As with last quarter, the focus is on the labor market. The pattern of surprisingly strong nonfarm payroll releases followed by outsized downward revisions continues, such that it’s surprising that the large initial prints even produce a market reaction anymore. In addition, there’s an increasing disparity between the establishment and household surveys that paints two entirely different pictures of the labor market.
Labor Market
Nonfarm payrolls were originally reported to have increased by 272,000 in May, a number that was slashed to 218,000 with the June print. Payroll growth for June was reported as 206,000, slightly more than forecast. Job gains for the first five months of 2024 have averaged 222,000 a month, vs. 299,000 a month for the first five months of 2023, so gains are clearly slowing. And they still don’t represent true job growth, but rather recovery from the growth trajectory that would have taken place had the economy not been shut down in 2020, as the labor market remains more than 4 million jobs shy of equilibrium.
Unemployment unexpectedly edged up to 4.0% in May, then 4.1% in June – the highest level since November 2021. The jobless rate is up from 3.7% at the beginning of 2024, and 3.4% in April 2023. The labor force participation rate rose 0.1 percentage point in June. Job openings are back near pre-recession levels.
The household survey paints a different picture. In May, household employment, which is used to calculate the unemployment rate, declined by 408,000. It rose by 116,000 in June, well less than the establishment survey gain, and it showed a decline in full-time workers of 28,000 and an increase in part-time workers of 50,000. The May data showed a similar pattern with respect to full-time vs. part-time workers.
In addition, June’s gains in the establishment survey were driven by a pickup of 70,000 in government employment. Health care jobs grew by 49,000. Several other sectors saw declines, including retail.
Average hourly earnings are up 3.9% year-over-year. With headline inflation at 3.3%, that means that real wage growth is essentially flat. And wage growth has slowed markedly since the beginning of 2022.
Jobless claims have trended higher since the beginning of the year, with the four-week moving average of initial claims up nearly 20% since January. Continuing claims are at their highest level since November 2021.
The overall picture is one of a cooling job market, which brings hope that the Fed will cut rates this year, perhaps more than once. However, the inflation data will need to move more meaningfully in order to support that.
Inflation
The Consumer Price Index (CPI) ticked down to 3.3% in May. While that’s lower than the March and April readings, it’s above the January and February levels, and is down less than a percentage point from a year earlier. Core CPI is up 3.4% year-over-year, down a half-point from December and nearly two points from a year ago, but still higher than at any point from 1993 to early 2021 (and as one economist noted, core inflation only matters to people who don’t drive or eat).
The Fed’s preferred inflation gauge, the core PCE deflator, fell to 2.6% year-over-year in May, but that’s still higher than at any point from 2006 to early 2021, and down only 0.3% since the end of 2023. At that pace, it won’t reach the Fed’s target of 2.0% for ten months.
Consumption may be slowing, but government spending is not, so there is still inflationary pressure. Thus inflation remains the counter to a cooling labor market in providing support for Fed accommodation.
The Consumer
The first quarter GDP report showed that consumption slowed, and while personal consumption expenditures have slowed on a monthly basis, they’re up 5.1% year-over-year as of May, which is higher than in April and the second-highest level of this year. With regard to the consumer, the economy is stratified; discretionary spending remains strong among higher earners, while those less affluent are spending less on a discretionary basis (but they’re spending more on a non-discretionary basis, due to inflation).
Consumer sentiment also remains fairly healthy, in spite of concerns over inflation. The University of Michigan’s Consumer Sentiment Index dropped by eight points in May, but it’s still ten points higher than a year ago.
Credit card balances at large banks were up more than 12% year-over-year as of the end of 2023. That was down a bit from the beginning of the year, but still historically high. Balances at the end of 2023 were up more than 50% from the beginning of 2021. Perhaps not coincidentally, that’s when inflation began climbing.
Housing
The S&P/CoreLogic Case-Shiller 20-City Composite Home Price Index was up 7.2% year-over-year as of April, slightly less than in February or March, and a bit below the long-term average. For the second consecutive month, three markets posted monthly declines, but all 20 markets are positive year-over-year for the fifth consecutive month. The strongest market in the composite index is San Diego, up more than 10% year-over-year, in spite of a monthly gain in April of less than half a percentage point, while the weakest is Portland.
Thirty-year fixed mortgage rates are still hovering around 7%, keeping most homeowners from selling, whether to trade up or downsize. Existing home sales haven’t been positive on a year-over-year basis since June 2021, and the current sales level is similar to levels seen during the pandemic and the housing crisis of 2008-09. New home sales were down 16.5% year-over-year in May, the most in more than a year. The supply of new homes is at a 19-month high, 50% above the average level. Housing starts are down 20% year-over-year, the most in more than a year, and the lowest level since June 2020, and building permit issuance is down 8.7% year-over-year, also at the lowest level since June 2020.
Manufacturing
None of the manufacturing indicators are showing signs of particular strength, but neither are they sending signals indicating a recession is imminent. Capacity utilization is within the range that indicates normal conditions, and industrial production year-over-year is flat, but not negative. Vehicle sales are steady. LEI year-over-year is positive and trending slightly higher. And inventories-to-sales are at their tightest level since June 2022.
Output and Outlook
GDP growth was a mere 1.3% year-over-year in the first quarter of 2024, and the Atlanta Fed’s GDPNow forecast for Q2 growth is a meager 1.5%. That forecast is down from 3.0% in June and over 4.0% in May, so the outlook is weakening.
However, we do not foresee a recession in 2024. Given all the other indicators noted above, a downturn does not appear likely. The outlook for 2025 is most likely path-dependent, hinging on the Presidential election in November. Recent events have increased uncertainty surrounding the election, making it more difficult to handicap.
We also maintain our expectation that the Fed will not cut rates in 2024, though there is a slight chance that they will. Fed funds futures predict an implied probability of less than 10% of a cut at the July 31 FOMC meeting, but a 70% probability of a 25 bp cut in September. We remain skeptical; the September meeting is just seven weeks ahead of the election, and the Fed will want to avoid any suggestion that it is attempting to influence the outcome. The remaining meetings in 2024 are November 7, two days after the election, and in mid-December.
To assuage the fears of conspiracy theorists who believe the Fed may cut rates in an effort to influence the election, consider that the Fed has always avoided that appearance, regardless of who the Fed Chair is, and this Fed Chair is more politically agnostic than any in recent history. Also, a 25 bp cut in July or September would do little to benefit the incumbent; we see minimal immediate effect on mortgage rates or home sales resulting from such a modest cut in short-term rates.