Week In Review
April nonfarm payrolls grew by 263,000 jobs. The unemployment rate fell from 3.8% to 3.6%, due to a sharp decrease in the labor force. The labor force participation rate fell from 63% to 62.8%. Average hourly earnings gained 0.2% in April, and are up 3.2% year-over-year.
While recent employment reports have been volatile, showing large swings in hiring from month to month in 2019, job growth has been steady. Year-over-year earnings, however, peaked in February at 3.4% as the labor market does not appear to be tight enough to drive wages higher. The Fed is likely to point to this report as further proof that their current neutral stance is appropriate.
The FOMC concluded their meeting as expected with a decision to keep the target Fed Funds rate at 2.25-2.5%. The FOMC did lower the IOER rate 5 bps in response to the effective Fed Funds rate creeping higher in the target range. The FOMC statement noted continued steady though slower growth and a strong labor market while also noting that inflation has remained below the 2% target. In his press conference Powell stressed that the FOMC views the current policy stance as appropriate and does not see an imminent need to ease in response to below-target inflation.
Powell’s first quarter shift really was to a neutral stance while the Fed waits for further clarity on growth and inflation. Many capital markets participants were expecting a continued dovish shift, but the Fed seems most likely to stay on hold until developments push it to move policy in one direction or the other.
The ISM manufacturing index fell from 55.3 to 52.8 in April, a two and one half year low.
The ISM report provides further proof that the manufacturing sector is slowing. Anemic worldwide growth coupled with trade wars are proving to be difficult headwinds that do not appear to be abating anytime soon.
The Illinois Senate passed legislation that would change the Illinois Constitution and eliminate the state’s flat income tax. Democratic Governor J.B. Pritzker has proposed a graduated-rate state income tax which would place a higher tax rate on higher earners. If the legislation passes the Illinois House, voters could decide on the measure in 2020. It is estimated that the tax increase on the wealthy would generate $3 billion of revenue for Illinois. This week’s proposal passed on straight party-lines with Republicans expressing concern that raising taxes will not solve the state’s fiscal problems.
The proposed increase in tax revenue of $3 billion would cover the current $3 billion budget deficit but barely puts a dent into the $134 billion underfunded pensions. Tax hikes are not popular with voters, and many believe that the tax change could be rejected by voters in 2020. In addition to tax reform, Illinois must look at other means to close the budget gap for the next fiscal year and make meaningful pension reform a priority.
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