidence about the direction of the US economy.”
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