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Key Points for the Week

  • The U.S. economy created 528,000 new jobs in July, more than doubling expectations for a 250,000 increase.
  • Unemployment reached the pre-pandemic low of 3.5% last month, while wages rose 0.5%.
  • Corporate earnings are expected to have grown approximately 6.7% in July. However, five of the sectors tracked showed earnings to have dropped.

Upcoming Changes to the College Financial Aid Formula

The Free Application for Federal Student Aid (FAFSA) is a form completed by current and prospective college students to determine their eligibility for student financial aid. In addition, states and colleges use FAFSA information to award their own grants, scholarships, and loans. But, since aid is limited, you have to meet the deadlines. For federal student aid for the 2022-2023 academic year, the FAFSA form must be submitted by June 30, 2023. Each state has its own deadline which is earlier, and each college may have its own deadline. To find these deadlines, click here.

If you currently have a child in college, or one that will be going to college in the near future, you can learn about the upcoming changes to the college financial aid formula here. If you have any questions about these changes, or how saving for college fits within the scope of your financial plan, please contact us.


Economic Update

The strength of the United States economy continues to surprise analysts and economists.

There are signs that U.S. economic activity is slowing. For example, economic growth declined during the last two quarters, the U.S. housing market appears to be cooling, and consumer sentiment is low, reported Colby Smith of Financial Times. However, last week’s data suggested some parts of the economy remain strong.

  • Unemployment fell to 3.5 percent, tying a five-decade low. The U.S. labor market was on fire in July, adding more than twice the number of jobs economists had expected, reported Jeffry Bartash of MarketWatch. The primary driver behind the gains was women returning to work, reported Catarina Saraiva and Maria Paula Mijares Torres of Bloomberg.

    The jobs numbers added fuel to the debate about whether the U.S. is in a recession.

The labor market in the first seven months of 2022 looks nothing like the labor market in most recessions. Friday’s jobs report was unambiguous. Far from losing steam, the labor market recovery has been firing on all cylinders.

Labor Economist Julia Pollak, Barron’s

  • Corporate profits grew in the second quarter. So far, 87 percent of the companies in the Standard & Poor’s 500 Index have reported on second quarter earnings. While the pace of growth is slower than the five-year average, three-out-of-four companies have reported higher than expected profits, reported John Butters of FactSet.

The blended earnings growth rate for the second quarter is 6.7% today. Six of the 11 sectors are reporting year-over-year earnings growth, led by the Energy, Industrials, and Materials sectors. On the other hand, five sectors are reporting a year-over-year decline in earnings, led by the Financials, Consumer Discretionary, and Communication Services sectors.

FactSet

  • The services sector continued to recover. Economic activity in the services sector grew for the 26th month in a row. It was up 1.4 percentage points in July, according to the latest Services ISM® Report On Business®.

Growth in the U.S. services sector unexpectedly strengthened to a three-month high in July on firmer business activity and orders, easing concerns of a broader economic slowdown.

Jordan Yadoo, Bloomberg

Last week, major U.S. stock indices delivered mixed performance, while U.S. Treasury yields rose, reported Jack Denton of Barron’s.

This Week in the Markets

The U.S. job market didn’t get the message it was supposed to slow down. The establishment survey estimated 528,000 new jobs were created last month. Every employment sector experienced growth, although services and government hiring accounted for 87% of new jobs.

A couple pre-pandemic milestones were reached. There are now more people employed in the U.S. than prior to the pandemic. Unemployment also dipped 0.1% and reached the pre-pandemic low of 3.5%. Getting all these people to take jobs didn’t come cheap. Private sector wages increased 0.5% in July, which is faster than the economy can sustain without pushing inflation higher.

S&P 500 earnings are expected to rise 6.7%. Energy companies have experienced rapid earnings growth as energy prices have climbed. Without energy growth, S&P 500 earnings would have dropped. The financial sector contributed most to earnings weakness, with approximately 25% of the S&P 500 still to report.

Markets held on to the previous week’s gains, while faster growth pressured bonds. The S&P 500 and global MSCI ACWI both added last week. The Bloomberg Aggregate Bond Index declined slightly. The Consumer Price Index leads the list of economic data released this week. Markets will likely focus on core inflation as energy price declines are expected to help rein in July’s headline inflation.

CTN 08-08-22 Image 1

Jobs Data Show Underlying Economic Strength

The U.S. employment report indicates the U.S. economy remains strong despite much speculation to the contrary. The economy added 528,000 new jobs last month, according to the establishment survey. Rather than job growth slowing, the survey indicated the economy added the second most new jobs this year. With the gains, the economy has added 3.3 million jobs in 2022 and 1.3 million in the last quarter. The problem may be the economy remains too strong, not too weak.

The underlying data showed the gains were broadly based. Every industry increased employment. Health care and social services, leisure and hospitality and professional and business services all added close to 90,000 jobs. Government hiring, in advance of a new school year, rose 57,000. With the gains, employment reached the level it was before the pandemic, and the unemployment rate fell back to 3.5%, its pre-pandemic low.

One area that hasn’t reached previous levels is labor force participation. The overall labor force participation rate fell to 62.1% in July. When only prime-age workers 25-54 are included, that number rises to 80.0%. Prime-age participation is close to the pre-pandemic record but not quite there. With supply challenges contributing to inflation, getting people back to work can help fill key roles and cap wage pressures.

