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Portfolio Update

Cautiously Optimistic

By Elliott H. Gue, on Mar. 20, 2017

Incoming US economic data continue to exceed consensus expectations, giving the Federal Reserve enough confidence to hike rates by 25 basis points on March 15 and maintain its guidance for two additional rate hikes in 2017.

The February Employment Report, released in early March, looks strong on paper, with total payroll gains of 235,000 outpacing the consensus estimate of 200,000. So far this quarter, average monthly payrolls are up 237,000, a significant jump from the 187,000 averaged last year.

That said, the unusually warm winter across much of the US likely distorted these numbers a bit, exaggerating the economy’s strength. For example, just 157,000 workers in the US were reported as not at work in February due to bad weather, compared to the historical average of 399,000.

Since US employment data is seasonally adjusted to account for issues such as seasonal hiring in the retail sector, auto-factory production schedules and winter weather, conditions outside the norm can distort the data.

In this case, for example, the 58,000 gain in construction payrolls–one of the industries that’s historically most impacted by winter weather–likely reflects seasonal adjustments rather than an acceleration in the industry.

However, some economic trends look undeniably positive. For example, acceleration in manufacturing and private goods-producing payrolls growth lends additional credence to survey data–such as the monthly Purchasing Managers Index. The combination of payrolls growth and survey data points to a meaningful manufacturing rebound following two tough years.

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