(Photographer: Krisztian Bocsi/Bloomberg)

Nine Days, One Signal: U.S. Economy Is Doing Fine If Not Great

(Bloomberg) -- The data deluge that swept over the U.S. economy since the middle of last week can be boiled down in one message: Lofty expectations, but more down-to-earth numbers.

Overall, the job market is going strong without overheating, while the economic expansion -- which this month became the second-longest on record -- is on solid ground even with a soft start to the year that’s expected to give way to a tax-cut-driven rebound. The results amount to a wash for Federal Reserve policy makers, who skipped a rate hike at their May 1-2 meeting as expected.

The central bank remains on track to raise interest rates in June for the second time this year, and once or twice more after that in 2018.

Here are the highlights from recent numbers:

1. Job market is doing fine, wage gains remain tepid

While the 164,000 increase in April payrolls was less than forecast, revisions added a total of 30,000 to payrolls for the previous two months. The unemployment rate fell to 3.9 percent, dropping below 4 percent for the first time since 2000, and drifting further below Fed officials’ estimates of levels sustainable in the long run.

The slack isn’t disappearing fast enough, though, to create the long-awaited acceleration in pay gains. The payrolls report showed wages rose a less-than-forecast 2.6 percent from April 2017, and the prior month’s increase was revised lower. A more positive signal came from the first-quarter employment cost index, seen as a more comprehensive measure, which showed private-sector wages and salaries posted the strongest year-over-year gain of this expansion.

2. Factories are hiring and struggling to fill robust orders

One standout in the jobs report was manufacturing payrolls, which in April had the strongest year-over-year gain since May 1998. The numbers tied in nicely with the Institute for Supply Management’s manufacturing survey released Tuesday, which showed solid-but-moderating growth. That index missed economists’ forecasts, and the group said factories are struggling to find the workers, supplies and delivery trucks needed to keep up with demand. The dynamic is creating price pressures and supply-chain disruptions, worsened by the U.S.-China trade spat.

3. Hiring, growth in service industries is a bit cooler lately

Hiring at service providers was little changed in April at 119,000, according to the Labor Department figures on Friday. Some hint of that came in the ISM non-manufacturing survey released a day earlier, which also fell short of analysts’ forecasts. Growth in service industries, which account for about 90 percent of the economy, cooled in April to a four-month low and hiring eased as businesses cited a shortage of qualified labor.

4. The trade gap narrowed but tensions with China remain

Trade tensions between the world’s two-largest economies also are weighing on an otherwise solid outlook for activity and employment. While Commerce Department data released Thursday showed the export-import gap shrank in March, the U.S. merchandise trade gap with China widened by 16 percent to $91.1 billion in the first three months of the year. Two days of U.S.-China trade discussions ended in Beijing Friday on a note of discord, with both sides agreeing to keep on talking.

5. Productivity still isn’t going anywhere fast

The weakness in worker pay may be partly a reflection of lackluster productivity. The latest confirmation came Thursday, with the Labor Department reporting that in the first quarter, nonfarm business employee output per hour climbed 1.3 percent from a year earlier, in line with the 1.2 percent average from 2007-2017. Unit labor costs rose 1.1 percent from a year ago. Recent technological advances have failed to spur a big surge in productivity that’d allow businesses to increase profits while also giving out bigger paychecks.

6. GDP, consumer spending slow but set to pick up

At the same time, lower taxes may improve households’ ability to sustain their spending -- the biggest part of the economy -- and help bring about a rebound in growth after the first-quarter slowdown. Commerce Department figures on April 27 showed gross domestic product grew at a 2.3 percent annualized rate after three quarters of gains above or near 3 percent.

Still, figures released Monday showed consumer spending picked up in March, providing a solid handoff into this quarter. Alongside, the Fed’s preferred gauge of inflation hit the central bank’s 2 percent target in March, the first time in a year and a reinforcement of the outlook for further, gradual interest-rate hikes.

Meanwhile, the University of Michigan survey on April 27 showed consumer sentiment remained elevated in April amid increasingly favorable views of personal finances, though the index fell from March. In addition to the healthy jobs numbers, it’s another sign of how this quarter is shaping up.

©2018 Bloomberg L.P.

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