David Joy: Signs of growth in the economy, but stocks lack conviction

As David Joy observes, stocks have been fairly muted in response. “Somewhat curiously, capital markets exhibited little conviction in the evidence of firming economic activity,” he writes. “Last week, although the S&P 500 rose 1.0%, it actually fell during the two trading days following release of the manufacturing, vehicle sales and jobs data.”

Economic data from the past week offered the first view of monthly activity that is largely devoid of weather-related distortion, and the news was encouraging. After first learning that the U.S. economy grew at an anemic 0.1% pace in the first quarter, subsequent reports on April activity for job creation, manufacturing, and automobile sales seemed to offer compelling evidence that activity has improved along with the weather.

The employment report showed the addition of 288,000 new jobs in April. It was the strongest month for jobs growth since January 2012. In addition, the totals for February and March were revised higher by a combined 36,000.

The April total was a marked improvement over the pace of the first quarter when job creation averaged 190,000 a month. The unemployment rate fell to 6.3%, down from 6.7% in March, and the lowest rate since September 2008. The so-called underemployment rate also fell 0.4% from March, to 12.3% its lowest level since October 2008.

As the Bureau of Labor Statistics reported, “Employment gains were widespread, led by jobs growth in professional and business services, retail trade, food services and drinking places, and construction.”

However, the report, while encouraging, did contain some aspects that suggest the labor market recovery remains less than robust. The size of the labor force shrank by 806,000 and the labor force participation rate fell back to 62.8%, the same rate at which it ended 2013, after having risen over the course of the first quarter to 63.2%. In addition, average hourly earnings growth year-over-year fell to 1.9% from 2.1% in March, suggesting income gains for workers remain elusive.

Manufacturing and Motor Vehicle Sales
Activity in the manufacturing sector also firmed in April, as the ISM Purchasing Managers’ Index rose for the third straight month, following a steep plunge in January. After hitting a recent cycle high of 57.0 last November, the ISM index fell to 51.3 in January. Since then it has steadily climbed back to its current reading of 54.9. Among the various sub-components of the index, acceleration was most pronounced in employment, trade and slowing supplier deliveries.

The annual pace of motor vehicle sales in April moderated slightly from March, but remained close to the 16 million unit mark that it first reached during the recovery last November. Given the record age of the U.S. automobile fleet in excess of 11 years, and recent evidence of firm consumer spending, the current pace of sales seems likely to be sustained.

The Federal Reserve also took note of the improving conditions in its decision last week to continue to taper the pace of quantitative easing, while keeping the Fed funds rate unchanged. It its meeting statement it said, “Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.”

Capital Markets Unconvinced
Somewhat curiously, capital markets exhibited little conviction in the evidence of firming economic activity. Last week, although the S&P 500 rose 1.0%, it actually fell during the two trading days following release of the manufacturing, vehicle sales and jobs data. This came despite the fact that first quarter earnings continue to be better than expected, with aggregate results now running at +1.5% compared to last year, with approximately three-quarters of the S&P 500 companies having reported. At the start of the reporting season, expectations were for earnings to decline 1.2%.

In addition, the yield on the ten-year Treasury note fell seven basis points on the same two days, to end the week at 2.58%, its lowest level since early February. Various explanations for the drop in yields have been offered, ranging from skepticism toward the pace of economic growth, to deflationary concerns globally, to safe-haven buying in light of rising tensions in Ukraine. Whatever the reason, the result so far is difficult to reconcile with expectations for accelerating growth. A softer reading on manufacturing activity in China in April reported on Monday will only add to the growth story skepticism, as will the decline in investor confidence reported in the Eurozone.

During the week ahead, the calendar of U.S. economic reports slows somewhat, but does include the April report of service sector activity. Overseas, China’s trade activity for April will be watched carefully, as will April PMI readings in the Eurozone. The ECB also meets this week, amidst discussion about the possible implementation of non-traditional monetary stimulus measures. Further insight into the U.S. economy’s April performance arrives next week with reports on retail sales, industrial production, and housing starts and building permits.

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The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.

The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.

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