- U.S. ISM manufacturing index expected to extend its 2-month slump but remain well above 50
- ADP report expected to show a solid increase
- Unemployment claims expected to remain very favorable
- U.S. vehicle sales expected to remain weak
- Weekly EIA report
U.S. ISM manufacturing index expected to extend its 2-month slump but remain well above 50 — The market is expecting today’s April U.S. ISM manufacturing index to show a small -0.2 point decline to 54.6. That would bring the 3-month decline to a total of -3.1 points from February’s 2-3/4 year high of 57.5. The latest ISM report (for April) took a particularly hard hit with a -2.4 point decline in the ISM manufacturing index, a -7.0 point decline in the ISM new orders sub-index to 57.5, and a -6.9 point decline in the ISM employment sub-index to 52.0.
U.S. manufacturing confidence has been sliding over the last several months due to (1) Washington political uncertainty and reduced hopes for large Republican tax cut and infrastructure programs, and (2) weaker prospects for the U.S. auto industry. Despite this decline in manufacturing confidence, however, the April ISM index level of 54.8 was solidly above the 50.0 expansion-contraction level, which indicates moderate optimism about the U.S. manufacturing sector.
U.S. manufacturing confidence still has support from (1) expectations for solid overall U.S. economic growth in coming quarters, (2) optimism about improved global economic growth, and (3) the decline in the dollar index since January, which helps boost the competitiveness of U.S. exports.
ADP report expected to show a solid increase — The market consensus for today’s May ADP employment report is for an increase of +180,000, which would be close to April’s increase of +177,000. The ADP report has been strong since the Nov election with a Nov-April average monthly increase of +230,000. However, that growth rate is probably unsustainably high due to the tight labor market.
In addition, the ADP report may see some downward convergence toward the Labor Department’s payroll reports, which have been weaker than the ADP reports. Private payrolls since November have shown an average monthly increase of +171,000, much weaker than the comparable ADP average of +230,000.
Looking ahead to Friday’s May payroll report, the market consensus is for an increase of +180,000, down from April’s +211,000. The payroll series may see some continued volatility after the weather-related weakness in the March payroll report of +79,000 was offset to some extent by a stronger April report of +211,000.
Meanwhile, the consensus is that Friday’s May unemployment rate will be unchanged from April’s 16-year low of 4.4%. April’s drop in the unemployment rate to 4.4% means that the unemployment rate is already below the Fed’s forecast for a 4.5% unemployment rate during 2017-19 and is also below the Fed’s longer-run forecast of a 4.7% rate. The low unemployment rate means the Fed has essentially already met its goal of full employment.
The low unemployment rate has the Fed on guard for a surge in wages and a rise in inflation, although those increases have yet to appear. Average hourly earnings in April actually eased to a 1-1/4 year low of +2.5% y/y from the 8-year high of +2.9% posted in Dec 2016. In theory, the tight labor market should be forcing employers to pay higher wages in order to retain their workers and hire new workers. In any case, the tame level of wages is helping to keep inflation in check.
Unemployment claims expected to remain very favorable — The unemployment claims data continues to show a tight U.S. labor market. Employers are holding on to their employees and layoffs are therefore at their lowest level in decades. The initial claims series is currently only +7,000 above the 44-year low of 227,000 posted in February and the continuing claims series is only +24,000 above the recent 28-1/2 year low of 1.899 million.
The market is expecting only small changes for today’s claims report. The consensus is for a +4,000 increase to 238,000 in initial claims (after last week’s +1,000 to 234,000) and a -3,000 decline to 1.920 million in continuing claims.
U.S. vehicle sales expected to remain weak — The market is expecting a small uptick in today’s May total vehicle sales report to 16.90 million units from April’s 16.81 million units. U.S. vehicle sales have plunged this year from the 11-year high of 18.29 million units posted in Dec 2016. Vehicle sales in March fell to a 2-1/4 year low of 16.53 million units due in part to bad weather and then showed only a weak upward rebound to 16.81 million units in April. The series is well below the 12-month average of 17.33 million units.
U.S. vehicle sales have fallen due to (1) very poor demand for autos (versus trucks), (2) indications that high prices are hurting new vehicle sales, particularly with the recent drop in used vehicle prices, and (3) the reduced availability of auto loans. Banks are stepping back from auto loans due to rising subprime auto-loan defaults and the reduced collateral value of used cars as prices fall.
Weekly EIA report — The market consensus for today’s weekly EIA report (delayed by a day due to Monday’s holiday) is for a -2.7 million bbl decline in U.S. crude oil inventories, a -1.5 million bbl decline in gasoline inventories, a -650,000 bbl decline in distillate inventories, and an unchanged refinery utilization rate of 93.5%. U.S. crude oil inventories have fallen fairly sharply in the past 7 weeks by more than the usual seasonal amount. That decline has left crude oil inventories +26.4% above their 5-year seasonal average, still qualifying as a serious glut but down sharply from +40.7% above average in February.
