This week featured a robust set of economic data supportive of a more restrictive Federal Reserve monetary policy. The U.S. economy added 431,000 jobs in March, with upward revisions from the prior months totaling 95,000. Trends in employment remain strong, with the three-month moving average payrolls at 561,000 and the six-month moving average at 600,000. Job gains were broad based in March, led by leisure and hospitality and professional and business services. The unemployment rate fell to 3.6% from 3.8%, the lowest level since February 2020. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons, fell to 6.9% in March from 7.2% in February, declining below its pre-pandemic level of 7.0% in February 2020. Wage growth accelerated in March, with average hourly earnings rising 5.6% from 5.2% year-over-year.
Elevated inflation data were also reported this week, setting the stage for further rate hikes by the FOMC. The Personal Consumption Expenditures (PCE) index was up 6.4% year-over-year in February, up from 6.0% in January. Core PCE was up 5.4% year-over-year in February, versus up 5.2% in January. While the conflict in Eastern Europe continues to exacerbate commodity inflation, the U.S. plans to release roughly a million barrels of oil a day from its reserves for six months beginning in May, an unprecedented drawdown designed to reduce accelerating oil and gas prices. After a volatile week, West Texas Intermediate fell about 13% to just under $100 per barrel.
Additional data this week were largely constructive. According to the third estimate, fourth quarter GDP grew at an annualized rate of 6.9%, revised slightly downward from the second estimate of 7.0%. Economic growth reaccelerated in the fourth quarter after slowing to a pace of 2.3% growth in the third quarter, bringing overall GDP growth for 2021 to 5.7%. The most significant contributor to fourth quarter growth was inventory build, potentially reflecting some easing in supply chain disruptions. The fourth-quarter's build will make for a tough comparison in the first quarter. The consensus estimate calls for 1.5% GDP growth in the current quarter and 3.5% growth for 2022.
The Conference Board’s Consumer Confidence index rebounded to 107.2 in March following declines in January and February, primarily driven by positive assessments of employment. However, while consumers’ evaluations of the present situation were strong, future expectations have been deteriorating. According to the Case-Shiller 20-City home price index, home prices were up 19.1% year-over-year in January versus up 18.6% year-over-year in December, suggesting tight supply may be continuing to support prices. Rising mortgage rates and affordability could be headwinds to further price growth. The Institute for Supply Management (ISM) manufacturing index fell to an 18-month low of 57.1 in March from 58.6 in February due to surging energy and commodities prices triggered by Russia's invasion of Ukraine.
The yield curve inverted at the end of this week, with the 2-year treasury rising to 2.43% and the 10-year increasing to 2.37% (as of this morning), as investors anticipate more aggressive tightening by the Fed to combat inflationary pressures. Notably, the spread between 3-month and 10-year treasuries is still steep at about 187 basis points, which indicates likely economic growth in the coming year. We believe the Fed will continue to tighten monetary policy this year, while remaining cognizant of the impact of rate hikes on the yield curve. We believe a strong labor market and consumer spending will continue to provide tailwinds to the economy; however a prolonged conflict in Eastern Europe, elevated commodity prices, and a potential monetary policy error may present risks to the outlook.
Next Week:
Durable Goods Orders, Trade Balance, S&P Global US PMI, ISM Services Index, FOMC Meeting Minutes, Consumer Credit, Wholesale Trade Sales and Inventories
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