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Key Points for the Week

  • The U.S. economy produced 390,000 new jobs last month and the unemployment rate remained at 3.6%.
  • Average hourly earnings increased 0.3% last month, reflecting moderate wage pressures in the economy.
  • Stocks and bonds declined as markets focused more on the likelihood of additional rate hikes than the generally positive jobs report.

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Economic Update

How strong is the United States economy?

That’s the question investors were mulling after last week’s jobs report.

More jobs were created in May than economists expected, and the labor force participation rate rose, meaning some people are returning to work. Overall, the unemployment rate remained at 3.6 percent. However, unemployment rates varied by age, sex and race:

  • Adult men: 3.4 percent
  • Adult women: 3.4 percent
  • Asian: 2.4 percent
  • Black: 6.2 percent
  • Hispanic: 4.3 percent
  • White: 3.2 percent
  • Teenagers: 10.4 percent

From an inflation perspective, there was some good news in the employment report as earnings increased at a slower pace than in previous months. Apart from that bit of good news, “More jobs added and higher wages are signs of a strong economy…the concern is that inflation will remain close to its recent peak,” reported Joel Woelfel and Jacob Sonenshine of Barron’s.

Some pointed to layoffs at technology companies as a sign the economy might be weakening. However, as Randall Forsyth of Barron’s reported:

…16,800 pink slips were handed out last month by 66 technology companies, the most since May 2020 at the depth of the pandemic…Many of those cuts came from outfits with much promise, but no profits, that burned through copious amounts of cash bestowed by a once-ebullient equity market.

Randall Forsyth, Barron’s

Investors who hoped the Fed would ease up were disappointed by the strength of the employment report. The data reinforced expectations that the Federal Reserve will continue to tighten monetary policy, causing the economy to cool down and inflationary forces to recede, reported Barron’s.

Bond markets appear to agree that the Fed will have to work harder to tame inflation. The U.S. Treasury yield curve moved higher as rates on all maturities of U.S. Treasuries marched higher during the week. That also suggests recession concerns may be overblown, reported Ben Levisohn of Barron’s.

This Week in the Markets

The S&P 500 dropped last week as a strong employment report was a little “too good” and raised concerns of more interest rate hikes in the future. The U.S. economy added 390,000 jobs in May, based on the establishment survey. Job growth is slowing, but it remains well above the level required to provide jobs for new workers entering the labor force for the first time.

The corresponding household survey also contained good news. Unemployment dropped to 3.6% and the percentage of people employed rose 0.1% to 60.1%. Average hourly earnings remain contained, rising 0.3% for the second consecutive month.

The JOLTS survey, which measures job openings, indicated available positions dipped slightly but stayed above 11 million. The large number of unfilled positions is another indication the labor market is “too good.” The Federal Reserve would view additional declines in the number of openings as a positive step that reduces the pressure to raise rates. The trend towards lower openings may have already started as some technology companies have announced plans to slow hiring or lay off staff.

Global stocks also declined last week. The MSCI ACWI and Bloomberg U.S. Aggregate Bond Index both lagged. The Consumer Price Index will be the big data release of the week and provide further indication of how quickly consumer prices are increasing.

A Little Too Good

Last week the market reacted negatively to a very positive employment report. As mentioned above, the S&P 500 dipped last week, giving back a portion of the previous week’s rally. Markets were higher last week, through Thursday, but declined enough on Friday to turn the gains into a loss for the week. The market decline was precipitated by concerns the Fed would raise interest rates more than desired in response to the strong jobs data.

The employment situation in the U.S. definitely favors the employee more than in recent decades. There are more than 11 million job openings in the U.S., and for inflation to get under better control, this number needs to move lower. The lack of workers in a period of heightened demand has contributed to higher inflation.

The rise in the Labor Participation rate means that some people are returning to work while others are entering the labor force for the first time. The employment-population ratio increased from 60.0% to 60.1%. Future data will either confirm that this is a sustained trend and reflects a turning point, or that this is just a statistical bump in a downward trend.

Average hourly earnings increased 0.3%, which roughly matched the previous month. In the last 12 months, hourly earnings have increased 5.2%, a monthly rise of more than 0.4%. Higher wages can lead to inflation becoming more entrenched than it already is, so a 0.3% rise suggests wage inflation is close to the long-term target.

Amid many strong data points, there are signs the labor market is starting to slow to more manageable levels. The JOLTS survey for April indicated openings fell 455,000 to 11.4 million. After frequent records, the job opening trend is moving in the right direction. Retail trade openings experienced the biggest declines, and retail employment also fell in the May report. Large retailers mentioned in their earnings reports that they were overstaffed, so a decrease in that one sector isn’t surprising.

