A week of mixed economic news was overshadowed by a very disappointing U.S. employment report on Friday, making this the second week in a row when economic data appear to be giving recovery naysayers ammunition for their arguments.
Ahead of a week heavy on speeches by members of the U.S. Federal Reserve Board, the Labor Department's monthly jobs report on Friday spurred a vigorous debate among the few on Wall Street working on the market holiday. The question on virtually everyone's mind was: Do the new employment data mean more quantitative easing -- aka QE3 -- is coming?
The soft March employment report will renew debate about the possibility of further monetary policy easing, but has not changed our view that a move is unlikely in April, Dean Maki, chief U.S. economist at Barclays Capital in New York, wrote in a note to clients. (However, he noted, Most [Federal Open Market Committee] members continue to believe that 'substantial slack' in the labor market will put downward pressure on inflation, which means they most likely would be open to QE3 in the future under certain circumstances.)
Meanwhile, Joseph A. LaVorgna, chief U.S. economist at Deutsche Bank in New York, wrote: [T]he minutes of the March FOMC meeting showed that policymakers were concerned that the economy could follow a similar profile in 2012 compared to the prior two years when activity trailed off following a solid start to the year. To be sure, the disappointing March payroll print will exacerbate these concerns.
Also on economists' minds was the fact that -- with positive economic developments coming into March like a lion and then going out like a lamb -- there is a distinct possibility the rate of the current recovery will slow down.
Citing analysis based on state-by-state data, the economics team at Wells Fargo Securities wrote in a report Friday that our current forecast view is that the middle of the year will be characterized by somewhat slower [gross domestic product] growth as the pace of hiring moderates and uncertainty around the future political landscape increases.
Here's a look at how U.S. economic data appeared this week:
Employment. The March employment report was a rotund disappointment that is likely to weigh on equity markets Monday (U.S. and European stock markets were closed for the Good Friday holiday, but equity-futures markets sold off sharply on the news). The Labor Department said the economy added 120,000 nonfarm jobs last month, fewer than one-half of the three-month average of 246,000 jobs. The slowdown in hiring was widespread across sectors. As has been the case over the past few months, the more comprehensive household survey was filled with nuggets of data that indicated the employment situation was better last month than was suggested by the less exhaustive establishment survey. Alexandra Estiot, an economist at BNP Paribas, characterized the employment situation as a slowdown, not a drop. Estiot noted that while the headline payrolls and labor-force participation rate figures were disappointing, other indicators are bringing good news. Among them is the average duration of unemployment, which is dropping, as is the number of discouraged or marginally attached workers. The number of people voluntarily leaving jobs, which climbs when people believe job-market opportunities are improving, is also on the rise.
Industry. Purchasing managers' indexes, which serve as proxy measures of industrial activity, were mixed. The most widely followed index that looks at U.S. manufacturing was up, but the equivalent index for the much larger services sector was down. However, optimists found reasons to rejoice even in that soft report. The good news in the report was the jump in the employment component, which signaled a possible expansion of payrolls in the service sector, the economics group at Wells Fargo Securities wrote in a note to clients. Meanwhile, factory orders, a notoriously volatile measure, were disappointing, coming in below analysts' consensus expectation.
Housing. The newest data on housing was scarce and contradictory. Construction spending in February was weaker than expected, but construction activity apparently picked up in March. After turning negative on prospects for housing last week, investors and economists are in a holding pattern regarding the topic.
Consumer health. Consumer credit increased by $8.7 billion, a respectable amount that was nonetheless dwarfed by the massive increase over the previous three months. Revolving credit, the amount consumers are accessing via their credit cards, declined. Student loans, the main driver in previous months, failed to be as big a factor in the latest release.