Economic Update July 2024

Overview

The June payroll rise of 206,000 topped market expectations of 190,000, but the upside surprise was more than offset by some big revisions to April and May jobs gains. U.S. job gains in May were lowered by 54,000 to 218,000 from an original 272,000. April was revised down by 57,000 to 108,000 from 165,000. This is a total downward revision of 111,000. The unemployment rate ticked slightly up to 4.1% from 4%. That's the highest since Nov 2021 post-pandemic and last seen Feb 2018 pre-pandemic. The labor participation rate increased to 62.6% from 62.5%. I alluded to this last month but all in all, the full-time employment has been relatively flat and is seeing similar levels to June 2022. Over the same period, we have seen about 2.5 million part-time positions being added.

Year-over-year annual inflation rate continued to trickle down to 3.3% vs 3.4% the previous month. Expectations are a further easing to perhaps 3.1% for June, which will be reported on July 11th.  The core inflation rate, which excludes volatile food and energy costs, also came in lower at 3.4% from 3.6%. Core inflation has seen a steady decline and expectations are for another slight improvement in the next report. Further improvements or lowering of shelter and service costs increases remain the main driver for further reduction in inflation. Some heads wind could challenge the path to 2%. More on that in the What's Next section.

The stock markets overall are higher month over month and some hit record territory again. The Dow Jones is up about 600 points month over month, closing at around 39,400. The S&P 500 is up about 400 points to 5,567, another new record high last week. The Nasdaq is up about 1200 points month over month to 18,350, also a new record high. The 10-year Treasury yield remains volatile, moving between 4.20% and 4.50% during the month, and is currently sitting just below 4.30%. The average rate for 30-year mortgages remains around 7%. Oil moved has moved up to $83/ barrel, which is the highest point since April. Gold has remained relatively steady m/m staying around $2,400/ ounce. The US dollar was relatively stable over the past month against the Euro, with the EUR/USD exchange rate at 1.08.

Jobs Report (June)

Non-farm employment increased by 206k in June, slightly above market expectations for a gain of 190k. However, job gains for the prior two months were revised materially lower by roughly 111k jobs. Private payrolls rose 136k, with most of the gains concentrated in health care & social assistance (+82.4k) and construction (+27k). In the household survey, the increase in civilian employment (+116k) lagged the increase in the labor force (+277k), pushing the unemployment rate higher by 0.1 percentage points to 4.1%. Meanwhile, the labor force participation rate ticked up by 0.1 percentage points(ppts) to 62.6%. Average hourly earnings (AHE) were up 0.3% month-on-month (m/m) – one-tenth below May's gain. On a twelve-month basis, AHE ticked down to 3.9% (from 4.1% in May), with the three-month annualized rate falling 0.4ppts to 3.6%. 

Payroll growth remained solid in June, but sizeable revisions to the prior two months reduced the gain in the second quarter to 607k, marking a four-year low. This cooling is consistent with other labor market metrics which have shown that the hiring rate, quit rate, and job opening to unemployed ratio are all at or below their pre-pandemic levels. Softening fundamentals have now pushed the unemployment rate to a new cycle high of 4.1%, which outside of the pandemic has not been seen since early 2018.

The resultant deceleration in average hourly earnings in June will be viewed favorably by the Federal Reserve as they look for signs of waning support to spending which would aid in cooling inflation. Chair Powell noted earlier this week that recent inflation reports have been encouraging, but that more confidence would be needed before the FOMC considers adjusting their monetary policy stance. June's employment report should bolster the Fed's confidence as we await the June CPI inflation report next week.

Existing Home Sales (May)

U.S. Existing Home Sales Decline Further in May as Prices Hit a Record High. Existing home sales fell by -0.7% month-on-month (m/m) to 4.11 million units (annualized) in May, coming in a bit better than the consensus forecast calling for a steeper decline of -1.4% m/m. Single-family home sales fell -0.8% to 3.71 million units, while sales in the smaller condo/co-op segment remained unchanged at 400k units. The sales decline was entirely in the South last month (-1.6% m/m), as sales remained unchanged in all other regions. Total housing inventory at the end of May was 1.28 million units, up 18.5% from a year ago. Measured at the current sales rate and seasonally adjusting, unsold inventory sat at 3.7 months' supply – up from 3.1 months in May 2023, but still tight on a historic basis. House prices were up 5.8% from a year ago, an acceleration from 5.4% (y/y) in the month prior. Median existing home prices now stand at $419,300 – the highest price ever recorded.

