Trend watch and what’s new this week
Weekly air passengers slipped to 16.8 million, which isn’t unusual during the week following Memorial Day. Still, it stretched the number of weeks above 16 million to 12, the longest span since the summer of ’19. The year-to-date passenger total is now running 0.1% ahead of 2019.
The remaining activity-based data generally improved last week (slides 5 and 6). For instance, rail carloads rose for the third week in a row, while the staffing index hit a 13-week high.
More jobs in May, but unemployment rate jumped
U.S. payrolls in May added 339,000, easily eclipsing the consensus of 195,000. That was coupled with upward revisions to the prior two months that added 93,000 jobs, pushing the six-month average up to 301,500.
Yet, there were clear signs of cooling. Most notably, the unemployment rate jumped by 0.3 in May to 3.7% (slide 7). Also, two of the 10 major industry groups lost workers during the month, including manufacturing. The monthly pace of average hourly earnings ticked down (slide 8), as did hours worked.
Supplementary employment data mixed, too
On slide 9, the number of job openings rose in April, snapping a three-month decline streak. It was also the 8th decline in the past 13 months. Hiring rose modestly. But the so-called quit rate – officially known as the percentage of employees voluntarily quitting – ebbed to 2.4%, down from the cycle peak of 3% in 2022. All three indicators – openings, hiring, and the quit rate – remain above pre-pandemic levels.
Manufacturing contracted for seventh straight month
Two separate gauges showed continued weakness within manufacturing. The Institute for Supply Management (ISM) Manufacturing Index fell to a reading of 46.9 in May (slide 10). That’s the seventh straight reading below 50, which signifies a decrease in manufacturing activity. The prices paid component swung negative to 44.2, meaning prices fell compared to April. It was the lowest reading since December ‘22.
The final May reading of S&P Global’s U.S. Manufacturing Index fell to a reading of 48.4, contracting for the sixth time in seven months.
Auto production steadily climbing in ’23
Overall rail carloads in May rose to 245,691, a seven-month high and an increase of 0.8% from April. That was largely helped by motor vehicle carloads, which rose 3.3% in May, their highest level since September ’20. Finished vehicles are mostly shipped via rail to points closer to their final destination, to ports for export, or from port in the case of imports. Vehicles are then hauled via trailer to dealerships.
The May jobs report likely frustrated both the bulls and the bears (though stocks rose today). The resilience of the headline jobs growth is hard to argue with, averaging more than 300,000 over the past six months, which is significantly above the pre-pandemic average of 177,000. So too the broad-based nature of the major industry composition indicates a solid economy.
Yet, the signs of cooling are also quite evident, including the rise in the unemployment rate of 0.3 to 3.7% in May. A rise of 0.5 is a recession flag in and of itself. It was coupled with a downtick in average hourly earnings and hours worked. Moreover, weekly jobless claims and continuing claims are grinding higher after bottoming in the third quarter of 2022.
Similarly, other sources are reporting labor market softness. For instance, fewer workers are voluntarily quitting as the so-called quit rate was 2.4%, practically down to the pre-pandemic level. The Challenger job cut announcements are averaging 83,500 per month year-to-date in 2023, significantly above the 2022 average of 30,300. Small business hiring plans are trending lower, according to the National Federation of Independent Businesses (NFIB), as are the number of respondents saying positions are hard to fill.
We believe the May jobs report somewhat clouds the Fed’s decisions to hike rates on June 14. Based strictly on headline job growth within this report, which included adding roughly 125,000 more jobs per month than the pre-pandemic average, another quarter-point hike (0.25%) appears to be warranted.
But the rate decision isn’t solely predicated on job growth. Other indicators remain sluggish at best, while others are outright weak. For instance, two separate manufacturing gauges showed continued weakness in May. The Institute for Supply Management (ISM) Manufacturing Index contracted for the seventh straight month, which signifies a decrease in manufacturing activity. Moreover, the S&P Global’s U.S. Manufacturing Index also dropped in May, contracting for the sixth time in seven months.
Two key inflation gauges, the Consumer Price Index and the Producer Price Index, will be released just ahead of the Fed meeting. We believe those two reports will factor prominently in the Fed’s “hike/pause” calculation. It’s quite possible that the Fed will weigh the evidence and won’t raise rates, choosing instead to wait for further confirmation that inflation has sufficiently cooled. On the other hand, financial conditions have eased slightly in recent weeks, so the Fed may want to send a clear signal that it prefers keeping conditions tight to definitively slay inflation for this cycle. Ultimately, we believe there's a high bar for a rate hike in June.
While most data is coming in below ’22 levels, it isn’t necessarily weak compared to pre-pandemic levels and trends. The economy isn’t collapsing nor is a recession necessarily inevitable. It is possible that the U.S. could skirt a recession. That said, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions. Accordingly, a recession remains our base case in ’23.
Lastly, we maintain our view that the coming economic slowdown will be relatively mild compared to the Great Financial Crisis and Pandemic recessions. We anticipate a continued gradual weakening of the economy rather than a sudden downshift.
A recession remains our base case as dramatically higher interest rates and 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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