Trend watch and what’s new this week
The activity-based data continues to hold up better than expected (slides 5 and 6). Hotel occupancy rebounded to 66.2% in the latest week, which is seasonally strong, and is tracking better than the prior three years (2020 – 2022). Similarly, weekly air passenger counts climbed to 16.4 million, staying above 16.3 million for four consecutive weeks for the first time since August 2019. Moreover, rail traffic rose 0.5% for March after dropping in February.
Manufacturing contracted for fifth month
Two separate gauges showed continued weakness within manufacturing. The Institute for Supply Management (ISM) Manufacturing Index dropped to a reading of 46.3 in March, the fifth straight reading below 50, which signifies a decrease in manufacturing activity (slide 7). Yet, the prices paid component flipped to 49.2, meaning prices decreased compared to January. Similarly, the final March reading of S&P Global’s U.S. Manufacturing Index also contracted for the fifth consecutive month.
Services indices expanded again in March
On slide 8, the ISM Services Index had a reading of 51.2 in March, expanding for the third straight month after contracting to 49.2 in December. The prices paid component continued its sharp decline, down for the 10th time in 11 months (May ’22 through March).
Meanwhile, the final March reading of S&P Global’s U.S. Services Index rose to 52.6, expanding for a second month after an ugly seven-month contraction streak from July ’22 to January ’23.
Job openings dropping, but still elevated
On slide 9, the number of job openings in February fell to the lowest level since April ’21, which was the 7th decline in the past 12 months. Hiring also ebbed, slipping to 6.2 million. The so-called quit rate ticked up in February but is down from the cycle peak of 3% in 2022. All three indicators – openings, hiring, and the quit rate – remain above pre-pandemic levels.
Job cuts up in March; mostly tech, financials, and health care
On slide 10, the number of job cuts rose in March, but is down from the most-recent peak in January. Technology, financials, and health care account for 72% of the announced cuts out of 32 industries.
It’s important to note that job cut announcements aren’t a great leading indicator of either recession or of an increase in the unemployment rate. Aside from the pandemic recession, it lagged both as well as had big jumps in non-recession years (’02, ’03, ’11, and ’15).
Most of the economic data released this past week showed continued cooling. Two manufacturing surveys continued to contract in March, their fifth straight month, while two services surveys expanded. Their respective inflation components cooled.
Similarly, on the labor front: job openings, hiring, and the quit rate all cooled though February. The cooling trend for each, coupled with the inflation components within the manufacturing and services surveys, bolsters the argument for the Federal Reserve (Fed) to "pause“ their rate hikes.
Inflation has been moving in the right direction, but it remains uncomfortably high and well above the Fed’s 2% target, meaning the Fed will rightly remain focused on curbing inflation, aka price stability. As the past two years have illustrated, once the inflation toothpaste is out of the tube, it’s extremely difficult to regain control. Historically, it has taken years and required a recession to do so.
Yet, there are four key data points being released between now and the Fed meeting on May 3rd. One of those, the March jobs report, will be released tomorrow. Two more – the Consumer Price Index and the Producer Price Index – will be reported next week. The last is another inflation gauge, the price index for personal consumption expenditures, which comes out the last week of April.
The Fed will likely closely scrutinize credit conditions, including how much banks are borrowing from the Fed’s credit facilities such as the discount window. It does appear that much of the liquidity concerns have started to subside in the past few weeks. Additionally, we believe that the Fed will pay close attention to the banks’ first quarter earnings reports, which will kick off late next week.
Lastly, we maintain our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. More importantly, the Fed is hamstrung by inflation. Cutting rates to support the economy appears unlikely in the near term, especially with still-solid employment trends. While deeper rate cuts are plausible in the event of a sharper recession, we maintain our view that the coming economic slowdown will be relatively mild. Hence, we believe that the Fed rate tightening cycle is effectively over, though wouldn’t rule out that the Fed could do one more hike rate if inflation persists. Ultimately, this likely means that the Fed keeps rates higher for longer than markets currently expect.
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