It’s been a rough week for US economic data. With the exception of auto sales, which surged 13% in January, the numbers so far this week have been disappointing. This morning’s January release of the ADP Employment Report is hardly a washout, although it fell short of expectations. Nonetheless, private payrolls continued to expand above the 200,000-per-month mark in January. True, last month’s 213,000 gain is the lowest since last September. What’s more, today’s news follows updates in recent days of a hefty decline in consumer spending in December; a sharp slide in factory orders at 2014’s close; and a slower rate of growth in manufacturing via the ISM Index. It all looks rather worrisome, but it’s too soon to assume the worst.
What’s the case for optimism? Let’s start with today’s ADP numbers. Although the monthly comparison has been fading lately, the year-over-year change continues to improve. Private payrolls grew 2.3% for the year through January—the best rate in over two years. By this measure, the labor market isn’t sputtering. The monthly figures hint that the growth rate may be slowing, but until/if that shift turns up in the year-over-year rate it’s reasonable to see the short-term data as noise.
The slide in personal consumption expenditures in December—the biggest monthly drop in five years—could an early sign of trouble. But as I discussed earlier this week, as long as private-sector wages are rising at a healthy rate—and they are—one weak spending report doesn’t look threatening. All the more so in the wake of yesterday’s news that demand for autos posted a solid 13% advance in January, which implies that January’s broad spending profile for consumers will post a rebound after 2014’s year-end slump.
What about Monday’s slowdown in manufacturing via ISM’s survey data? The numbers on this front look a bit more problematic. January’s headline ISM number fell to 53.5, the lowest in over a year and well below the expectations in my econometric forecast. Even worse, the critical components of new orders and employment weakened as well. Manufacturing is clearly cooling, although at 53.5 the overall trend is still positive, i.e., moderately above the neutral 50.0 mark, according to ISM figures.
The next couple of ISM updates will be telling, but for now it’s premature to conclude that manufacturing is headed for tailspin. The big picture for the economy is still positive, with a broad set of indicators pointing to growth. To the extent there may be a victim lurking around the next bend it could be the narrative that US growth is accelerating on a sustainable basis. A stronger trend overall is still possible, perhaps even likely, but at the moment there are fresh doubts. But until we see more numbers for January, the case for expecting a moderate expansion still looks persuasive.
Yes, the upbeat outlook is subject to change, perhaps after reading tomorrow’s jobless claims release and Friday’s official jobs report from Washington. But based on the numbers in hand, the view ahead doesn’t look terribly different from the rear-view mirror of the last several months: moderate growth, and perhaps something a bit better.