Trend watch and what’s new this week
The streak of weekly air passengers above 16 million stretched to eight, which is the longest span since the summer of 2019. Passenger traffic continues to track very closely with 2019 (slide 6), with the year-to-date total passengers running 0.1% above four years ago. The test will come as May progresses, when weekly counts should be climbing above 17 million around Memorial Day on their way to consistently topping 18 million during June and July.
The rest of the activity-based data (slides 5 and 6) has mostly improved in recent weeks. Rail traffic increased for the past three weeks, up 5% for the month of April to a six-month high. It was boosted by motor vehicle carloads, which jumped 4.4% in April to a 26-month high. (Finished vehicles are shipped via rail from the manufacturing plant to a point nearest their domestic destination or to a port for export, or vice versa from a port for imported vehicles.)
Is affluent spending starting to crack?
Attending a Broadway show is purely discretionary spending and, given an average ticket price of $125, is typically for affluent patrons. Season-to-date Broadway attendance is up 92.1% compared to last year, according to The Broadway League, through Week #49 (4/30/2023). Attendance for the ‘22-'23 Broadway season, which has just three weeks left, should top 12.2 million.
However, Broadway attendance appears to have softened in the past six weeks. Prior to Week #43 (3/19/2023), the '22-'23 season attendance was tracking closely with '16-'17 and '17-'18 seasons, when attendance exceeded 13.3 million.
Fed hikes rates for 10th time
The Federal Reserve’s (Fed) rate-setting committee unanimously agreed to increase its target range for the federal funds rate by a quarter point (0.25%) to a range of 5.00% to 5.25% at its May meeting (slide 7). This was the tenth consecutive meeting with a rate hike, pushing the target rate up 5% in the past 15 months from essentially zero. The disconnect is that the Fed says it will keep rates higher, but markets expect rates will be cut to 4.1% by year-end 2023.
Manufacturing contracted for sixth straight month
Two separate manufacturing gauges showed mixed results. The Institute for Supply Management (ISM) Manufacturing Index ticked upward to a reading of 47.1 in April, the sixth straight reading below 50, which signifies a decrease in manufacturing activity (slide 8). Yet, the prices paid component surged to 53.2, which was the highest reading since July ‘22.
However, the final April reading of S&P Global’s U.S. Manufacturing Index expanded, halting a five-month contraction in activity. That said, a reading of 50.2 can hardly be categorized as strong.
Services indices expanded again in April
On slide 9, the ISM Services Index had a reading of 51.9 in April, expanding for the fourth month in a row after briefly contracting in December. Meanwhile, the prices paid component rose modestly, the first uptick in five months after declining in 10 of the prior 12 months.
Meanwhile, the final April reading of S&P Global’s U.S. Services Index rose to 53.6, expanding for a third straight month after an ugly seven-month contraction streak from July ’22 to January ’23.
Job openings dropping, but still elevated
On slide 10, the number of job openings dropped 3.9% in March to 9.6 million, the lowest level since April ’21. It was also the 8th decline in the past 12 months. Hiring also declined, slipping to 6.1 million. The so-called quit rate – officially known as the percentage of employees voluntarily quitting – ebbed to 2.5%, down from the cycle peak of 3% in 2022. All three indicators – openings, hiring, and the quit rate – remain above pre-pandemic levels.
The gale of crosscurrents in the economic data continued, though it generally appeared to contain more negatives than positives.
As far as monetary policy, the Fed largely stuck to the proverbial script, delivering the expected quarter-point rate hike. We maintain our view that, while it has clearly peaked, elevated inflation remains public enemy number one and will dictate the Fed’s future actions. Thus, while we believe this week’s rate hike likely marks the end of the Fed’s hiking cycle, we can’t completely rule out a June hike if inflation doesn’t continue cooling.
More importantly, we maintain our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. While rate cuts are plausible in the event of a sharper recession, we maintain our view that the coming economic slowdown will be relatively mild.
A recession remains our base case as dramatically higher interest rates and now tighter credit conditions place additional stress on consumers and businesses going forward. We also believe that the Fed will keep interest rates higher for longer.
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