On a seasonally adjusted basis, median home prices rose 0.7% m/m, extending last month's 0.4. The housing market continues to be mired in a tangle as elevated mortgage rates and record home prices dissuade prospective buyers and keep potential sellers on the sideline. There isn't much of a reprieve in the new home market either, as higher prices in that segment test the affordability limit of already stretched buyers. With sales declining for the third month in a row, the prospect of a pick-up in the housing market seems tenuous. While mortgage rates pulled back for three consecutive weeks following bolstered expectations for a Fed rate cut, they are still high relative to pre-pandemic levels. Additionally, given that a rate cut is most likely to occur closer to the end of the year, activity in the housing market will likely remain subdued for much of 2024.

U.S. Personal Income & Spending (May)

Personal income grew 0.5% month-on-month (m/m) in May, up from April's 0.3% gain, and ahead of market expectations (0.4%). Accounting for inflation and taxes, real personal disposable was also up 0.5% m/m in May, relative to a flat reading in April (revised up from a -0.1% decline previously).  Personal consumption expenditures rose by 0.2% m/m. This is higher than the revised 0.1% recorded in April (0.2% previously) but below market expectations (0.3%). Spending in real terms rose 0.3% m/m – more than reversing the -0.1% decline recorded in April. The uptick in real spending reflected increases in both goods (0.6%) and services (0.1%) outlays.

On inflation, the Fed's preferred inflation metric, the core PCE price deflator, decelerated on both a monthly and annual basis. The measure fell from 0.3% to 0.1% month-over-month and from 2.8% to 2.6% annually. Both measures were in line with market expectations. The personal savings rate rose by 0.2 percentage points to 3.9% in May. June's GDP update showed that Q1 consumer spending continued to be revised lower. At 1.5%, the Q1 reading is now a full percentage point lower than the advanced estimate, largely due to a combination of weaker durable goods spending and a slower pace of services spending. That said, with data in for the first two months of Q2, growth in real consumer expenditures is expected to land around a similar place for the second quarter.

With May's CPI report following through on the good news from April's release, markets were primed for even more positive developments on the inflation front this morning. The core PCE deflator did not disappoint, with both the monthly and annual figures decelerating. These movements are sure to be welcomed by Fed members, but given the inflation upswing observed at the start of the year, "caution" will remain the watchword. As such, rate cuts aren’t likely to materialize until closer to the end of the year.

Manufacturing Index (June)

The most recent manufacturing index for June 2024 shows mixed results. The ISM Manufacturing PMI dipped slightly to 48.5 from 48.7 in May, indicating continued contraction in the sector. This decline was broader than in previous months, with 62% of manufacturing GDP now shrinking compared to 55% in May and 34% in April. Key factors contributing to this contraction include slowing demand, with new orders remaining below the growth threshold and new export orders falling back into contraction. Additionally, the employment and production indexes returned to contractionary territory after slight growth in May. Despite these challenges, price pressures have eased, with the price index falling to 52.1 from 57.0.

Overall, the manufacturing sector has been in contraction for nearly all months since October 2022, affected by tighter monetary conditions and a shift in consumer spending from goods to services. This month's report reinforces the cooling impact of high interest rates on demand and price growth. U.S. manufacturing activity continued in contraction at the close of the second quarter. Demand was weak again, output declined, and inputs stayed accommodative. Demand slowing was reflected by the (1) New Orders Index improving to marginal contraction, (2) New Export Orders Index returning to contraction, (3) Backlog of Orders Index dropping into stronger contraction territory, and (4) Customers’ Inventories Index moving into the low side of the ‘just right’ range, neutral for future production

Vehicle sales (June)

U.S. vehicle sales fell 4.0% month-on-month (m/m) to 15.3 million (annualized) units in June – well below consensus expectations for 15.8 million units. Unadjusted sales volumes were 1.32 million units or 3.4% below year-ago levels. The average daily selling rate (DSR) was 50,844, down from June 2023's 52,643 – both calculated over 26 days. Passenger vehicle sales fell 10.0% year-on-year (y/y) while sales of light-trucks were down 1.7% y/y. Light-trucks accounted for 81% of last month's sales, slightly below its year-ago 82% share. Light vehicle sales in June were weighed down by a cyberattack at CDK Global, a company that offers dealer management services for over 15,000 dealers in the U.S. and Canada.

