Introduction

The employment report for April doesn't show much of an upswing from the depressed conditions of the first quarter, yet there are spots of strength and more recent data hint at strong acceleration going into May.

The economy

Employment, where's the bounce'

Non-farm payroll growth came in near expectations, but only at a moderate 223,000 in April. This looks weak against the 12-month average of 249,000 and against the 6-month average of 255,000. But 223,000 looks solid compared to the first-quarter average, up 39,000 to 184,000. However a comparison with April last year looks a little soft, when payrolls surged from a weather-hit 182,000 first-quarter average to 248,000. At 66,000, the 2014 gain is slightly more convincing.

But there are positives in the latest report including a rebound in construction jobs which, after falling 9,000 in March, rose 45,000 for the best monthly gain in more than a year. The gain here points to optimism among builders and offers an upbeat indication for a sector where indications are mostly hurting. April's report also includes a strong gain for professional & business services including a specific gain for temporary help. Gains for business services hint at gains ahead for full-time hiring as businesses replace contractors and temps.

Unemployment data in the report are also favorable with the U-6 unemployment rate, a rate with a wide definition watched closely by Janet Yellen, down 1 tenth to 10.6 percent. The official unemployment rate slipped 1 tenth to a new recovery low of 5.4 percent. The lower the rate, the harder it is for employers to find workers and the greater the pressure on employer costs. Wage readings in the April employment are mostly tame, in contrast to the most recent employment cost report that shows significant pressure. Policy makers are guaranteed to watch the unemployment rate and its irresistible march down to 5 percent, a level that could stand as a psychological barrier for the hawks at the Fed.

Claims at generational lows

Another concern for the hawks is what is not in the April employment report — that is the dramatic improvement underway in weekly jobless claims. Initial claims, in the latest two weeks going into early May, have come in with back-to-back readings in the low 260,000s. These are 15-year lows and, if extended only briefly, would become the lowest stretch since the early 1970s. Continuing claims tell the same story and are also at 15-year lows. Weekly data are only weekly data, they are volatile and hard to assess at any given point. But if the week-by-week improvement holds through May, expectations for the May employment report could definitely be on the strong side.

Service Backbone

Services make up more than 70 percent of total payrolls and growth in April was a respectable 182,000, well up from 115,000 in March. Yet the latest is well below the 207,000 average gain over the last 12 months. And it certainly doesn't match what Markit Economics, in its US services report, describes as "robust and accelerated" hiring in the sector. Yet the service sector, given export-related weakness in the manufacturing sector and a still flat construction sector, is increasingly the economy's bread and butter. Markit's US services PMI came in at a very solid plus-50 reading of 57.4 in April, getting a boost, not just from employment, but also from rising expectations as businesses increasingly see a bounce back from the slow first quarter. Also coming in very strong, at 57.8, was the ISM non-manufacturing index where extending growth in both new orders and backlog orders is a key highlight. This report's employment index, which includes the construction and mining sectors, has averaged 56.6 for one the strongest stretches since the peak of the last expansion in 2006.

Factory fizzle

Looking at factory data will test anyone's optimism. Factory orders did rise 2.1 percent in March, but this is the first gain since all the way back in July! That's 7 straight months of decline for the worst showing since the recession. And year-on-year, both orders and shipments are in negative ground for a 5th month. Weak exports, the result in part of the dollar's strength, have been dragging on the sector as has the oil & gas sector where contraction, in reaction to the long decline in oil, is very deep. Factory orders for energy equipment have fallen in 5 of the last 7 months and are down more than 1/3 from their peak in August, which coincidentally or not is when oil prices began to move lower.

Unfortunately, the latest signs from the factory sector are some of the most disappointing indications anywhere. Manufacturing hours slipped for a 2nd straight month in the April employment report while manufacturing payrolls, up only 1,000 in April, have been flat for 3 months straight. Manufacturing's poor showing in the employment report confirms weakness throughout April's run of regional manufacturing reports.

Port gridlock

One of the memorable readings in the week's run of indicators was imports in the international trade report which surged a shocking $17.1 billion in March making for a far wider-than-expected trade gap of $51.4 billion. Inbound shipments, following the end of the West Coast port slowdown, were unloaded en masse during the month. This distortion is a telling sign of how much the port slowdown slowed the first quarter economy, strangling imports and also slowing exports. The surge in imports (which are a subtraction for the GDP calculation) is expected to pull first-quarter GDP, initially at plus 0.2 percent, into contraction.

Markets

The stock market got a big boost from the jobs report where moderate growth points to healthy business conditions without pulling forward the risk of a Federal Reserve rate hike. The Dow once again popped over 18,000 to end the week at 18,191, up 1.5 percent on Friday and up 0.9 percent on the week.

Illiquidity mysteriously appeared in the global bond market of all places. For no specific reason, global yields on Thursday began to spike in Asian and European trading. Bond traders were left helpless, saying things like "Flash Crash" and offering more questions than answers. After the dust cleared, yields were little changed. The 10-year US Treasury yield, which spiked to 2.31 percent in the worst of it, came right back down, ending the week at 2.13 percent.

Oil also offered entertainment, breaking above $60 and near $62 at midweek before settling little changed near $59 for WTI. The overwhelming build underway in oil inventories this year, the result of rising imports together with rising domestic output, has coincided with oil's retreat. For the first time since the outset of the year, weekly oil inventories declined in Wednesday's EIA petroleum status report. If extended, falling inventories could provide uplift for prices.

The bottom line

Is a June rate hike still a possibility' It would probably take a very strong May employment report together with a sizable upward revision to April to make a possible case for the hawks. The drop in jobless claims is a wildcard right now, but otherwise it looks like the second quarter is getting off to no better than a moderate start.

