Trend watch and what’s new this week
The continued strength of air travel defies high prices, sour sentiment generally, and weak trends elsewhere. Weekly air passengers surged to 16.5 million, the highest weekly sum since 2019 and stretching the number of weeks above 16 million to nine, 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.
As we mentioned last week, 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) mostly improved in recent weeks as well. Container traffic in April surged 11.1% at the Port of Savannah, which is the third largest in the U.S., snapping a 5-month decline streak. The staffing index has also firmed. Yet, hotel occupancy and rail traffic dipped modestly in the most recent week.
Consumer inflation cooling but not enough
On slide 7, the Consumer Price Index (CPI) rose 0.4% in April. The year-over-year pace cooled to 4.9%, which was the ninth consecutive decline. On slide 8, core CPI, which excludes food & energy, rose 0.4% month over month, while the year-over-year pace ebbed to 5.5%.
On slide 9, we provide some possible inflation scenarios. While there are a wide range of potential outcomes, we expect CPI to trend toward 3% to 4% by this time next year. That would be considerably lower than the peak last June, but still above pre-pandemic levels. Of course, a recession would accelerate the cooling of prices.
Wholesale prices up in April, but have clearly peaked
On slide 10, wholesale prices, as measured by the Producer Price Index (PPI), rose 0.2% in April. The year-over-year pace cooled to 2.3%, dramatically lower than 11.7% in March ’22. Core PPI, which excludes food & energy, also rose 0.2% month over month, while the annual change continued to slide, up 3.2% from a year ago.
Private rental data shows prices plateaued
On slide 11, we show rents from private rental sources for new leases. Rents spiked during 2021, which continued into 2022, growing 0.9% per month on average through September. Since then, rents have cooled considerably and appear to have plateaued. Rental prices, which are seasonally stronger in the spring months, rose 0.6% month-over-month in April. While that’s the fastest pace in eight months, it’s less than half of last April’s rate and is below the pre-pandemic 5-year average of 0.7% for April. This has positive implications for inflation to continue cooling since there’s a lag between private rental data and CPI.
Bank credit tightened further in 1Q23, but demand plunged
On slide 12, we highlight the Federal Reserve’s (Fed) Senior Loan Officer Survey, which indicates that banks are tightening lending standards
for commercial and industrial loans to large firms. Banks tend to tighten lending standards when there are concerns about the broader economy, expecting that more borrowers will have difficulty repaying loans and credit. While the widely-held belief is that lending standards tightened after the banking stress that occurred in the first quarter ’23, banks began dramatically ratcheting up lending standards when the Federal Reserve started hiking rates in March ‘22.
On slide 13, we show that banks have increased loan interest rates by more than simply prevailing rates, which is known as spread over funding costs, during both the fourth quarter ’22 and first quarter ‘23. More importantly, demand for commercial & industrial loans collapsed in the first quarter, weaker than during the pandemic recession and approaching the weakest demand since the Great Financial Crisis.
Debt ceiling, recession woes weigh on consumer confidence
On slide 14, the University of Michigan Monthly Consumer Sentiment Survey slumped to a reading of 57.7 in May, giving back the jump to 63.5 in April. However, one-year inflation expectations ticked downward to 4.5% as gasoline prices moderate. While longer-term expectations appear well-anchored, the 5–10-year inflation expectations skipped up to 3.2% in May, the highest since 2011.
Inflation remains a headwind for the economy, which has hamstrung the Fed’s ability to change monetary policy. While the April data shows that it has clearly peaked, elevated inflation remains public enemy number one and will continue to dictate the Fed’s future actions.
Yet, while we continue to hear others opine that “the Fed is definitely done hiking rates,” the Fed’s next move is far from obvious. We too believe last week’s rate hike likely was the end of the Fed’s hiking cycle; however, we can’t completely rule out a June hike if inflation doesn’t continue cooling.
This is especially true given the continued strength in the labor market. Although monthly job growth has stepped down compared to very strong results in 2021 and 2022, the U.S. has averaged 277,800 new job openings for the past six months (slide 15). That’s over 100,000 per month more than the pre-pandemic 3-year average of 177,000. Furthermore, the unemployment rate dipped to 3.4% in April and matched the cycle low. Indeed, these are backward-looking indicators. Still, the forward-looking indicators, such as weekly jobless claims, are weakening but not weak.
Therefore, we reiterate our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. Furthermore, we believe the market’s expectations for rate cuts this summer are misplaced. Rate cuts are plausible in the coming year, particularly in the event of a sharper recession, but not that soon.
Lastly, we maintain our view that the coming economic slowdown will be relatively mild compared to the Great Financial Crisis and Pandemic recessions. Accordingly, we anticipate a continued gradual weakening of the economy rather than a sudden downshift.
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