Trend watch and what’s new this week
The activity-based data (slides 5 and 6) took a bit of a breather around the 4th of July holiday, which tracks with historical patterns. Still, nearly all measures are experiencing typical pre-pandemic seasonal increases.
As an aside, it’s fascinating how we can now see the impact of concerts and sporting events ripple through the economic data. For example, a two-day stop in Minneapolis for Taylor Swift’s Eras Tour pushed hotel occupancy in the Twin Cities up 9% year-over-year during the last week of June. Or Beyoncé’s Renaissance World Tour two-day stop in Stockholm in May elevated inflation for the entire country of Sweden. Nearly 100,000 “Bey Hive” fans buzzed about the nation’s capital, staying in hotels, eating in restaurants, and buying clothing. Unfortunately, we don’t have data to see if ABBA never did that.
Solid job growth again in June, unemployment rate dipped
U.S. payrolls in June added 209,000, below the consensus expectations of 230,000 – the first miss in roughly a year and a half. Three of the 10 major industry groups didn’t add workers during the month (slide 7). Meanwhile, the unemployment rate ticked down to 3.6% in June.
Still, adding 100,000 new jobs per month is more than the pre-pandemic 3-year average of 177,000 (slide 8). Again, weaker than ’22 doesn’t necessarily mean weak.
Also, the annual pace of average hourly earnings continued to cool but is running well-above pre-pandemic levels (slide 9).
Supplementary employment data mixed, but above prior levels
On slide 10, the number of job openings fell 4.8% in May to 9.8 million, the 9th decline in the past 14 months. Hiring rose 1.8% to 6.2 million. The so-called quit rate – officially known as the percentage of employees voluntarily quitting – ticked upward to 2.6%, down from the cycle peak of 3% in 2022. All three indicators – openings, hiring, and the quit rate – remain above pre-pandemic levels.
Services indices expanded again in June
On slide 11, the Institute for Supply Management (ISM) Services Index had a reading of 53.9 in June, expanding for the sixth month in a row after briefly contracting in December. Meanwhile, the prices paid component dropped to 54.1, the lowest reading since April ’20 and the 12th decline in 14 months.
Meanwhile, the final June reading of S&P Global’s U.S. Services Index rose to 54.4, expanding for the fifth consecutive month after an ugly seven-month contraction streak from July ’22 to January ’23.
June brought yet another solid jobs report. While it is cooler than the very strong pace of the past few years, it isn’t slow. The six-month average is 278,200 – literally 100,000 above the pre-pandemic 3-year average of 177,000. The unemployment rate is hovering near a 50-year low. Wages are still growing at nearly double the pre-pandemic 10-year average.
That strength is reinforced by a raft of other labor figures, such as weekly jobless claims and the so-called quit rate. We’re also hearing of fewer layoffs. The Challenger job cut announcements dropped to 40,709 in June, the lowest in eight months.
We acknowledge that these figures don’t seem to comport with the news headlines nor the constant drumbeat of recession worries. We, too, are concerned that many of the leading indicators are pointing downward and that some of the broader economic data has been lackluster.
While the economy isn’t collapsing, most of the incoming economic data isn’t strengthening either. In fact, the latest manufacturing data weakened considerably and has been contracting
It is possible that the U.S. could skirt a recession. It’s becoming increasingly plausible that we may only see one negative quarter of gross domestic product (GDP). That said, it would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions.
Hence, 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.
With respect to the Fed, the broader inflation situation hasn’t improved much. While it’s clearly cooler than the blistering pace of ’21 and ’22, it remains well above anyone’s comfort level. Based strictly on labor market conditions, we think that another hike is warranted. However, the rate-setting decision isn’t just about labor market conditions. For instance, two services sector reports for June (the ISM Services Index and S&P Global’s U.S. Services Index) both showed multi-month high readings. Accordingly, we believe the Fed will hike rates by a quarter point (0.25%) in three weeks.
Lastly, there are two key inflation gauges coming ahead of the Fed’s meeting on July 26th. June retail sales will also be released as will the housing data, which has improved despite higher mortgage rates. All of these data points (and more) will factor prominently in the “hike/pause” calculation. Another hike isn’t a slam dunk, but we believe that the Fed will raise rates in July.
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. But there’s a little more wiggle room that the U.S. could skirt a recession.
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