Forecasts for a near-term recession were dealt a blow in May as the U.S. Unemployment Rate dipped to 3.4%, the Job Openings survey for April surged back over 10mm, and U.S. Q1 GDP was revised upward to reflect a 1.3% growth rate. Certainly, cracks are beginning to appear in the form of an increasingly stretched consumer struggling with sticky inflation, rising credit card delinquencies, and sub-50 PMI readings suggesting manufacturing contraction. Added to all that is a higher short-term interest rate, with the Federal Open Market Committee raising the Fed Funds rate by 25 basis points at it’s May meeting. The jury is out on further Fed rate hikes, with FOMC members offering conflicting signals as to whether the Fed might pause in June or continue raising rates to battle stubborn inflation.
With a better than expected 253k jobs added in April, the U.S. Unemployment Rate dipped to 3.4%, while the U6 rate (a measure of underemployment) fell to 6.6%. Average Hourly Earnings rose a higher than expected +0.5% MoM, translating to a +4.4% YoY increase. Notably, Q1 Unit Labor Costs surged by +6.3%, handily beating estimates for a +5.6% increase. As mentioned above, the JOLTS (US Job Openings and Labor Turnover Survey) reading for April saw a move back above 10mm, indicating a still strong demand for labor here in the U.S.
On the inflation front, goods inflation would appear to be falling while services inflation remains problematic. CPI rose +0.4% MoM in April (+4.9% YoY), while ex Food & Energy, prices are up by +5.5% over the past year. Producer prices edged up a more modest +0.2% MoM (+2.3% YoY), which suggests lower prices may be getting closer to the consumer. Housing, specifically the categories of Shelter and Owners-equivalent rent, remains sticky despite the rise in mortgage rates. This should keep upward pressure on headline numbers for the time being.
The Federal Open Market Committee convenes again on June 14th and markets are currently assigning a 30% chance for a 25 basis point rate hike. There appears to be a growing movement on the FOMC for a pause, however, robust economic data reports would suggest the Fed still has an inflation problem. Perhaps not until we begin to see cracks in the labor market will the Fed feel it can take its foot off the brake. With the debt-ceiling issue likely behind us for now, all eyes will remain on central bank monetary policy for clues as to the future direction of the U.S. economy.
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