Do Strong US Economic Data Matter?

This week's US economic data are expected to be exceptionally strong.  But, they may have little impact on the markets, as was the case last week.  Here are five possible explanations.  One, the markets already moved in anticipation of the strength and are just consolidating as the incoming data ratify these expectations.  Two, the markets don't expect the exceptional strength to last for long.  Three, some of the major indexes, like the S&P 500, are hesitating before breaking through psychological levels and to new highs.  Four, some concern over President Biden's tax proposals are beginning to seep in.  Five, month-end profit taking held back market gains last week.

Consensus expects this week's US economic data to continue to show exceptional strength.  It looks for the Mfg ISM to edge up to 65.0 in April from 64.7 in March.  The March level was the highest since 1987.  Most regional surveys improved in April, supporting the idea of a higher Mfg ISM.  It also looks for +2.0% m/m in March Construction Spending, a bounce-back from the bad February weather. 

As for the April Employment Report, there is reason to think the consensus estimates are too high, although the prints should still be strong.  Consensus looks for a speedup in Nonfarm Payrolls to +978k m/m from +916k in March, and some Street Economists look for 1.0+ Mn.  A problem with this forecast, however, is that the Claims data argue for a smaller jobs gain than March's.   Similarly, consensus expects the Unemployment Rate to fall to 5.7% from 6.0%.  But, the Claims data suggest only 5.9%.  Moreover, the latter does not take account of the possibility of a jump in the Labor Force Participation Rate, which cannot be ruled out given the favorable view of the labor market seen in the Conference Board's Consumer Confidence Survey.

Last week's data support the idea that economic growth will continue above trend although not by as much as in H121.  The 6.4% Real GDP Growth in Q121 was boosted by the stimulus-fed surge in consumption.  Almost all of the jump in March Personal Income resulted from one-off government transfer payments.  While a jump in Personal Savings should support consumption ahead, the boost from this stimulus should abate over time.  While other parts of Final Sales in GDP also posted large gains, they slowed for the 2nd quarter in a row.  In contrast, Nonfarm Inventory Investment fell, presumably in part reflecting the chip shortage.  So, it represents a potential catalyst for growth ahead, as businesses restock.  All told, above-trend growth should be seen in a further downtrend in the Claims data.

Last week's inflation data were on the high side.  And, the y/y for the PCE Deflator should rise further in the next few months if only because of base effects (see my April 11 blog).  While the Q121 Employment Cost Index was above trend, it was attributable to an increase in sales commissions (reflecting the jump in retail sales), which reflects higher productivity and thus is not inflationary.