Markets have remained in a trading range after mixed U.S. economic data failed to provide clarity. The Dow Jones Industrial Average climbed to yet another new all-time high on light volume. However, others saw continued weakness in the small-cap Russell 2000 index as a troublesome, early-warning signal. We learned last week that U.S. GDP growth flat-lined to an annualized pace of just 0.1% in the first quarter, its slowest pace since the fourth quarter of 2012.
The deluge of economic data reported over the past week largely came in better than expected, with the exception of first-quarter GDP, suggesting the U.S. economy has shaken off the impact of a severe winter. Many are now predicting a strong second-quarter rebound. One data point to watch is a recent uptick in weekly initial unemployment claims, which last week rose to the highest level since February, for an indication of whether the labor market momentum suggested by April’s headline jobs data is likely to persist into the summer.
For the week, the S&P 500 gained +0.93%, the Dow added +0.93%, and the MSCI EAFE (developed international) grew +1.25%.
Here are the 3 stories this week that rose above the noise:
About that jobs report...maybe it wasn't so great
On the surface, the April jobs report was very strong. Not only were 288,000 nonfarm payrolls added, but the unemployment rate dropped from 6.7% to 6.3%. But unfortunately, the sizeable drop in the unemployment rate was largely the result of 806,000 people dropping out of the labor force.
Additionally, the average length of unemployment remained above 35 weeks and no improvement occurred in April within the average work week or average hourly earnings, two closely watched labor market statistics. Furthermore, a large number of new jobs created in April were in low-paying industries including retail, restaurants, and hospitality. All of that said, despite some weakness within the details of the jobs report, the labor market continues to improve, albeit at a slower rate than prior post-World War 2 recoveries.
U.S. Manufacturers Gain Ground
After more than a decade of losing ground to China and other export powerhouses, U.S. manufacturers are finally showing signs of regaining their competitive edge. An article from The Wall Street Journal points out the recent improvements in the U.S. trade deficit and the Boston Consulting Group’s (BCG) forecast for further trade-deficit improvements due to a surge in U.S. exports.
BCG says rising exports and “reshoring” of production to the U.S. from China could create 2.5 million to 5 million American factory and service jobs associated with increased manufacturing by 2020 that could reduce the unemployment rate by as much as two to three percentage points.
Why Weather Could Determine Who Wins a Race to Measure Inflation
A post on the The Wall Street Journal’s economics blog discusses an interesting recent divergence between the government’s measure of inflation and the measure calculated by the PriceStats Index, which was first developed by economists at MIT to measure inflation using web-based data. The internet-based measure uses real-time pricing data and until recently generally predicted CPI very accurately.
However, in late 2013 and the early part of 2014 the two measures have diverged, with official CPI showing much lower inflation than the internet-based measure. The article contends that the official CPI measure has been depressed by weather-related effects and will converge toward the PriceStats Index, which implies inflationary pressures in the economy are higher than generally believed. This inflation debate has important implications for asset allocation decisions over the remainder of the year.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
