Hiring beat forecasts with sector divergence, retail demand rebounded across categories, and factory output grew despite weak exports, rising costs and delays, with uncertainty likely to pressure upcoming services activity.
The U.S. economy continues to perform steadily, navigating multiple challenges, with fresh data released Wednesday providing further evidence of its resilience. The private sector added more jobs than anticipated in March, the February retail sales growth exceeded expectations and March manufacturing activity stayed fairly resilient.
Commenting on the reports, ING Chief US Economist James Knightley said, “Today’s retail sales and ISM manufacturing numbers, suggesting that the economy is in a relatively good position to withstand the economic challenges presented by the Middle East conflict.”
U.S. stocks were higher Wednesday morning, with the optimism attributed primarily to signs of the Iran war coming to an end, while bond prices showed volatility as traders digested the geopolitical developments and macro data.
Decent Job Gains: The private payrolls expanded by 62,000 in March versus the upwardly revised gains of 66,000 for the previous month, the results of ADP’s survey showed. The March number, however, was notably higher than the 41,000 private payroll gains economists were bracing for.
ADP Chief Economist Dr. Nela Richardson said, “Overall hiring is steady, but job growth continues to favor certain industries, including health care.” The economists also noted a boost in pay gains for job changers.
- In the industrial sector, construction and natural resources & mining added 30,000 and 11,000 jobs, respectively, while manufacturing lost 11,000 jobs.
- In the services sector, education & health services expanded payrolls by 58,000 and information services added 16,000 jobs. On the other hand, trade, transportation and utilities shed 58,000 jobs.
The focus now turns to Friday’s non-farm payrolls report as traders seek to confirm the positive takeaways from the ADP report.
Consumers Continue to Spend: A Census Bureau report showed that retail sales climbed 0.6% month-over-month in February, reversing the 0.1% drop witnessed in January. Economists had estimated a more modest 0.5% increase.
Core retail sales, excluding auto sales, rose 0.5% compared to flat growth in January, exceeding the consensus estimate of 0.3% growth.
The retail control group also increased 0.5% versus the 0.3% estimate. This measure excludes volatile categories such as auto dealers, gasoline stations, building materials and food services, and it is used to calculate the consumer spending component of the GDP report.
Auto sales grew 1.7%, reversing the 0.7% January drop. The other categories that performed better in February are:
- Health & personal care stores (2.3% Vs. -2.9%)
- Gasoline (0.9% Vs. -1.9%)
- Clothing & clothing accessories stores (2% Vs 0.6%)
- Sporting goods, hobby & book stores (1.3% Vs. 0.2%)
- Food services & drinking places (0.4% Vs -0.2%)
The categories that fared worse than in January are:
- Furniture & home furnishing stores (-1% Vs 0.4%)
- Electronics & appliance stores (0.5% Vs 0.8%)
- Building material & garden equipment & supplies dealers (0.4% Vs 0.6%)
- Food & beverage stores (-1% Vs 0.1%)
- General merchandise (0% Vs 0.3%)
- Non-store retailers (1.1% Vs 1.6%)
Manufacturing Holds Up: S&P Global’s final manufacturing purchasing managers’ index (PMI) came in at 52.3 for March, up from 51.6 in February. The index was revised slightly from the flash reading of 52.4 reported mid-month.
The better-than-expected data reflected gains in output and new orders, while export sales continued to struggle due to the tariff impact. Input and output prices accelerated in March. The time taken to deliver inputs to manufacturers deteriorated by the most since October 2022.
A separate nationwide survey showed that manufacturing activity expanded for a third straight month in March. The Institute for Supply Management’s (ISM) manufacturing PMI edged up 0.3 points to 52.7 versus the consensus estimate of 52.3.
The new orders expanded in March following four straight months of contraction, the production index rose 1.6 points to 55.1, and the order backlogs index fell 2.2 points and yet remained in expansion territory at 54.4.
On the flip side, the new export orders index fell 1.7 points to 49.9 and the supplier deliveries index indicated a fourth straight month of slowdown.
The prices index jumped 7.8 points to 78.3 and the employment index edged down 0.1 points to 48.7%.
Chair of the ISM’s Manufacturing Business Survey Committee Susan Spence said, “This month also marks the first report with panelists citing the Iran war as a new impact to their business, along with ongoing uncertainty with U.S. economic policy, despite the recent Supreme Court ruling striking down International Emergency Economic Powers Act (IEEPA) tariffs.”
Of the negative comments (64% of the total), 20% cited tariffs and 40% the war in the Middle East.
ING’s Knightely, however, sees ISM services reading to face more headwinds. “We suspect the high energy/economic uncertainty will be more of a drag for Monday's service sector ISM where we expect the headline index to drop to 53.0 from 56.1,” he said.