Trend watch and what’s new this week
Weekly air passengers dipped to 17.0 million, which isn’t unusual during the week following Memorial Day holiday. That’s three straight weeks above 17 million and 13 consecutive weeks above 16 million, both of which are the longest streaks since the summer of ’19. The year-to-date passenger total is running 0.1% ahead of 2019.
Meanwhile, the holiday-shortened week rippled through most of the remaining activity-based data (slides 5 and 6). For instance, hotel occupancy fell 5 percentage points to 61.6% last week, as business travel drops around the holiday.
Services indices expansion cooled in May
On slide 7, the ISM Services Index fell to a reading of 50.3 in May, narrowly expanding for the fourth month in a row after briefly contracting in December. Meanwhile, the prices paid component dropped to 56.2, the lowest reading since the pandemic, and has declined in 10 of the past 12 months. Although “good” from an inflationary standpoint, the sharp decline in prices likely indicates some weakness in demand.
Meanwhile, the final May reading of S&P Global’s U.S. Services Index rose to 54.9, expanding for a fourth straight month after an ugly seven-month contraction streak from July ’22 to January ’23.
Consumers appear to be burning through stimulus/savings
Consumer savings skyrocketed in 2020 and 2021 thanks to three rounds of pandemic relief stimulus checks. However, the amount put into savings has steadily declined since August 2021, when the spike in inflation really began to gouge consumers. At $67 billion in April, that’s about 60% the pre-pandemic trend.
This is especially troublesome, in our opinion, given the additional headwind of restarting student loan repayments for roughly 45 million Americans (roughly 17% of the population) later this year as a result of the recent federal debt deal. The average student loan payment is estimated to be roughly $500 per month, which would likely be spent on something else.
The cooling trend in economic data has continued. Yet, as we have repeatedly noted, 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. There are crosscurrents within most reports. That was certainly the case with the May jobs report, which showed strong jobs growth, averaging more than 300,000 over the past six months, which is significantly above the pre-pandemic average of 177,000. But it was coupled with a rise in the unemployment rate to 3.7%, along with a downtick in average hourly earnings and hours worked.
The latest weekly jobless claims jumped 12% WoW to highest level since October 2021 and are up 29% from their September ’22. However, continuing claims – the number of people who continue to receive unemployment benefit – have been grinding lower; continuing claims haven’t increased for 13 weeks.
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, 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 mild recession remains our base case as dramatically higher interest rates and tighter credit conditions place additional stress on consumers and businesses going forward. This now includes restarting student loan payments later this year as a result of the recent federal debt deal. We also believe that the Fed will keep interest rates higher for longer.
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