It was relatively quiet on the economic front this week. The FOMC's blackout period is under way, so there was no communication from Federal Reserve officials ahead of next week's meeting and rate decision. Next week will also bring an onslaught of impactful economic data, including the Consumer Price Index (CPI), retail sales, consumer sentiment and industrial production. While the calendar was light, the data released throughout the week showed that, while downshifting, economic growth still looks to be on a positive trajectory.
The service sector is one area that, while remaining afloat, is starting to tread water. The ISM services index declined for the fourth consecutive month in May. Despite the drop, the top-line index is still in expansion territory, although only barely. May's reading of 50.3 was the lowest since the index temporarily dipped below 50 in late 2022. Generally speaking, the service sector has been resilient to persistent inflation and higher interest rates thanks in large part to pent-up demand from the pandemic. However, the recent trend decline in the ISM services index suggests that the sector is running out of steam. The underlying details showed the extent activity is slowing. Aside from the inventory subcomponents, every major subindex moved lower in May. Notably, the backlog of orders fell almost nine points to the lowest reading since the financial crisis in 2009. The decline in the employment index was not quite as large, but the subindex fell to a contraction reading of 49.2 during May, which suggests hiring in the service sector is starting to falter.
The slip in the ISM services employment index arrived on the heels of last week's blowout nonfarm payrolls report, which revealed the U.S. economy added 339,000 net new jobs in May. The surprisingly strong gain is further evidence that, while moderating, the labor market appears to be in solid shape at present. That noted, a potential crack appeared this week. Initial jobless claims unexpectedly jumped to 261K during the week ending June 3. Claims are still relatively low, but rose to the highest level since October 2021. Considering the challenges that come along with seasonally adjusting high frequency data, any single week of data should be taken with a grain of salt. Still, the uptick in claims indicates that more firms may be reducing headcounts, which is another sign the labor market is easing up a bit. So far, the labor market has been surprisingly resilient to higher interest rates. On the other hand, the residential sector continues to serve as a reminder of how increased financing costs are weighing on the economy. After spiking to just over 7% last year, mortgage rates descended slightly and moved closer to 6% to start 2023. The modest dip in mortgage rates was enough to end the slide in housing activity seen over the course of last year, and home buying as well as new construction looks like it has been perking up slightly over the past few months. However, expectations for more restrictive monetary policy alongside stubborn inflation pressures have driven mortgage rates higher in recent weeks, with the average 30-year fixed mortgage rate reaching 6.8% in the week ending June 1. Higher borrowing costs now look to be hindering the nascent recovery in home buying. Mortgage applications for purchase dropped 1.4% during the week ending June 2, the fourth consecutive weekly decline. Mortgage applications are published weekly and thus also tend to be volatile, but the back-track in purchase applications means a full-fledged housing market recovery is still off in the distance.
Elsewhere, net exports are setting up to be a substantial drag on real GDP growth in the second quarter. The U.S. trade deficit widened by $14.0 billion to $74.6 billion in April, more than reversing the narrowing that occurred in March. Exports declined sharply during April, while imports rose only modestly. These data are consistent with our expectations for net exports to shave 1.4 percentage points off of top-line growth in Q2 GDP. Despite the drag from trade, the totality of the data this published this week lends credence to our estimates for a more moderate but still solid pace of real GDP growth in the second quarter of the year.
This Week's State Of The Economy - What Is Ahead? - 23 April 2021
Wells Fargo Economics & Financial Report / Apr 26, 2021
This week\'s lighter economic calendar allowed forecasters more time to assess the implications from the prior week\'s blowout retail sales report.
This Week's State Of The Economy - What Is Ahead? - 01 December 2023
Wells Fargo Economics & Financial Report / Dec 05, 2023
U.S. data released this week indicates the economic expansion remains alive even as inflation continues to slow. The year-ago rates of headline and core PCE inflation were the lowest since March 2021 and April 2021, respectively.
How Long Can US Businesses Remain Shut Down?
Wells Fargo Economics & Financial Report / Apr 29, 2020
The sudden stop in economic activity caused by the COVID-19 pandemic means that many businesses will need to rely on their cash reserves to survive the next few months.
This Week's State Of The Economy - What Is Ahead? - 03 March 2023
Wells Fargo Economics & Financial Report / Mar 07, 2023
Looking at Q4 GDP, Australia\'s economy grew by less than expected, GDP was flat for the quarter in both Canada and Switzerland, and Sweden\'s economy contracted in the final quarter of last year.
This Week's State Of The Economy - What Is Ahead? - 11 December 2020
Wells Fargo Economics & Financial Report / Dec 14, 2020
Emergency authorization of the Pfizer-BioNTech COVID vaccine appears imminent, but the virus is running rampant across the United States today, pointing to a grim winter.
This Week's State Of The Economy - What Is Ahead? - 27 November 2019
Wells Fargo Economics & Financial Report / Nov 28, 2019
A series of U.K. general election polls released this week continue to show Boris Johnson’s Conservative Party with a significant lead over the opposition Labor Party.
This Week's State Of The Economy - What Is Ahead? - 20 October 2023
Wells Fargo Economics & Financial Report / Oct 27, 2023
Treasury yields surged this week due to strong economic activity, impacting expectations for longer-term rates. New home sales led to a rise in single-family permits, but spiking mortgage rates are testing builder affordability strategies.
This Week's State Of The Economy - What Is Ahead? - 08 November 2019
Wells Fargo Economics & Financial Report / Nov 09, 2019
Optimism soared this week on hopes of a forthcoming trade deal, as equity markets hit all-time highs and the yield curve steepened.
This Week's State Of The Economy - What Is Ahead? - 19 June 2020
Wells Fargo Economics & Financial Report / Jun 22, 2020
Retail sales kicked off the week with a bang, rising 17.7% month-over-month in May. The increase was larger than every single one of the 74 forecast submissions.
This Week's State Of The Economy - What Is Ahead? - 26 April 2024
Wells Fargo Economics & Financial Report / Apr 29, 2024
We got our first look at Q1 GDP, which downshifted to a 1.6% annualized pace and was accompanied by a hot core PCE deflator reading.