Fighting inflation will mean getting wage inflation under control. Prior to the pandemic, aggregate payrolls rose about 5% per year. Increased average hourly earnings accounted for most of the gains, and a significant minority resulted from new jobs being added to the economy. In the last 18 months, yearly payroll increases have averaged around 10%, with gains roughly split evenly between higher earnings and new jobs.

The strong jobs data mean the chief worry has swung from recession back to inflation. As we noted last week, two negative quarters is a popular definition of a recession. The National Bureau of Economic Research uses six primary indicators to determine if the economy is in a recession. Only one of those is negative: real wholesale and retail sales. The nominal level of sales remains strong, but high inflation has pushed that indicator negative. A measure of real income excluding government payments to individuals is neutral. The other four indicators — total employment, employment level, real personal consumption, and industrial production — are all positive.

For inflation to start declining, wage gains will have to slow. Renewed concerns about inflation mean the Federal Reserve may do more than expected. Prior to the jobs data, markets reflected a 66% chance for a 0.50% rate hike in September and a 34% chance of a 0.75% hike. After the jobs data, odds swung to 70% expecting a 0.75% increase and only 30% predicting 0.50%. Strong economic data mean the market expects the Fed to do more to tame inflation.

The CPI report this week will be the next big indicator of current economic conditions. Core inflation excludes food and energy, and many believe that reflects the underlying trend in inflation better than headline data. Headline CPI, which has been higher than the core rate, should be lower than core inflation. In July, energy prices dropped, and that should help temper headline inflation. We will be watching core inflation to see if lower energy prices spilled over into core inflation categories and the rapid inflationary pressures start moving the other way.

Keep in mind it will be more than a month before the next Fed meeting. Another employment and CPI report will be released before then. It also means the Fed’s tightening strategy will have another month to work itself into the economy. A rate hike in September seems nearly certain. The level will depend on how future data affect the overall outlook. Expect volatility to remain elevated and more swings between recession and inflation concerns. There is a lot to think about in the current market, and as we’ve learned the market is almost always worried about something.

What Do You Do When It’s Really Hot Outside?

In the United Kingdom, they’re cooling off by eating ice cream. It has been hot in England this summer. Temperatures reached 104 degrees Fahrenheit for the first time ever. Asphalt buckled at airports and on roads, and the British government recommended that people stay home, reported Becky Sullivan of NPR.

Those who ventured out could visit a pop-up store offering a unique treat: ice cream flavored to taste like savory sauces, condiments, breakfast cereals, and other foods that might be found in a British pantry. The adventurous could pick up pints of ice cream flavored to taste like:

  • Tomato ketchup
  • Rolled oats
  • Coco pops
  • Soy sauce
  • Black tea
  • Mayonnaise
  • Salad cream
  • Golden syrup
  • Worcestershire sauce
  • Baked beans

What’s do you like to do when it’s hot outside?

The IRS Backlog Continues

As of May 31st, The IRS was still sitting on 21.3 million unprocessed tax returns. This continuous growing backlog has left many taxpayers waiting at least 10 months for their refunds from their returns. According to the Taxpayer Advocate Service, the primary reason for this backlog is that about 17 million taxpayers filed paper returns, and added that the agency is almost finished processing 2021 tax returns. The IRS announced in March their plan to hire 5,000 new employees, but as of May they had hired less than half of their goal.

Potential New Tax Provisions

New tax provisions have been included in recent legislation agreed upon by Senate Democrats. This legislation, known as the Inflation Reduction Act of 2022, also aims at lowering carbon emissions and reducing healthcare costs. Proposed tax changes in the bill include:

  • 15% corporate minimum tax on companies with profits greater than $1 billion in book income.
  • Enhanced tax enforcement efforts at the IRS (more audits of more taxpayers).
  • Residential energy credits are now extended to 2032.
  • Both the solar and wind credits are increased back to 30% and extended for 10 years.
  • The electric car credit of $7,500 is restored but the car must meet US component. thresholds (estimates are that only 30% of the current vehicle market would qualify).
  • A new credit of 30% for the purchase of a used electric vehicle. This provision is subject to several restrictions.
  • The credit for the alternative energy refueling station has been extended.

If passed, the deal is expected to raise about $739 billion in revenue, and is projected to reduce the budget deficit by roughly $300 billion in ten years. The bill has been approved in the Senate, and will now need to be passed in the House. The House plans to take up the bill at the end of this week, and then send it to President Biden for his signature.

Did you Know? This Week in History

August 9, 1974: Gerald Ford Becomes President After Richard Nixon Resigns

In accordance with his statement of resignation the previous evening, Richard M. Nixon officially ended his term as the 37th president of the United States at noon on August 9, 1974. Before departing with his family in a helicopter from the White House lawn, he smiled farewell and enigmatically raised his arms in a victory or peace salute. Richard Nixon was the first U.S. president to resign from office.

Minutes later, Vice President Gerald R. Ford was sworn in as the 38th president of the United States in the East Room of the White House. After taking the oath of office, President Ford spoke to the nation in a television address, declaring, “My fellow Americans, our long national nightmare is over.”

Ford, the first president who came to the office through appointment rather than election, had replaced Spiro Agnew as vice president only eight months before. In September 1974, Ford pardoned Nixon for any crimes he may have committed while in office, explaining that he wanted to end the national divisions created by the Watergate scandal.

Weekly Focus

Having a million opinions about everything comes cheap and easy, whereas actually doing something can cost you quite a lot.

Gary Indiana, Writer and Actor

The best time to plant a tree is 20 years ago; the second-best time is today.

Chinese Proverb