Last week's employment report -- much weaker than expected -- has heightened concerns that the U.S. economy is beginning to sputter, a concern exacerbated by a steady decline in the ISM index which measures activity in manufacturing. The ISM is still in positive territory and we are still creating jobs, but one gets the sense we may have reached a tipping point.
There are valid reasons for gloom. The dollar has been on a tear for almost a year to the point it is depressing exports. During the recovery, manufacturing has been the mainstay of our economy and manufacturing is more dependent than other sectors on exports. It takes a while for currency fluctuations to work their way through the economy because exports and imports are generally based on long-term agreements, but now the impact is being felt.
There are other negatives. The winter was one of the most severe in memory and fell hardest on the Midwest and Northeast industrial belts. Consumers were housebound, housing construction came to a virtual standstill, and industrial production was curtailed. Those sorts of things are a drag on the economy. Also, the west coast port strike has had a dampening effect on the economy -- preventing goods from reaching retailers, impeding exports and fostering uncertainty about labor market stability.
The jobs report and all the other negatives suggest economic growth in the first quarter will come in at 1 percent or lower, and I would not be surprised to see first quarter earnings decline as much as 3 percent. But bad news can be good news in today's topsy-turvy world of central bank easing. The indicators of weakening economic growth should serve to stay the Federal Reserve's hand on interest rates until the end of the year. Weaker growth and the prospect that rates will not rise has caused the dollar to decline from its all-time high which is why oil, commodities and stock prices have risen.
Also, despite the weak employment report, new filings for unemployment compensation have hit an extremely low level of 268,000 which, despite the modest gain in jobs, suggests a healthy labor market. Over the next couple of weeks I expect to see more positive data on employment, housing and consumer spending as the effects of an exceptionally cold winter wear off and the high dollar comes off its highs.
So despite the likelihood of a weak GDP and first quarter earnings, I believe this bad news is just the thing the Fed needs to defer hiking interest rates which will help keep the dollar at a reasonable level and foster investment.