Some cracks are appearing in the U.S. economy. Initial jobless claims with revisions were 228,000 last week. The ISM mfg & svc indices both fell notably in March. The Fed’s H.8 release showed bank loans declining at the end of March. The Dallas Fed reported loan demand was down with contacts noting “waning consumer confidence from recent financial instability as a concern.” The American Banker Association (ABA) indicated tighter credit conditions.
We continue to believe the Fed’s Senior Loan Officer Survey should take on added importance as we approach the May FOMC meeting: it’s a “survey of up to eighty large domestic banks and twenty-four U.S. branches and agencies of foreign banks. The Federal Reserve generally conducts the survey quarterly, timing it so that results are available for the January/February, April/May, August, and October/November meetings of the Federal Open Market Committee.”
We’re looking to gauge how much the banking shock in March further stalls activity. Credit concerns work similarly to Fed tightening. While the Fed aspires to another hike in their dot plot forecast for 2023, we are not sure they are going to be able to get it this cycle – uncertainty argues for a pause to assess the situation (if the data is any bit cloudy).
To be fair, the U.S. economy does not appear to be in recession now. U.S. payroll employment rose a solid +236,000 m/m in March. But there were downward revisions to payrolls in prior months. Temp-help employment (a leading indicator) declined -11,000 m/m. The workweek fell to 34.4 hours.
The U.S. unemployment rate fell to 3.5%, but that was with labor supply showing up (!) as the participation rate rose to 62.6%. Job openings also declined notably in Feb, ie, the gap is closing between labor supply & demand.
U.S. average hourly earnings were +0.3% m/m and moderated to 4.2% y/y in March.
Bottom line: we want to focus on leading indicators. All eyes are turning to inflation metrics, which should moderate as restrictions on credit develop. That makes March price data somewhat old news.
Additionally, falling profits should restrain business spending generally. We continue to believe a Fed pause makes sense since 1) there have already been swift & significant rate hikes; 2) policy is looking restrictive as things are breaking (eg, banks, home prices, labor?); and 3) if inflation slows, as we expect, real interest rates should continue to automatically climb.
As we’ve noted previously, eventually inflation should be tamed & anchored (if that’s at 2-3% vs. 2%, we could live with that). We continue to care less about the precise number that inflation settles at as long as it is 1) low enough where it doesn’t influence business decisions much, and 2) anchored so that returning to a neutral policy stance (say a 0.5% real rate) does not cause an immediate reacceleration. Monitoring long-run inflation expectations is key (market-based measures, NY Fed survey, U of Mich survey, etc). Thus far these data are behaving.
But we’re not close to “mission accomplished” yet & until then there remains downside risk to U.S. economic growth and corporate earnings. The Fed can pause in our opinion, but is unlikely to cut rates. We continue to watch layoff announcements & the removal of job openings. We only have micro-cracks thus far in the labor market.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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