Looking Ahead: Week of May 11 through May 15

Labor readings start out the week with the Fed's labor market conditions index on Monday followed Tuesday by JOLTS data on job openings. Wednesday will see retail sales and the latest indications whether strong consumer confidence is finally giving a lift to spending. Thursday could be the week's sleeper with the latest jobless claims release, data that have been hinting at a major upturn underway for the labor market. Manufacturing will take Friday's headlines with the Empire State report offering the first hints on May and the industrial production report offering definitive data on April.

Monday

The labor market conditions index, which gives a broad view of the labor market as measured by the Fed, has been very soft, especially relative to the steady decline underway in the unemployment rate and the respectable strength of employment growth.

Labor Market Conditions Index - Consensus Forecast for April: 3.1

Range: 2.6 to 3.5

Tuesday

The first-quarter slowdown clearly dented the NFIB small business optimism index where the economic outlook component showed special weakness. But forecasters see a solid uptick for April, to a consensus 96.0 vs 95.2 in March.

NFIB Small Business Optimism Index - Consensus Forecast for April: 96.0    

Range: 95.3 to 96.5

Data throughout the Job Openings and Labor Turnover Survey have been pointing higher, including jobs openings which broke through 5.0 million in the last report.

JOLTS job openings - Consensus Forecast for March: 5.158 million

Range: 5.150 million to 5.165 million

The Treasury budget for April, the biggest tax month on the calendar, is expected to show a surplus of $153 billion, which would be well up from $107 billion last April. Higher tax receipts, however, are being offset by higher spending on Medicare. The government's budget gap for March, 6 months into the fiscal year, was 6.3 percent higher than a year ago.

Treasury Budget - Consensus Forecast for March: +$153 billion

Range: +$138 billion to +$155 billion

Wednesday

Retail sales have been flat this year and there isn't much bounce expected for April, seen up only 0.2 percent. Vehicles are expected to hold down sales with the ex-auto reading seen at a much healthier plus 0.5 percent. But this gain in part reflects strength for gasoline stations where prices popped higher in the month. Excluding both autos and gasoline, sales are expected to rise a respectable 0.4 percent.

Retail Sales - Consensus Forecast for April: +0.2%

Range: -0.2% to +0.8%

Retail Sales, Ex Autos - Consensus Forecast for April: 0.5%

Range: 0.1% to +0.7%

Retail Sales, Ex Autos, Ex Gasoline - Consensus Forecast for April: 0.4%

Range: 0.3% to +0.7%

The Fed expects to see an uptick in inflation and import prices for April are expected to offer some of the very first evidence. Boosted by higher energy prices, import prices are expected to rise 0.4 percent which would be the strongest gain since March last year. Export prices, seen at plus 0.1 percent for a second month, broke into the plus column in March for the first time since July last year.

Import Price Index - Consensus Forecast for April: +0.4%

Range: -0.3% to +1.0% 

Export Price Index - Consensus Forecast for April: +0.1%

Range: -0.2% to +0.3%

Business inventories have been looking increasingly heavy relative to business sales with unwanted inventories centered in the wholesale sector. But forecasters see a let up in March, with inventory growth, at a consensus plus 0.2 percent, under sales growth which is seen at plus 0.7 percent. An easing in inventory overhang would be a solid plus for the economic outlook.

Business Inventories - Consensus Forecast for March: +0.2%

Range: +0.1% to +0.5% 

Business Sales - Consensus Forecast for March: +0.7%

Range: +0.4% to +1.0% 

Thursday

Initial jobless claims are the standout right now on the economic calendar. The two prior weeks for initial claims came in at the low 260,000 level, a 15-year low which if extended over the next several weeks would become the lowest stretch since the early 1970s. Another 260,000 reading for initial claims, even a 270,000 or maybe 280,000 reading, would send the hawks at the Federal Reserve scrambling.

Jobless Claims Consensus Forecast for May 9 week: 276,000

Range: 265,000 to 280,000

Prices at the wholesale level been extremely low but a bounce-back in energy prices, still low but climbing, is expected begin to add some pressure. The PPI-FD is expected to rise 0.2 percent though when excluding food and energy, the gain is seen at only 0.1 percent.

PPI-FD - Consensus Forecast for March: +0.2%

Range: -0.1% to +0.4% 

PPI-FD Less Food and Energy - Consensus Forecast for March: +0.1%

Range: 0.0% to +0.2% 

PPI-FD Less Food, Energy, and Trade Services- Consensus Forecast for March: +0.2%

Range: +0.1% to +0.2% 

Friday

The Empire State manufacturing survey offers the first glimpse of the month's manufacturing activity and has, like the factory sector itself, been flat going all the way back to the third quarter. No better is expected for May with the consensus calling for a pathetic plus 5.00.

Empire State Mfg Survey - Consensus Forecast for May: 5.00

Range: 2.00 to 7.00

Industrial production has been in the negative column more times than not, in 3 of the last 4 reports in fact. The consensus for April, at zero, isn't much better. The key component for this series, manufacturing, hasn't shown any life at all since November.

Industrial Production - Consensus Forecast for April: 0.0%

Range: -0.3% to +0.4% 

Manufacturing Component - Consensus Forecast for April: +0.2%

Range: 0.0% to +0.4% 

Capacity Utilization - Consensus Forecast for April: 78.4%

Range: 78.1% to +78.7% 

Consumer sentiment has been signaling strength in consumer spending that, for the most part, has yet to appear. Most consumer sentiment readings are near 9-year highs. One detail to note is inflation expectations which fell suddenly in April despite that month's rise in gasoline prices. Further declines in expectations could renew deflation talk.

Consumer Sentiment - Consensus Forecast for final April: 95.8

Range: 93.5 to 98.0