To throw cold water, April the 1st is so much more than a day of fools. Specific to H₂O, on April 1, 1853, Cincinnati became the first city to employ full-time professional firefighters. On the 1st of April in 1889, Josephine Cochran marketed the first dishwasher to the – no joke – relief of dish pan handlers. And chew on this, in 1891, April 1st marked the founding of the Wrigley Company. If science gets your juices flowing, then you must mark your calendar every 4/1 when, in 1948, cosmologists Ralph Alpher, Hans Bethe and George Gamow proposed the Big Bang theory. Anyone with an iPhone in their possession is thankful every April 1st, the date in 1976 that Steve Jobs and Steve Wozniak founded Apple Computer. And if your email address ends in @gmail.com, rewind to April 1, 2004, when Google launched Gmail. You can also celebrate Happy National One Cent Day, commemorating the first U.S. issued one-cent coin, designed by Benjamin Franklin and produced by a private mint on April 1, 1787.
We kid you not that the first week of the month tends to be the most important on the U.S. economic calendar. Minding your business is not an option when the Institute for Supply Management (ISM) surveys and the Employment report are all on tap. All kidding aside, data surprises in either direction have symmetrical effects on investors’ perceptions. We don’t think we need be braced for that this morning despite knowing that tariff terror has materially pulled forward import activity, one that should drive itself right off a cliff once the impulse diminishes. Downside disappointments, however, are unlikely to fade in the current environment. Last Friday’s real consumer spending data, which dragged down first-quarter U.S. GDP forecasts are a case in point.
That brings us to the National Association of Credit Management’s (NACM) credit manager report, released one day early, i.e., March 31. The biggest surprise was the -10.4-point month-over-month sink in service sector sales — from 65.6 in February to March’s 55.2 (yellow line). This NACM top-line proxy for the bulk of the U.S. economy flipped from an above-normal +0.6 to a below-normal -0.6 z-score. The sequential swing was so large, its closest comparison was that of September 2008’s -10.1-point compression, only exceeded by November 2008’s -14.9-point plunge. Per NACM, “the huge decline in dollar sales for the sector is worrisome. Although still in expansion, the decline indicates that respondent firms are seeing a large decrease in business activity.” Thursday’s ISM service data is at risk of a cooling from February’s 54.3 mark and disappointing the consensus expectations for a 54.2 print (red line). Such is the NACM outlier that we wouldn’t be surprised to see this series come in appreciably closer to the 50-dividing line between expansion and contraction.
As for today’s ISM manufacturing survey’s prospects, consider NACM’s Amy Crews Cutts perspective on what her data revealed: “…The way in which the administration levies tariffs, they often go into effect immediately with no exception for ‘goods on water,’ meaning that if a shipment is already on its way to me, I might have to pay the tariff even though the order was fulfilled before the policy was effective. Many importers could face losses by simply having a shipment arrive on the wrong day.” Margin squeeze, anyone?
First, a detour…NACM manufacturing sales accelerated for the second time in three months in March, to 54.5 (orange line). This provides an underpinning for the ISM headline index that printed at 50.3 in February, the one economists anticipate will ease to 49.5 in March (blue line). Not depicted, Bloomberg Economics’ aggregate regional ISM metric models a better-than-expected 50.4.
As for the data that is in hand, the Dallas Fed manufacturing survey is projecting a margin squeeze over the next six months. Reflecting tariff risks, Future Prices Paid jumped sharply to 60.2 in February and remained at a still elevated 55.8 in March (green line). The pass-through looks to be more challenging — Future Prices Received posted a sizable -14.4-point easing, from 42.0 last month to 27.6, a pullback that placed it in the 6th percentile (fuchsia line).
When firms are faced with squeezed margins, they fall back on costs that they can control. Labor tops that list making Future Wages and Benefits the poster child. In March, this index fell to 27.2 from 39.5 previously (purple line). The -12.3-point plummet was the 7th largest on record since the survey’s 2004 inception. The mirror image of cooling wages in manufacturers’ view is an income shock on the part of workers.
Drilling directly to that prospect, the Dallas Fed asked a special question of its constituents: “Do you expect changes in government spending to affect your business this year?” Thirty-six percent of them anticipated a negative impact, while just 10% expected a positive impact. This dichotomy leads us to today’s horizontal bar chart. It teases out the ways declining government spending will impact business. As Danielle posted to Dr. Gates: “Seventy-seven pickin’ percent expect a hit to top line in a $2.7 trillion economy?!” No fooling, revenue risks translate to risks for a loosening in the Texas labor market. It’s a clear and present danger reflected in recession risk rising from 33.7% to 50% among 11th District executives queried about their primary concern in their firm’s six-month outlook. We wish it was, but that’s no April Fools.