Economic Slowdown Accelerating - What Triggers Federal Intervention?
In the fast-paced world of finance, it's still a secret that the economy is cooling off – don't let the stock market get wind of it! Last week of May saw a surge in the major indexes, with gains ranging from 1.3% to 2.0%. Nasdaq led the pack, advancing an impressive 9.6%. This market behavior seems more driven by the tariff tango (on-off-on again) than actual economic conditions.
The renowned group, the Magnificent 7, all reported gains between 2% and 3%. It was a strong week for equity investors, and it was a decent month for all except Apple (AAPL). The average gain for the week was around +2.5%, and +13.5% for the month. Although they're still in negative territory for the year-to-date (-4.2%), the Magnificent 7 have had quite a ride.
Signaling a Slowdown Ahead
Soft data, based on surveys, point to the economy's chilling out – not quite a Recession, but it could turn into one if this softening translates into contracting numbers.
Recent surveys show that one out of every eight respondents might struggle to meet minimum debt payments within the next three months. In the mainstream media, two relevant articles cropped up in a recent edition of the Wall Street Journal (May 22):
- Walmart Cuts Jobs in Restructuring Move: Walmart execs announced eliminating 1,500 jobs, signaling a shift in hiring trends.
- Americans Scale Back Vacation Plans: This among other factors implies a slowdown in the leisure/hospitality sector.
The latest JOLTS (Job Openings and Labor Turnover Survey) reflects a significant decrease in new hires from private businesses, as well as less job hopping than observed previously. Unemployment Rate has ticked up to 4.2%, and according to the latest Federal Reserve meeting minutes, it could reach 4.5% by year's end. Our prediction is bleaker, as we anticipate the Unemployment Rate climbing towards 5% by then.
Cold hard data is on its way. Q1 GDP growth was sluggish (-0.2%), and we strongly suspect that Q2 will follow suit. Housing data paints a dismal picture too:
- Single family starts plummeted -14.0% in March, and again fell another -2.1% in April.
- Pending Home Sales saw a drop of -6.3% in April, prolonging a slowdown from earlier in the year.
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A key indicator of a potential Recession is the monthly data series for median home prices, which almost never tumbles except during a Recession. However, the Case-Shiller Home Price Index showed a negative sign (-0.3%) in March for the first time since January 2023, highlighting a potential cause for concern.
Auto and credit card delinquencies have risen to levels reminiscent of the '08 Recession. Finished apartment unit lease up times have extended to levels similar to the last Recession too. Orders for Durable Goods in April fell -6.3% from the previous month. Retail sales were flat to negative in three of the last four months, and manufacturing has been sluggish for the past 18 months.
A climate of uncertainty can make consumers less enthusiastic about spending, as it did in this situation. However, the financial markets seem more concerned with policy uncertainty surrounding tariffs, while ignoring the economic indicators pointing to a slowdown.
Are We Waiting for a Recession?
With the soft data turning into hard data, it's high time for the Fed to apply monetary policy to ease the situation. But the Fed might be lagging behind, waiting for the soft data to become hard data before taking action. For example, despite an underperforming three-month annualized CPI of 1.6% (below their 2% target), the Fed still seems focused on the year/year CPI inflation rate, which was +2.3% in April – just shy of their 2% target. Using current rents in the calculation would result in a three-month annualized CPI of barely +0.7%, revealing an overall weakening in inflation rates.
In conclusion, the equity market might be selling a rosy outlook while ignoring the warning signs of a slowing economy. The job market is softening, and Q1 GDP growth was already negative, hinting at the possibility of a Recession. Let's hope the Fed acts swiftly to avoid this scenario.
(Joshua Barone and Eugene Hoover contributed to this blog.)
The softening job market, indicated by an increase in unemployment rate and decreased new hires from private businesses (JOLTS), suggests a possible slowdown in business activities, aligned with consumer sentiment that may be scaling back vacation plans and retail sales. The housing sector, as measured by single family starts, pending home sales, and the Case-Shiller Home Price Index, also exhibits signs of potential recession, with declines in home starts and drops in pending home sales.
The current climate of policy uncertainty regarding tariffs might be overshadowing the attention given to economic indicators, such as contracting retail sales, manufacturing sluggishness, and rising auto and credit card delinquencies, which all point towards a slowdown ahead. With soft data turning into hard data, the Federal Reserve (the Fed) may need to urgently apply monetary policy to prevent a potential recession.
