Trend watch and what’s new this week
After several strong weeks, most of the activity-based data (slides 5 and 6) ebbed this past week. Hotel occupancy, restaurant bookings, and air passenger counts all fell WoW. It’s possible that some of the decline is the timing of the Independence Day holiday; thus, some folks may have extended or shortened their trips, pushing up the prior week figures, etc.
On the other hand, temp staffing jumped WoW on top of sizable increase in the prior week. Rail traffic also increased WoW.
Job growth surprised to the upside in June
U.S. payrolls in June increased by 372,000, handily beating the consensus of 265,000. Meanwhile, the unemployment rate held steady at 3.6% for a fourth straight month. We reiterate that these are not the hallmarks of a weak economy.
The June job gains were widespread by industry (slide 7). Yet, some of the internal components are signaling that the overheating conditions within the labor market continue to cool from the hard boil during 2021. For instance, average hourly earnings haven’t increased year-over-year in four months, and hours worked have steadily fallen since peaking in the spring of 2021 (slide 8). But these point to a gradual cooling rather than a dramatic slowdown.
Other data remains mixed
On slide 9, we show the Institute for Supply Management’s (ISM) Service Index, which fell in June but is roughly back to long-term average and continued to expand. Unlike the ISM Manufacturing Index, which saw the new orders component contract for the first time since the pandemic, the Services new orders continued to expand. That said, it has cooled since its all-time high last autumn.
Crude oil prices had a wild ride this past week. It fell more than 8% on Tuesday but clawed back more than half of the lost ground to end the week down 3.8%. On slide 10, we outline the reasons why we think U.S. crude oil prices will likely stay elevated in the near term.
On slide 11, we revisit the Global Supply Chain Pressures Index, which tracks the state of global supply chains using data from the transportation and manufacturing sectors. It shows that supply chains continue to recover but remain impacted.
Finally, on slide 12, we show that the return of blockbusters has moviegoers coming back to theaters, though the four-week average is roughly 17% below the average during same span in 2016 through 2019.
The labor market remains firmly in the “strong” camp, underscored by another strong jobs report in June. It is corroborated by a nearly 50-year low in initial jobless claims, and job openings and quit rates hovering near record levels. It is also confirmed by wage growth running well above the long-term averages.
There have been 2.74 million jobs created in 2022 alone, or an average of 457,000 per month. That’s more than 3.5 times the long-term monthly average of 125,000. These are not the hallmarks of a weak economy as the U.S. has never had a recession while maintaining such strong job growth.
Just like the 2021 economic rebound was unprecedented, we have entered a period that will feel dramatically different compared to the past cycles. Demand is coming down from the unsustainably strong period, but in many cases remains well-above pre-pandemic levels. Frankly, it feels unusual, which may explain why so many people believe we are already in a recession. Specifically, sharp declines in activity are typically associated with a recession, but businesses are still generally busier than the pre-pandemic period and continuing to hire, and consumers are buying and doing things. Thus, it may feel like a recession, but it technically isn’t because production is still humming along, and employment remains strong.
That said, most of the labor market data are lagging or coincident indicators, except for initial jobless claims, which are considered a leading indicator. In other words, the strong labor market dynamics today don’t tell us much about the future.
We think that the current labor market strength validates the Federal Reserve’s (Fed) laser focus on inflation in the near term and front-end loading rate hikes. We expect the Fed to follow through with another three-quarter point (0.75%) rate hike when it meets late this month.
But there is a difficult macro backdrop globally as uncertainty abounds. For example, disrupted supply chains are much improved today compared to 2021 but are still not fully recovered. Autos are the poster child for this, and production is still well-below pre-pandemic levels. There is also abnormal spending, marked by the outsized spending on goods and continued pent-up demand for services, the aforementioned stretched labor market, tightening financial conditions, and higher inflation. Meanwhile, global central banks, especially the Fed, have dramatically hiked artificially low interest rates and governments have reduced fiscal stimulus. The latter two are appropriate and shouldn’t continue. Still, on net, these are less supportive for economic growth.
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