5/2/25: Strong Economic Data and Cooling Inflation Stimulates Market Optimism

The market had a full slate of economic data to absorb this week, with labor market data top of mind.  Nonfarm payrolls rose by 177,000 in April, above the consensus estimate of 138,000, and the prior two months were revised down by 58,000.  The unemployment rate remained unchanged at 4.2%, the underemployment rate fell slightly to 7.8%, and the labor force participation rate gained a tenth to 62.6%. The Job Openings and Labor Turnover Survey (JOLTS) reported a decline in job openings to 7.192 million in March after a downward revision to 7.480 million in February.  While exhibiting signs of cooling, the labor market remains resilient.

Economic growth and inflation data also made headlines this week.  The advance estimate of first quarter GDP showed growth of -0.3%, the first negative quarter since 2022.   Net exports were the primary drag on growth, as imports surged in anticipation of higher tariffs. On a more positive note, the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index was unchanged month-over-month in March, after a 0.4% rise in February.  Compared to a year ago, the March PCE price index rose 2.3% after a 2.7% increase in February. Excluding food and energy, the Core PCE price index was also flat month-over-month in March and up 2.6% year-over-year, down from February’s 3.0% year-over-year increase.  While the slowdown in inflation is encouraging, the data does not capture the full impact of global tariffs imposed in early April.

Additional data pointed toward a potential slowdown in economic growth.  The Conference Board’s Consumer Confidence Index declined for the fifth straight month in April to 86.0, down from 93.9 in March, driven primarily by weakening future expectations for business and labor market conditions. The S&P Case-Shiller 20-City Home Price Index showed house price inflation eased slightly to 4.5% in February on an annual basis, down from 4.7% in January.  Limited inventory, elevated mortgage rates, and lack of affordability continue to weigh on the housing market.  The ISM Manufacturing Index fell to 48.7 in April from 49.0 in March, indicating a continuation of slow contraction in the sector.

Next week:  S&P Global US Services PMI, S&P Global US Composite PMI, ISM Services Index, Trade Balance, MBA Mortgage Applications, FOMC Rate Decision, Consumer Credit, Nonfarm Productivity, Unit Labor Costs, Jobless Claims, Wholesale Trade Sales, Wholesale Inventories, NY Fed 1-Year Inflation Expectations.

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