This likely subtracted tens of thousands of additional sales from the June total, however, CDK Global has announced that the disruptions have been largely resolved, which will likely boost sales for July. Despite the cyberattack, a combination of stable supply levels, falling vehicle prices, and rising incentives pushed sales up 2.1% year-on-year in the first half of 2024. Volumes should continue to grow in the second half of the year with real incomes, even though financing rates remain high. While the Federal Reserve is expected to begin gradually reducing interest rates later in the year, this will likely provide more of a lift to sales in 2025 than in 2024.       

What's Next

I won't belabor the point, but this month's jobs report certainly helped with my assessment of last month's report that something was off and that headline numbers don't match reality. The main job growth of 2.5 million new jobs were part-time jobs, which have grown from 25.5 million to 28 million. Meanwhile, full-time employment has stayed steady at around 133 million. The number for full-time employment topped out at 135 million a year ago and has since dropped by 2 million. While we do have job growth, it has mainly come in the form of part-time jobs. Something I am sure the Fed is looking at as well vs the headline numbers published each month. Overall, the labor market remains relatively strong, but there are signs of cooling. The unemployment rate has edged up slightly again and is now at 4.1%, which is up from 3.4%, which was last seen in April 2023.

Inflation has seen a steady improvement but there are some headwinds ahead. Oil has moved up to $83 / barrel, increasing again transportation costs. It started the year around $70 / barrel and has since traded mainly between $75 -85/ barrel. The general trend and expectation is that Oil is moving up due to summer travel as well as the hurricane season that recently started. Also, shipping costs have recently increased again. The composite index increased 10% to $5,868 per 40ft container last week and has increased 298% when compared with the same week last year. The latest Drewry WCI composite index of $5,868 per 40ft container is 43% below the previous pandemic peak of $10,377 in September 2021, but it is 313% more than average 2019 (pre-pandemic) rates of $1,420. The main culprit of the most recent spike in shipping prices are the Red Sea Conflict – Military clashes have created significant volatility in the global trade routes, impacting logistic costs and supply chain reliability. Also, The Panama Canal area has gone through a severe drought, leading to a 40% reduction in its daily usage capacity. This has forced major shipping lines to reroute their container ships, increasing transportation costs and affecting supply chain efficiency.

So, what's the outlook for interest rate cuts from the Federal Reserve? The job market is cooling. Inflation continues to come down, although it's facing some of the aforementioned issues (Shelter and Service costs continue to be the main drivers, both have also seen improvements). The housing market remains challenged with high interest rates. While some areas have profited from the recent building boom, various housing projects are currently on hold due to the high construction costs. This will once again lead to a shortage and increased housing costs. In addition, economic growth has slowed, not just in the US but across the globe. High interest rates have made borrowing more expensive, impacting both consumers and businesses. This is reflected in reduced consumer spending on big-ticket items and capital investments made by companies.

The outlook for interest rate cuts from the Federal Reserve remains uncertain, although consensus at this point is 50 bps by year-end and that's the most likely scenario. The job market shows signs of cooling, with a shift toward part-time employment, while inflation continues to decline despite persistent challenges in shelter and service costs. The housing market struggles with high interest rates, leading to delays in construction projects and potential future shortages. Additionally, global economic growth has slowed, and high borrowing costs are curbing consumer spending and business investments. The signs for rate cuts are certainly here but inflation remains a fickle beast to tackle. If the aforementioned headwinds cause inflation to remain at current levels or even to increase, then we might not see any rate cuts this year. Of course, there is also still the case for a recession, although, that might impact the amount of rate cuts more next year than this year.

Disclaimer

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