PMI Services Index

PMI services in comparison to other sample surveys have been soft but this index reports strength and signs of acceleration. Driven by new orders, PMI held on to its strong gains seen mid-month; as it matched the level of the February flash, with a final score of 55.9. This is up sharply increasing 2.6 points from January. Capacity stress is now appearing in the sample with backlog orders increasing for a third straight month to a nearly 3 year high. Prices are accelerating, especially input costs which are at a 2.5 year high while selling prices also continue to climb in the report. Hiring is solid and business optimism remains strong at a 13-year high.

ISM Non-Mfg Index

The ISM non-manufacturing index, at 59.5 in February easily bets economists’ predictions and is in line with the PMI Service Index report (above) as it too hints at accelerating and what could be unsustainably strong conditions for the bulk of the nation’s economy. New orders in the report’s sample are at 64.8 with new export orders also unusually strong at 59.5. These are moving into backlogs, which continue to build to an unusually strong reading of 56.0. Deliveries continue to lengthen and input prices, at 61.0, are clearly elevated. The ISM sample of hired employees in the month was at 55.0, down sharply from January ‘s level of 61.6; this does not point to rising strength in the employment report. Besides the employment component, this report does point to rising strength.

Factory Orders

Factory orders in this latest report were down 1.4 percent from the headline level, as it closes the book on what was only a mixed to soft month of January for manufacturing. Aircrafts have been a highlight in the factory sector as it helps alleviate the large 28 percent downswing in January. Factory orders fell 0.3 percent after the two prior months posted impressive gains of 0.8 and 0.4 percent. The two main components of the report are split between a 0.8 percent rise in nondurable goods and a 3.6 percent drop for durable orders; this is one tenth less weak than last week’s advanced reporting for this component. Orders for computers and consumer products are highlighted in this report as is a 0.6 percent rise in total shipments. Shipments of core capital goods are not part of the good news in the report, as they fell 0.1 percent in the month for a two tenth downward revision from the initial reading; giving business investments a slow start in the first quarter. Orders for January core capital goods are revised one tenth lower to a 0.3 percent decline following December’s 0.5 percent dip. Unfilled orders are another weakness in the report down 0.3 percent in a reading that does not point to capacity stresses or immediate inflationary risks.

Mortgage Applications

Mortgage rates continue to rise pushing purchase applications for home mortgages to fall on a seasonally adjusted 1.0 percent in the week of March 2nd, this shrinks the yearly gain of the unadjusted Purchase Index to just 1.0 percent. Applications for refinancing, typically more sensitive to rising interest rates, actually increased by 2.0 percent from the previous week; the refinancing share of mortgage activity remained unchanged despite this increaser at a level of 41.8 percent. Interest rates are at the highest level seen since January 2014.

International Trade

The nation’s trade deficit widened sharply in January to $56.6 billion, far beyond economists’ highest estimates and marks a negative start to first quarter net exports. Imports were at $257.5 billion and were unchanged in the month, exports, however, fell a sharp 1.3 percent to $200.9 billion. Exports of services were steady at $66.7 billion while exports of goods fell 2.2 percent to $134.2 billion. Industrial supplies are to blame for this decline, down $1.3 billion to $41.5 billion and also capital goods, a main focus of US strength, fell $2.6 billion to $44.9 billion, including a $1.8 decline in civilian aircraft exports to a level of $3.8 billion. Imports show a $2 billion rise in industrial supplies to $47.3 billion and welcome a $0.9 billion decline to consumer goods to a level of $54.6 billion. Petroleum imports rose $2.2 billion to $13.2 reflecting both higher volumes and higher prices.

Beige Book

In this reading of the latest Beige Book, all 12 districts their readings back to “modest-to-moderate” with especially soft readings for auto supplies which hare said to be flat or declining in all districts. Housing and construction in the report, outside of isolated strength in some nonresidential markets, is being held down by labor and material shortages. Inflation is described was moderate along with wage growth, which the report notes is actually picking up in many districts. It also cites modest compensation in a few districts due to the tax act implemented the beginning of this year. Rising costs for building materials and fuel are also noted along with an increase in steel prices which the report attributes in part to a decline in foreign competition.

Jobless Claims

Jobless claims increased from the prior week’s 49 year low; up 21,000 to 231,000 in data for the week of March 3rd. The four week average is up 2,000 to 222,500, still several thousand behind levels seen a month ago in what is a favorable comparison and points to a positive employment report. Continuing claims, in lagging data for the week of February 24th, fell a sharp 64,000 to 1.8970 million with this four week average at 1.907 million, 40,000 below the month a go comparison. The unemployment rate for insured workers remains very low at a rate of only 1.3 percent.

Employment Situation

Wage inflation still remains unchanged, but the flashpoint may be sooner than later based on unusual strength in the February employment report.  Nonfarm payrolls rose an outsized 313,000 which is more than 80,000 above economists’ high estimates. Revisions add to this strength, at a net 54,000 for January which is now revised to 239,000 and December now at 175,000. Strength in construction is a standout in the report as payrolls in the sector surged 61,000 in February following gains in the three prior months, all above 40,000. Manufacturing is also very strong up 31,000 for its fifth straight strong gain. Retail, recently uneven, added 50,000 as did professional and business service3s where the closely watched temporary help subcomponent spiked 27,000 in an indication that employers are trying to fill positions. Government payrolls, which have recently been weak added 26,000 to February’s nonfarm total. Despite this strength, average hourly earnings came in below expectations of economists at only plus 0.1 percent and a yearly rate that is 3 tenths below the 2.6 percent consensus. But given the strong labor demand, policy makers at the Federal Reserve may not want to run the risk of runaway wage gains as employers try increasingly to attract candidates. The work week points to further strength, up 1 tenth to an average of 34.5 weekly hours for all employees and the prior month revised 1 tenth higher to 34.4 hours; the private sector workweek rose 2 tenths to 38.8 hours with manufacturing also up 2 tenths to 41.0 hours in a gain pointing to strength for the industrial production report coming out next 3week. The unemployment rate held at a very low 4.1 percent as discouraged workers entered the jobs market. The labor participation rate, another major headline, was up 3 tenths to 63.0 percent and again well beyond the high end of economists’ expectations. The strength in hiring solely in this report would appear certain to raise expectations for four rate hikes this year by the Fed policy makers.