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Another positive trend is more companies are announcing a reduction in job openings and even some layoffs. Given how low unemployment is, having some companies lay off workers likely helps reduce inflationary pressures even as it is difficult for the workers and their families.

Our view is the data last week should not be viewed in isolation. Job growth is moderating. May had the lowest number of new jobs created in the last 13 months yet there remains a significant number of job openings. We believe that the economy is at a precarious point and that the policies of the past year have increased the risk that we may be entering into a period of stagflation. At the moment the Federal Reserve seems intent on raising interest rates.

The market raised its expectations for interest-rate hikes by elevating the probability of three more 0.5% increases in the next three meetings. The data continues to confirm that inflation remains problematic and that the interest rate increases this year have not started to bend the curve for inflation. The decline in unfilled positions and the increase in the number of people working are positive trends that indicate that the interest rate increases have not yet impacted the demand for labor. The Federal Reserve is in a tough position as it addresses inflation without creating a recession.

Sometimes the market gets too focused on the Fed keeping rates low or looking at weaknesses in the report. This jobs report indicates the economy remains healthy and key data points are moving in the right direction.

Consumer Sentiment

Consumers are feeling more pessimistic than they have in a decade. The University of Michigan Consumer Sentiment Survey shows that sentiment has been sliding lower all year. In May, consumer sentiment was down 10.4 percent from April and 29.6 percent year-over-year. Surveys of Consumers Director Joanne Hsu explained:

This recent drop [in sentiment] was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation.

Joanne Hsu, Surveys of Consumers Director

One reason analysts keep an eye on consumer sentiment is that it helps predict what will happen to consumer spending. In theory, when consumers are optimistic, spending should increase and when they are pessimistic, spending should decline.

That’s not what happened this year, though.

Despite high levels of pessimism, inflation-adjusted consumer spending has increased every month in 2022, supported by solid wage gains and abundant savings. Here’s the month-by-month rundown:

  • January +1.5 percent from the preceding month
  • February +0.1 percent from the preceding month
  • March +0.5 percent from the preceding month
  • April +0.7 percent from the preceding month

Consumer spending includes everything we buy: furniture, cars, clothing, food, shelter, fuel, healthcare, education, etc. It is the primary driver behind the American economy, comprising about 70 percent of economic growth (as measured by gross domestic product or GDP).

It’s possible that consumers are less pessimistic than the Consumer Sentiment survey suggests. Hsu wrote, “Less than one quarter of consumers expected to be worse off financially a year from now. Looking into the long term, a majority of consumers expected their financial situation to improve over the next five years; this share is essentially unchanged during 2022. A stable outlook for personal finances may currently support consumer spending.”

Another factor for the consumer is the amount of cash that has been accumulated during the pandemic. This cash reflects the possibility of sustained consumption as the cash is spent down to more historical levels.

Did you Know? This Week in History

June 9, 1973: Secretariat Wins Triple Crown

One June 9, 1973, Secretariat became the first horse since Citation in 1948 to win the Kentucky Derby, the Preakness and the Belmont Stakes in the same year, achieving what is known as the Triple Crown in horse racing.

After winning the Kentucky Derby and Preakness, almost 100,000 people came to Belmont Park near New York City to see if “Big Red” would become the first horse in 25 years to win the Triple Crown. Secretariat gave the finest performance of his career in the Belmont Stakes, completing the 1.5-mile race in a record 2 minutes and 24 seconds, knocking nearly three seconds off the track record set by Gallant Man in 1957. He also won by a record 31 lengths.

Ron Turcotte, who jockeyed Secretariat in all but three of his races, claimed that at Belmont he lost control of Secretariat and that the horse sprinted into history on his own accord. Secretariat would race six more times, winning four and finishing second twice. In November 1973, the “horse of the century” was retired and put to stud at Claiborne Farm in Paris, Kentucky. Among his notable offspring is the 1988 Preakness and Belmont winner, Risen Star. After falling ill and passing away in 1989, an autopsy showed that his heart was two and a half times larger than that of the average horse, which may have contributed to his extraordinary racing abilities. In 1999, ESPN ranked Secretariat No. 35 in its list of the Top 50 North American athletes of the 20th century, the only non-human on the list.

Weekly Focus

The only way of discovering the limits of the possible is to venture past them into the impossible.

Arthur C. Clarke, English Science-Fiction Writer

We are more often frightened than hurt, and we suffer more in imagination than in reality.

Seneca, Roman Stoic Philosopher