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? - 24 May 2024
Wells Fargo Economics & Financial Report / May 29, 2024
Homebuying retreated in April following a leg up in mortgage rates. Meanwhile, durable goods orders surprised to the upside, suggesting the manufacturing industry is on better footing.
This Week's State Of The Economy - What Is Ahead? - 06 November 2020
Wells Fargo Economics & Financial Report / Nov 10, 2020
As of this writing, the outcome of the U.S. presidential election is undecided. Joe Biden, however, appears likely to become president based off of his growing lead in several key states.
This Week's State Of The Economy - What Is Ahead? - 02 April 2021
Wells Fargo Economics & Financial Report / Apr 08, 2021
Increased vaccinations and an improving public health position led to an easing of restrictions and pickup in activity across the country in March.
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? - 10 November 2020
Wells Fargo Economics & Financial Report / Nov 17, 2020
The U.S. election has come and gone, but we have not made any meaningful changes to our economic outlook, which continues to look for further expansion in the U.S. economy in coming quarters.
This Week's State Of The Economy - What Is Ahead? - 07 April 2023
Wells Fargo Economics & Financial Report / Apr 10, 2023
Employers added jobs at the slowest pace since 2020 in March, job openings fell and an upward trend in initial jobless claims has emerged.
This Week's State Of The Economy - What Is Ahead? - 29 May 2020
Wells Fargo Economics & Financial Report / May 30, 2020
The beginning of this week saw some optimism that the economic downturn could be relatively short-lived, but data through the rest of the week provided grim reminder of the economic damage from COVID-19.
This Week's State Of The Economy - What Is Ahead? - 17 March 2023
Wells Fargo Economics & Financial Report / Mar 21, 2023
Retail sales declined 0.4% during February, while industrial production was flat (0.0%). Housing starts and permits jumped 9.8% and 13.8%, respectively.
This Week's State Of The Economy - What Is Ahead? - 12 June 2020
Wells Fargo Economics & Financial Report / Jun 13, 2020
Lock downs began to be lifted across most of the country by the end of May and the total amount of daily new coronavirus cases has been trending lower. But the flattening case count has not been consistent across the country.
This Week's State Of The Economy - What Is Ahead? - 02 October 2020
Wells Fargo Economics & Financial Report / Sep 29, 2020
In what was a jam-packed week of economic data, the jobs report, prospects of additional fiscal stimulus and the president’s positive COVID-19 test result commanded markets’ attention.
