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A Rate Hike & So Much More
Week in Review: May 1-5
This week had it all: job openings (Tuesday), a rate hike and subsequent press conference (Wednesday), productivity data (Thursday), and of course, the jobs report (Friday), which you can read about at length in our post from earlier today.
Manufacturing Purchasing Managers’ Indices
We got the two major manufacturing PMIs for April. The ISM measure indicated that the manufacturing sector contracted for the sixth straight month, though at a slowing rate. The S&P measure showed the sector expanding for the first time in six months. So both measures agree that business conditions were better in April than in March (or at least getting worse at a slower rate).
Chalk this up to improved supply chains and still strong domestic demand. The downside is that prices seem to be on the upswing again. There’s a lot of that (rising prices, expanding expenses) in this week’s data, suggesting that maybe the Federal Reserve isn’t finished raising rates just yet . . .
Construction spending increased modestly in March.
Residential spending fell 0.2%, due entirely to a 0.8% decrease in construction of new single-family units (multifamily construction spending increased 0.4% for the month). That’s been the trend for a few months now. Over the past year, single-family construction spending is down 22.9% while multifamily is up 23%. Because single-family construction is a much bigger part of the segment, overall residential spending is down 9.8% year over year.
Nonresidential spending increased for the month, but only because of another large increase in manufacturing-related spending. Reshoring activity and the CHIPS Act have really, really bolstered that segment.
You can see some more on this over at Associated Builders and Contractors.
Fed Report on SVB
The Fed released a review of their supervision of Silicon Valley Bank this past Friday, and—spoiler alert—it wasn’t great. In short, SVB’s management was really bad. The people who were supposed to be supervising SVB missed a lot of the bank’s vulnerabilities, and the few they caught they just kind of ignored (or at least didn’t do enough to fix).
There’s some other stuff in there about social media and the effects of a “highly networked and concentrated depositor base” and how that can cause bank runs. If you’re really into this stuff, it’s worth checking out. Otherwise, not so much.
Gas prices fell for a second consecutive week. At $3.711/gallon, prices are about $0.57 lower than one year ago but $0.51 higher than at the cyclical low point in late December. The war in Ukraine and OPEC+ production cuts have not been enough to drive oil prices higher, an indication that global demand is sagging.
TSA Checkpoint Travel Numbers
Travel numbers for the week ending 5/2/2023 fell back below 2019 levels, but by less than 2%. This continues the trend of current year travel being (for the most part) modestly below pre-pandemic levels.
Job Opening and Labor Turnover Survey (JOLTS)
The number of job openings fell to 9.6 million in March, the lowest level since April 2021 but still about 2.6 million more than in February 2020. The layoff rate, which is the share of all of workers who were fired in a month, increased to 1.2%, the highest level since the end of 2020. The quit rate fell to 2.5%, matching the lowest level since early 2021. This doesn’t change the fact that workers are still quitting their jobs at a much higher rate than before the pandemic, but it appears that labor market dynamics have begun to shift in favor of employers. Don’t get me wrong – it is still a very strong labor market, but there are some indications of initial weakening.
New York Ban on Gas in New Construction
A few months ago gas stoves emerged as a new battlefield in the culture wars (we try to stay away from this kind of stuff, but this has some economic implications). The political right was like “you’ll have to pry the gas stoves from our seared, dead hands” and the left was like “you’re insane, nobody is trying to take your gas stove.”
Turns out the left was gaslighting on this one (ironic on a few levels), because New York State voted to ban natural gas connections in a few types of new construction. So certain policymakers aren’t trying to take away your gas stove, they are simply trying to render it useless (you could of course use those stoves for gun storage, but I’m thinking that’s not great either). In any case, the New York state law won’t apply to healthcare, restaurants, or a few other types of buildings, and tall buildings won’t have to do this until 2029 (assuming this doesn’t get overturned).
This, in our humble, non-partisan opinion is bad policy. Living in New York is already expensive. Banning gas connections in new homes will drive up already-elevated construction costs; construction input costs are up 39% since the start of the pandemic according to BLS. We already have a housing affordability problem in America, especially in places like New York City.
FOMC Interest Rate Decision
The FOMC hiked interest rates by another 25 basis point (a fancy way of saying 0.25 percentage points), which brings the target range of the federal funds rate to 5-5.25% (here’s our very basic primer if you need a refresher on what that means). That brings the FFR to its highest level since 2007.
