Economic Commentary – April 2018

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By John Beuerlein, chief economist, Pohlad Companies 

The employment report for March (released April 6) indicated that hiring slowed in March after a strong February. Payrolls increased 103,000 versus expectations of 185,000 and an upwardly revised 326,000 in February. The March number may have been impacted by snowstorms in the Northeast, which kept some people away from work. For the first quarter, the average monthly gain for payrolls was 202,000, a healthy figure for this stage of the economic cycle. The unemployment rate remained at 4.1% for the sixth straight month. Average hourly earnings grew 2.7% on a year/year basis in March compared to a 2.6% year/year rate in February. All in all, the report suggests that the labor market remains healthy with some improvement in wages, but not enough to cause the Federal Reserve to change their announced program of gradual interest rate increases. Additionally, a healthy labor market is a pre-condition for a healthy consumer, which is the basis for ongoing economic growth. At their March meeting, the Fed increased the Fed Funds rate to 1.75%, as expected. Going forward, the market expects two additional rate hikes in 2018, in line with what the Fed is signaling. Stronger wage acceleration which would likely push inflationary expectations higher could cause the Fed to increase rates at a faster rate, but at this time the data does not suggest this to be the case. On the trade front, the ongoing tensions between the US and China have rattled markets around the world and created concerns about the impact on economic growth. These concerns are at least partially reflected in the fact that US longer term Treasury yields peaked in late February. The 10-year Treasury yield peaked at 2.95% and is now under 2.80%. It is very interesting to see long-term rates unable to increase even as the federal budget deficit is being driven up by the tax cuts and spending bills passed by Congress. The primary determinant of long term interest rates is inflation and inflationary expectations. Despite all the issues mentioned above, inflationary expectations have not advanced much, and consequently longer term rates have been relatively stable since the end of January. Of particular interest as we move through 2018 will be the relationship between long-term interest rates and short-term interest rates. If long rates remain relatively stable as the short-term rates are increased, the yield curve flattens – an unfavorable development for lending companies. Additionally, if short rates advance above long rates, we have a situation known as an inverted yield curve. This is a condition that has preceded every economic slowdown over the last 60 years. Although this condition is not of immediate concern, it warrants ongoing monitoring.