Key Takeaways:
In the minutes from the Federal Open Market Committee’s (FOMC) March 16-17 meeting, participants noted the potential for a stronger economic recovery given the improvement in vaccinations and in economic data. Regarding inflation, the FOMC agreed that “they would aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent” and that they expected to “maintain an accommodative stance of monetary policy until those [inflation and employment] outcomes were achieved.”
The ISM Service Index jumped 8.4 points in March to 63.7, the second-largest increase in series history and the highest reading in series history. Any reading above 50 indicates expansion. The business activity, new orders, and employment indices all increased, with both the business activity and new orders indices reaching record highs.
The Producer Price Index (PPI) for final demand of goods and services rose 4.2 percent in March from a year ago. Core PPI (excludes energy, food, and trade services) increased 3.1 percent from a year ago, the fastest pace of annual growth since September 2018.
Consumer (non-mortgage) credit outstanding jumped by $27.6 billion to $4.2 trillion in February, the largest increase since November 2017, according to the Federal Reserve Board. The increase was driven mostly by nonrevolving credit (largely student and auto loans), which rose by $19.5 billion, while revolving credit (largely credit cards) rose by around $8.1 billion.
The real goods trade deficit (an input into the calculation of net exports) widened by approximately $3.0 billion to $99.1 billion in February, according to the Census Bureau. This represented the widest deficit since the series began in 1994. Exports fell 5.3 percent, while imports fell 2.0 percent. Real exports were down 8.0 percent from the level seen a year ago.
The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings increased by 268,000 in February to 7.4 million, according to the Bureau of Labor Statistics. Total hires increased by 273,000 to 5.7 million, while total separations rose by 133,000 to 5.5 million.
Factory orders and shipments fell 0.8 percent and 2.0 percent, respectively, in February, according to the Census Bureau. Nondurable goods orders decreased 0.4 percent over the month but were up 0.5 percent from a year ago. Core capital goods orders dropped 0.9 percent, while shipments fell 1.1 percent in February.
Forecast Impact:
February data continued to be affected by the severe weather seen across much of the country during that month, while March data continued to show strength. The March jump in service sector activity and the increase in February consumer revolving credit highlights the extent of recovering consumer demand, though March service sector activity was likely bolstered in part by the rollout of the $1.9 trillion March stimulus legislation. Regardless, these data support our expectation of an acceleration in consumer spending. Growing consumer demand coupled with comparative weakness abroad is affecting trade, leading to imports outweighing exports and a widening of the trade deficit. Therefore, we expect that net exports will likely drag on Q1 GDP growth. Producer prices continued to climb in March, with headline PPI recording the fastest pace of annual growth since September 2011. Despite the large PPI growth, the Fed is unlikely to change its current accommodative stance, as its stated position is to wait for data to match its expectations for both employment and a long-run inflation average of two percent. The February JOLTS survey does reflect improvement in the labor market, with job openings reaching the highest level in just over two years, though employment levels still remain considerably below the pre-COVID peak.