We don’t know that this is the last rate hike of the cycle, but it’s definitely possible. The Fed signaled that they’re changing their approach (in a typically oblique and annoying way). They removed the phrase “additional policy firming may be appropriate” from their statement and added that they’ll be keeping an eye on the data to determine “the extent to which additional policy firming may be appropriate.”
Powell said explicitly, though, that they haven’t made a decision on pausing. The one thing he seemed steadfast about was that rates won’t be coming down in the near-term.
So where do we stand? Interest rates are high, and this has been an extraordinarily rapid tightening cycle. I think that they raise in June, for what that’s worth.
Conventional wisdom says it takes 12-18 months for interest rate hikes to fully affect the economy, and we’re right about 14 months out from the first hike. There have been many rate hikes since of course, and it’s really about lag effects at this point. Will these lag effects trigger recession? I think so and have been telling audiences that recession will begin on September 5th of this year, the day after Labor Day. I may be wrong, but at least I’m specific.
According to payroll processing firm ADP, private sector employment increased by 296,000 jobs in April. This is a big number, both based on historical hiring and expectations, but ADP seems to think the bigger takeaway is that pay growth slowed in April, especially for job changers. Importantly, “slowing” is different than “slow.” The median job changer’s pay is still up 13.2% year over year.
This release is broadly considered less important than the BLS jobs report (Friday), but the Pay Insights component of it has been interesting given the labor shortage/elevated quit rate dynamics of the past few years.
Mortgage applications declined during the week ending April 28, down 1.2% from the prior week.
Services Purchasing Managers’ Indices
Both S&P Global’s index and ISM’s index say the services sector expanded in April (and at a faster rate than in March). Both indices also show price pressures returning. So the services sector is strong, fueled by healthy demand, but that’s pushing prices higher. This suggests the Fed has more work to do.
Average mortgage rates were pretty flat this week. The average 30-year fell to 6.39%, while the average 15-year fixed increased to 5.76%.
Initial jobless claims jumped to 242,000 during the week ending April 29, up 13,000 from the previous week. Initial claims are trending higher, but not at a pace that signals acute labor market softening. Continued claims for unemployment insurance declined, down to 1.805 million. These are also still broadly trending higher but remain below pre-pandemic levels.
Labor productivity fell 2.7% during the first quarter, but that doesn’t mean much. Sure, productivity is really important, but it’s also really hard to measure (especially in the short term). Productivity is calculated as inflation-adjusted output divided by hours worked, both of which are hard to measure in normal times and harder to measure during a period with really high inflation, fast job growth, slower GDP growth, and changing work from home dynamics. Also, a lot of job growth recently has been in lower-wage segments like leisure and hospitality, and that generally has a dampening effect on productivity measures.
BLS Jobs Report
U.S. employers added 253,000 jobs in April, and the unemployment rate ticked back down to 3.4%, matching the lowest rate since 1969. Hiring is still faster than the Fed wants to see, and wages are rising too quickly to bring inflation back down to the 2% target.
You can read Zack’s full post on today’s jobs report here.
Links of the Week
The White Oak Shortage That Could Ruin the Bourbon Industry (Odd Lots podcast)
This website that lets you see the impact of an asteroid strike (more fun that it sounds)
Two guys on Twitter made a million dollar bet about hyperinflation, and they actually went through with it (Yahoo! Finance)
After this week, my outlook for the economy is: Unchanged
Clearly, we are not in recession. An object in motion tends to stay in motion. The labor market is still strong, and that supports ongoing household outlays. But some people, including those Millennials I love to hate (Zack), may not see the clouds on the horizon. Commercial real estate is in bad shape, and there is a wall of debt maturity facing us for the next four years. And those idiosyncratic bank failures/struggles don’t look so idiosyncratic; Silvergate, Silicon Valley, Signature, Credit Suisse, First Republic and now the trials and tribulations of PacWest and Western Alliance. Credit conditions are tightening, credit is expensive, and the Federal Reserve is far from winning the war on excess inflation.
Recession is coming. But there is good news: Lamar Jackson is still a Raven.
Next week is all about the two inflation data releases (CPI and PPI).