Macroeconomic Overview: The latest report on job growth produced numbers that were below expectations and below readings in recent months. However, monthly additions to payrolls can be erratic. In 2016, the lowest recorded value (+43,000 in May) was followed by the highest of the year (+297,000 in June), emphasizing that a series of low readings are required to declare a definitive slowdown in hiring. Nonetheless, at some point, job growth can be expected to slow due to the fact that most people who want work are already working. This month's decline pulled the unemployment rate to its lowest level since the recession, and wage growth is holding steady near the highest levels since the recession. Both of these factors suggest that some tightening of the labor market has already occurred.
Consumers are aware of the strength of the labor market and consumer confidence has climbed to its highest level in 15 years. Unfortunately for retailers, the surge in confidence in recent months has not translated into a surge in spending. Overall consumer spending decreased in each of the first two months of 2017 and the weakness in consumer spending should imply a low rate of GDP growth in the first quarter. Given the strength of other economic indicators, lingering memories of the shock of the last recession may be holding back spending and motivating saving. The savings rate remains stuck at levels nearly double the average in the years before the recession (5.6% in February, average of 3.0% between 2005 and 2007).
Employment: The U.S. economy was estimated to have added 98,000 jobs in March. This was the lowest monthly addition since May. Despite the slowdown last month, the average monthly increase so far this year is 178,000, which is just slightly below the average from 2016 (+187,000). Revisions subtracted from figures for prior months, with the number for January dropping by 22,000 (from +238,000 to +216,000) and the number for February dropping by 16,000 (from +235,000 to +219,000).
The unemployment rate decreased in March, falling from 4.7% to 4.5%. The current value is the lowest since 2007 and is half a percentage point lower that it was one year ago. Layoffs are slow and initial claims for unemployment insurance continue to decline. The latest four-week rolling average of 250,000 is the lowest since the early 1970s. However, in the early 1970s, the number of people working is only about half of the number people currently employed, highlighting how the proportion of newly laid off employees relative to the working population is extremely low at the moment.
Wage growth was essentially unchanged at 2.7% year-over-year in March. This rate of growth, which is the strongest since the recession, has been generally maintained since the summer of 2016..
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence rose 9.5 points in March. With this increase, the current reading of 125.6 is not only the highest value since the recession, it is also the highest value in more than 15 years. Recent gains in consumer optimism have been driven by improved perceptions regarding current and future business conditions as well as a positive outlook for the labor market..
Even with steady wage growth and a high level of consumer confidence, consumer spending contracted slightly in inflation-adjusted terms for the second consecutive month in February. In February, overall spending decreased 0.1% month-over-month but was up 2.6% year-over-year. Spending on clothing fell 1.3% month-over-month but was up 0.3% year-over-year.
Consumer Prices & Import Data: Rising prices may be a factor affecting apparel spending. Retail apparel prices rose by more than a full percentage point for a second straight month in February (+1.7% in January and +1.1% in February). Increases over the past couple months more than reversed the declines in average clothing prices in November and December. Year-over-year, the CPI for garments was 0.9% higher in February.
In seasonally-adjusted terms, the average cost per square meter (SME) of cotton-dominant apparel imports was essentially unchanged month-over-month in February (+$0.01/SME, to $3.22/SME). Despite increasing slightly since November, sourcing costs remain near the lowest levels recorded outside of the recent recession. Several major U.S. retailers have been having trouble moving merchandise, and that difficulty has translated into slower order placement. For the twelve months ending in February, total imports of apparel (all fibers) were down 2.8% year-over-year in terms of volume. With fewer orders being placed, there likely has been an increase in competition among manufacturers for orders. This would have strengthened retailers' negotiating power, and could have helped push sourcing costs lower.