Weaker than Expected Economic Data? Yes, but Still Exceptionally Strong

May 07, 2021 | Nick Scholte


While employment might need to be monitored for a possible post-pandemic structural shift in equilibrium, data in aggregate suggests the recovery remains well on track.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 1.9%; the U.S. Dow Jones index up 2.7%; and the U.S. S&P 500 up 1.2%.

One topic this week – economic data. Being the first week of a new month, the “Big 3” economic data points were released. I’ll dive into a bit more detail than I have in recent months.

Beginning with the ISM Manufacturing Index, expectations were for a reading of 65.0 vs. the prior month’s reading of 64.7. Instead, the actual reading came in substantially lower at 60.7.

Moving to the ISM Services, expectations were for a reading of 64.3 vs. the prior month’s reading of 63.7. Instead, the actual reading came in somewhat lower at 62.7.

Lastly, the U.S. Employment Report was expected to show 978,000 new jobs created in April vs. the revised March reading of 770,000. Instead, the actual reading came in far lower at “just” 266,000 new jobs created.

As seen above, all three major economic reports declined from the prior month’s reading and also missed expectations. In the cases of manufacturing and employment, the misses were substantial. Does this mean the recovery is in trouble? Not at all. Let me explain.

Beginning with manufacturing, while the miss vs. expectations was substantial, it’s important to note that any reading above 60 is both rare and indicative of very strong manufacturing activity. This is only the 7th time in the past decade that this metric has printed above 60. Combined with the fact that the prior month’s reading was the highest since the early 1980’s, I’d suggest some pullback might well have been expected.

Moving to Services, which missed by a lesser amount than Manufacturing, the reading was still the second strongest on record dating back to 1997. The strongest ever would have been last month’s reading. In other words, we have seen two consecutive months of better than ever readings on the ISM Services Index. Again, very little to see here in my opinion.

If any possible concern might be hinted at by this week’s economic data, it would be found in the employment report. In normal pre-pandemic times, a reading of 266,000 new jobs would have been a solid report indeed. But coming off a year when, at the worst, over 20 million jobs were lost in a single month (!), expectations were understandably higher. There are hints that the creation of far lesser jobs than expected owes to a lack of available workers and that perhaps some workers may not want to return to the workforce. I suspect there may be some truth to this, especially in light of the fact that the weekly jobless claims data showed less than 500,000 workers filed for unemployment benefits last week – the first time this metric has dipped below 500k since the start of the pandemic.

Overall data is very strong. While the employment market should be monitored to see if an altered equilibrium might have resulted from the pandemic and associated government support programs, at this juncture it doesn’t rise to the level of a critical concern. In fact, some are already suggesting it will further encourage the U.S. Federal Reserve to keep rates cemented at ultra-low levels.

Bottom-line: the recovery remains well on-track and equities will continue to be given the “benefit of the doubt” via an overweight position in client portfolios.

That’s it for this week. All the best,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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