Weekly Economic Commentary

Welcome to economic decision making: Which way is north?

Chief Economist Eugenio J. Alemán discusses current economic conditions.

We received mixed economic signals this week with the ISM Manufacturing PMI remaining in contraction in May after a brief, one-month, slightly expansionary reading in March, but weaker than May consensus expectations. The ISM Manufacturing PMI Employment Index improved in May, moving from contraction in April to slightly expanding in May. Factory orders, which are a bit lagging compared to the ISM Manufacturing PMI, were positive in April for the third consecutive month. This could indicate some improvement in manufacturing production down the pipeline. Meanwhile, the ISM Services PMI rebounded from a surprise contractionary reading in April and moved again into expansion in May with a stronger than expected reading for the month. However, the ISM Services PMI Employment Index remained in contraction during the month of May even though it improved slightly compared to the April reading.

Furthermore, the JOLTS report showed the lowest job openings number since February of 2021 while the number of job openings to the number of unemployed Americans declined to a level close to pre-pandemic levels.

Then, today, we saw the two employment surveys, the nonfarm payroll survey and the household survey numbers, showing either a 272,000 increase in jobs or a 408,000 decrease in jobs in May, respectively. How’s that for reassurance going into the Federal Open Market Committee (FOMC) meeting next week? This is probably one of the reasons why economists are accused of being “two handed economists,” that is, “on the one hand” employment is doing just fine but, “on the other hand,” employment is really doing bad!

Pushing the first Federal Reserve rate cut to September while waiting for the June FOMC

With this latest information in hand, we are moving our first federal funds rate cut to September of this year compared to our current July call even though we are going to get more information from Federal Reserve (Fed) officials after the release of the Summary of Economic Projections (SEP) and the new ‘dot plot’ on June 12. Typically, the Fed puts more importance on the nonfarm payrolls survey number than the household survey so even though the rate of unemployment increased to 4.0% the strength in nonfarm payrolls will have more weight.

We want to caution that there have been an increased number of voices arguing that the Fed may be behind the curve and should start reducing interest rates earlier than what markets are expecting today. However, we believe that Fed officials are well aware that lowering interest rates too early could hurt confidence as well as inflation expectations and would probably refrain from cutting in July, which was our call until today. Having said this, the probability of a rate cut in July is not zero.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

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