Trend watch and what’s new this week
Summer travel activity remains solid, closely tracking 2019 (slides 5 and 6). The weekly air traveler count has exceeded 18 million five out the past seven weeks. That matches the 2019 summer total with three more weeks to go before Labor Day. Otherwise, most of the incoming economic data has softened of late, including shipping and freight data.
Solid job growth again in July, unemployment rate dipped
U.S. payrolls in July added 187,000 jobs, narrowly below the consensus expectations of 200,000. That’s about 60,000 above the pre-pandemic 3-year average. Three of the 10 major industry groups didn’t add workers for a second-straight month (slide 7). Also, the unemployment rate ticked down to 3.5% in July, which is just above the cycle low of 3.4%.
Still, the U.S. has created 222,500 new jobs on average for the past six months. That’s 60,000 per month more than the pre-pandemic 3-year average of 177,000 (slide 8). Similarly, the annual pace of average hourly earnings is down from peak levels but is running well-above pre-pandemic levels (slide 9).
Supplementary labor data mixed, but above prior levels
On slide 10, the number of job openings dipped 0.4% in June to 9.6 million, the 10th decline in the past 15 months. Hiring fell 5.2% to 5.9 million. The so-called quit rate – officially known as the percentage of employees voluntarily quitting – continued to trend down, dropping to 2.4% from 2.6%, and 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 9th straight month
Two separate gauges showed manufacturing continues to struggle. The Institute for Supply Management (ISM) Manufacturing Index improved to a reading of 46.4 in July, the nineth-straight reading below 50, which signifies a decrease in manufacturing activity (slide 11). The prices paid component increased to 42.6, meaning prices continued to decrease compared to June, but at a slower pace.
Similarly, the final July reading of S&P’s Global U.S. Manufacturing Index also showed a contraction in activity with a reading of 49.0. That’s the eighth contraction in nine months.
Services softer in July, but prices up
On slide 12, the Institute for Supply Management (ISM) Services Index had a reading of 52.7 in July, expanding for the seventh month in a row, but weaker than June’s 53.9. Meanwhile, the prices paid component rose to 56.8, which was a three-month high and snapped a two-month decline streak.
Similarly, the final July reading of S&P’s Global U.S. Services Index also ebbed in July, slipping to a reading of 52.3, weakening for a second- straight month.
Our take
It’s hard to categorize the July jobs report as anything but solid, which may frustrate those looking for considerably more weakness within labor markets. While it is cooler than the very strong pace of the past few years, it isn’t slow by any measure. The six-month average is still running 60,000 jobs above the pre-pandemic 3-year average (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 and their monthly pace is quickening, not cooling.
Indeed, it provides more data for those seeking a so-called soft landing of the U.S. economy. Yet, it also undercuts the soft landing thesis – that the economy is resilient enough to avoid a recession.
In our view, a soft landing looks like a negative quarter or two of gross domestic product (GDP), but without job losses. There has never been a recession without job losses, but there have been periods with job losses and no recession (including 2019, 1997, 1996, 1995, 1993, etc.). A soft landing is possible, but not our base case at this point.
While we don’t anticipate a sudden collapse in economic activity and don’t view the economy as weak currently, most of the incoming economic data isn’t strengthening. Regardless, it’s certainly not as strong as many of the soft landing bulls are projecting.
It would be unprecedented to avoid a recession with weakening leading indicators, higher interest rates, and tighter financial and credit conditions. Inflation isn’t quite behaving like it should, which is to say not cooling broadly enough, and is now being pressured once gain by crude oil prices. Additionally, real gross domestic income (GDI), which is an alternate measure of economic health, has been negative on a year-over-year basis for three-straight quarters, which has never occurred outside recessions in the last seven decades. In fact, the U.S. has never had more than one negative quarter of GDI without a recession. And that’s before student loan payments are restarting for 46 million people in the fourth quarter. In our opinion, that’s going to take a LOT of wind out of the economy.
Accordingly, we are beginning to view a soft landing scenario as self-defeating – the stronger the economy remains ultimately translates into higher interest rates for longer as the Federal Reserve (Fed) attempts to stabilize prices. While it’s clearly cooler than the blistering pace of ’21 and ’22, inflation remains well above anyone’s comfort level. At the very least, the Fed will need to maintain rates, though it’s still possible additional rate hikes will be needed to curb inflation given continued resilience of the overall economy. And we didn’t even get into the discussion of what parts of the economy will buckle under higher interest rates for an extended period. For example, commercial real estate appears particularly vulnerable.
Bottom Line
A shallow recession remains our base case as dramatically higher interest rates and tighter credit conditions ratchet up 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. Yet, a recession isn’t inevitable.
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