What data breaks the Fed out of its current “patient” stance? Given the persistence of low inflation, it appears to me most likely that the next move is down. Fed officials, however, are resisting any such moves just yet, requiring instead that the data break at least gently to the downside in the months ahead. And so we wait as the data rolls in.
The ISM nonmanufacturing report came in a little lower in March compared to the previous month, but I am not seeing any fundamental shift in the underlying pace of activity. Looks instead like typical noise in the series:
Softness was more evident in the 2015-16 slowdown than today. Good news for the economy; bad news for the recessionistas.
More interesting was the ADP employment report. That came in on the soft side with a 129k gain in private sector employees. Incorporating that information drags down my forecast to a 150k gain in March:
This forecast is on the soft side of consensus, which is currently expecting a rebound in job growth t0 170k with a 3.8% unemployment rate and a 0.2% wage gain. Given the noise in this data, the Fed would likely see little difference in any number in the mid-100’s. The Fed would probably view anything in that sort of range as consistent with relatively stable unemployment and continued upward pressure on wages. A good place to remain patient.
More interesting would something on either side of the mid-100s. If job growth came in closer to 100k or so, the Fed would start to get a bit nervous that maybe the February weakness wasn’t the one-off they believe it was. Any anxiety would step up a notch if the unemployment rate edged higher as well. That kind of pattern, if sustained for the next few months would likely prompt Powell & Co. to more seriously consider lower rates mid-year.
That said, betting against this job market hasn’t worked out very well yet. If we see job growth sticking closer to 200k a month, central bankers will start to think that they maybe became a little too dovish in March.
Bottom Line: We are stuck in a waiting game for the moment while we try to assess the degree to which the US economy is slowing.