In June, the business climate became more worrying. Almost all indicators of business confidence are down, sometimes sharply, but none point to a recession. Additionally, we’re looking at a battery of high-frequency indicators here in search of a breakout that could herald a reversal. Most show good resilience to shocks in the US economy, but two trend negatively: mortgages and weekly jobless claims. In both cases, the danger zone has not yet been reached, but we are getting closer to it.
Focus US Bruno Cavalier, Chief Economist, and Fabien Bossy, Economist
In retrospect, it is easy to find one or more reasons that triggered the recession. What is difficult is to capture the inflection point in real time. According to Alan Greenspan, who was the chairman of the Federal Reserve very aptly put it, “recessions are characterized by significant gaps in the data.” He said this in an interview with the Financial Times in May 2008. Bear Stearns jumped in March. Everything seemed favorable for a fire, but there was no spark. She will arrive in four months from Lehman Brothers. In some cases, the economic situation may be turbulent, but without interruption (1987, 1994, 1998, 2016). Today, the economy is developing on increasingly unstable ground, combining an energy shock and a monetary shock of the first magnitude. Are we seeing a gap?
Analysis of the economic cycle depends on the delay in the publication of statistical data. Since most of them are monthly, there is bound to be a delay to the real-time situation. In good weather this is not a problem, but in more uncertain situations you risk missing a turn. To address this issue, a large battery of high-frequency data is explored here. Their advantage is that they are quickly available, but the disadvantage is that they are unstable and require smoothing. It’s not a panacea, but it’s better than being in the fog (painting). First observation: Some variables are still not back to pre-pandemic levels, anything related to leisure (travel, hotel occupancy). Second observation: there is no gap in activity data. Most improve over the last few months, which is typical of recovery. The third observation: in June, the proportion of weakening data increases. Two signals are particularly negative: an increase in the number of unemployment claims and a sharp turn in mortgage applications.
In June, the Conference Board survey recorded a sharp deterioration in consumer sentiment for the second month in a row. The decline is much greater than in the University of Michigan survey (schedule), presumably because the UoM focuses more on cost climate and inflation, while the Conference Board focuses on employment conditions. Households describe the labor market as stable, close to all-time highs, but expect employment to deteriorate in the coming months (schedule).
If household confidence falls, what will happen to their spending? The final estimate of national accounts revised up consumption growth in the first quarter of 2022 from +3.1% to +1.8% year-on-year, indicating that spending has slowed since the start of the year. Monthly data for May indicate a drop in real (ie price-adjusted) consumption by 0.4% m/m, entirely due to spending on goods (-1.7%). Costs for services continued to grow (+0.3%). The three-month smoothed savings rate continues to fall to 5.3% of disposable income, below the pre-pandemic level. Excess savings accumulated over the past two years have declined moderately.
The consumer spending deflator (the Fed’s favorite index) continues to be less dynamic than the CPI. In May, it grew by 0.6% m/m, while the base index grew by only 0.3% m/m. Over the past three months, core PCE has been +4.2% year-on-year, up from nearly 6% at the start of the year. Finally, a signal of a decrease in inflation.
After the PMI (-4.6 points to 52.4), other regional indices of confidence in the manufacturing sector fell sharply in June (Richmond, Dallas). “Hard” data on orders and supplies of durable goods were, in any case, stable in May (excluding defense and aviation, +0.5% and +0.8% m/m).
The real estate sector is one of the most susceptible to monetary policy tightening. Although confidence and sales trends have started to decline, this is not the case for house prices, surely it is just a matter of time. In April, they remained at the level of more than +20% during the year. It is difficult to imagine a continuation of this trend, given the change in the number of applications for mortgage loans.
Monetary and fiscal policy
If the last FOMC meeting (June 15) were two weeks later, would the Fed have made the same decision? The question arises because one of the reasons given by Jerome Powell for raising key rates by 75 basis points, instead of the 50 basis points originally expected, was a 0.3 point jump to 3.3% in household inflation expectations five to 10 years from now in a preliminary study from the University of Michigan. just came out Fifteen days later, in the final survey, the increase is estimated at only +0.1 to 3.1%. Futures contracts now predict a Fed rate cut in the second half of 2023.
To be continued this week
Job report (July 8) will be thoroughly checked for any signs of deterioration in employment conditions. A harbinger of this is the slow growth of initial claims. The pace of job creation should continue to slow, but is still expected to be higher than the normal pre-pandemic trend. Also watch the evolution of wages, which recently seemed to show some signs of moderation. ISM services (the 6th) to judge the state of the business climate. Given the regional surveys already published, a decline seems likely.