U.S. job opening and hires (in millions)
Hiring components in other indicators are also showing softening, including the streak of contractions of the Institute for Supply Management (ISM) Manufacturing Index as well as the Federal Reserve district’s regional conditions surveys.
Manufacturing contracted for seventh straight month.
Two separate manufacturing gauges showed weaker results. The ISM Manufacturing Index fell to a reading of 46.9 in May, the seventh straight reading below 50, which signifies a decrease in manufacturing activity. The prices paid component swung negative to 44.2 in May, meaning prices fell compared to the previous month and the lowest reading since December 2022. Additionally, the final May reading of S&P Global’s U.S. Manufacturing Index fell to 48.4, contracting for the sixth time in seven months.
Existing home sales down 16 of the past 17 months.
Existing single-family home sales dropped 3.5% to an annualized rate of 3.85 million in April, which is 20.5% below the December 2019 level. Yet, with continued limited supply, home prices rose for the third consecutive month, up 3.6% to $393,300 in April. That’s 42% above the December 2019 level. There’s a wide variation based on location, with prices softening in markets that had the largest post pandemic increases, especially in the West.
Meanwhile, new housing activity is showing signs of stabilization. Total new building permits fell for a second month, though single-family permits increased for a third straight month after not increasing for 12 months prior. Housing starts rose in April, but the March figures were revised substantially lower. Both were dramatically impacted by the sharp increase in mortgage rates, which rose more than 3 percentage points during 2022. New home buyer traffic ticked higher the past few months, up from extremely depressed levels.
Consumers resilient but feeling pressure
Consumer spending has begun to flicker. However, it is markedly split by income level, whereby stronger higher end spending is masking weaker outlays by the masses. Retail sales fell for three of the past five months but is hovering near all-time highs (in dollar terms). Similarly, travel-related spending remains solid, including advanced paid bookings for this summer, especially international.
Credit quality has deteriorated further, though the largest deterioration has been chiefly with subprime income borrowers, and revolving credit balances continue to climb. The shift in spending from goods back towards services has continued. Supply is still an issue in parts of the economy, particularly housing and autos, which has helped stabilize activity in both.
Auto loan defaults and delinquencies signal increasing consumer stress
Consumer prices (CPI) have cooled generally, to a 4.9% year-over-year pace in May from the peak of 9.1% in June 2022—that’s still roughly double the 20-year average. However, wage growth has risen for 15 consecutive months, which has buoyed consumers, who are (so far) handling the economic conditions without a significant pullback in spending.
Despite the uptick in unemployment in May, more workers are holding jobs and collecting paychecks at a historically high wage rate. That’s good news for auto retailers. While buyers may need to buy used instead of new vehicles or make mileage and age tradeoffs given current price levels and increased financing costs, the need for reliable work transportation is keeping fundamental vehicle demand strong. Combined with the demand backlog for “hot” new vehicles and the dearth of off-lease vehicles entering the used market, dealers are in an enviable position, even in a softening economy.
Rates will likely remain elevated as the Fed stays higher for longer.
As for monetary policy, elevated inflation remains public enemy number one and will dictate the Fed’s future actions. The Fed rate-setting committee has pushed the target rate up 5% in the past 15 months from essentially zero and hasn’t deviated from its goal to keep conditions tight and slay inflation.
Mixed signals from the labor markets and ongoing indicators of price levels will all factor into the “hike/pause” calculations that the Fed will be called on to make in upcoming meetings. We maintain our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. While a sharp recession would precipitate rate cuts, given our view that the coming economic slowdown may be relatively mild, we’re not expecting to see lower rates anytime soon.
A mild recession—compared to the Great Financial Crisis and the Pandemic recession—remains our base case as dramatically higher interest rates and tighter credit conditions place additional stress on consumers and businesses going forward. We anticipate a continued gradual weakening of the economy rather than a sudden downshift. Further, we also believe that the Fed will keep interest rates higher for longer.