May 31, 2024


       The U.S. economy began the second quarter on a softer note. Employment growth in April was below expectations, but a still-healthy 175K. It was the smallest increase in jobs since October 2023. The unemployment rate edged up to 3.9% from 3.8% the prior month. The Job Openings and Labor Turnover Survey (JOLTS) in March saw a decline in openings, hirings and quits, which may presage cooling in the labor market. Other data that pointed to moderating economic activity in April included retail sales, manufacturing, and services sector indices.


GDP and Employment

     Retail sales were flat in April, with the data for March being revised lower. In addition to slower wage growth, consumers are showing some signs of stress, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit. Household debt has reached a record level in the first quarter, with rising delinquency rates on auto loans and credit cards combined with a lower savings rate. Uncertainty about demand and higher-for-longer interest rates are starting to affect other parts of the economy. Industrial production was flat in April, and both the Institute for Supply Management (ISM) manufacturing and service sector indices slipped into below -50 territory, which is consistent with contraction in overall economic activity.

Institute for Supply Mgt activity

     Not all the news was bad. The Fed got the first positive news on inflation following four months of upside surprises. The headline and core Consumer Price Index (CPI) decelerated on both a monthly and annual basis. Meanwhile, the headline and core Personal Consumption Expenditures (PCE) deflators held steady on a year-over-year basis at 2.7% and 2.8%, respectively. Even as price growth may be moderating, everything feels like it costs more, because it does. This has a compounding effect on consumers who spend less on discretionary items while prioritizing non-discretionary items such as shelter, groceries and gasoline.


CPI Goods vs CPI Services

     Economic growth is showing tentative signs of slowing and the labor market is showing tentative signs of softening, but inflation remains stuck above the Fed’s target. As a result, Fed officials are uniformly signaling a desire to give restrictive monetary policy more time to work in order to cool inflation. At the same time, there has been some increasing debate about whether the neutral rate has moved up and how restrictive policy really is. Even though April’s inflation gauges showed moderation, policymakers want several more months of data in order to regain confidence that inflation is on a sustainable path towards the Fed’s 2% goal. The Fed will hold rates at the current level until more compelling data shows inflation is on that path or until the risk of recession becomes dominant.