In the Coming Week:
- Factory orders
- S&P final U.S. services PMI
- Wholesale inventories
- Consumer credit
Weekly Highlights:
- Job openings
- Consumer confidence
- ADP payroll report
- PCE Index and Core PCE Index
- Canada Q2 GDP
Despite closing out its first negative month since February, the major stock market benchmarks showed hopeful signs on the inflation front and ended the week with solid gains. One contributing factor to these gains was a decline in longer-term interest rates throughout the week, which benefited growth stocks by reducing the implied discount on future earnings. Additionally, smaller-cap stocks outperformed large-cap stocks, narrowing the year-to-date performance gap. Meanwhile, TSX benefited from a strong oil price jump, driven by tight supplies resulting from production cuts from Saudi Arabia and other OPEC+ members.
In July, job openings in the United States hit a 28-month low at 8.8 million, a drop from June’s revised figure of 9.2 million, as reported by the Labor Department. This decline signals a cautious approach by companies due to concerns about a potential economic slowdown. It’s the lowest number of job openings since March 2021 and contrasts with economists’ expectations of 9.5 million job listings. The reduction in job postings, down from a record high of 12 million in the previous year, can be attributed to increased hiring and business apprehension due to the potential recession. The Federal Reserve will likely view this decline positively, aiming to prevent wage-driven inflation in a tight labor market. The number of people quitting their jobs also dropped to 3.5 million, reaching a two-and-a-half-year low, reflecting a tendency for workers to stay put when the economy weakens. Job openings decreased significantly in white-collar and professional sectors but increased in information services and transportation. The U.S. expected to add approximately 170,000 new jobs in August. However, the Fed anticipates a slowdown in hiring and rising unemployment rates as they work to lower the inflation rate from its current 3% to 4% range back to pre-crisis levels of around 2%. In summary, the decrease in job openings and quits and a cautious economic outlook suggest that the labor market landscape is changing, with potential implications for inflation and overall economic health.1
In August, the U.S. consumer confidence index declined to 106.1 from the revised 114 in the previous month, according to the Conference Board. This drop surprised economists who had anticipated a more modest decrease to 116 from the initial reading of 117, which marked a two-year high. The decline was most notable in the part of the survey that assesses how consumers perceive current economic conditions, falling from 153 in July to 114.8 in August. Additionally, the gauge measuring expectations for the next six months dropped from 88 to 80.2, slightly above the historically concerning 80 level that could signal a recession in the coming year. The tight labor market had boosted consumer confidence in June and July, but August’s decline reversed those gains. Economists suggest that rising gasoline prices, up 19.6% from the beginning of the year and over 2% from the previous month, may have contributed to the downturn. The Conference Board still expects a recession before the end of the year, and rising prices for groceries and fuel were significant concerns among consumers, according to Dana Peterson, the chief economist at The Conference Board.2
In August, private payrolls increased by 177,000, a slowdown from the revised 371,000 jobs added in the previous month, as reported by payroll services firm ADP. Economists, who had anticipated a gain of 200,000 private-sector jobs, noted this moderation. The July figure was also revised up from 324,000. The deceleration in job growth was primarily driven by decreased leisure and hospitality employment, with hotels and restaurants adding only 30,000 jobs in August. Service-producing jobs increased by 154,000, while the goods sectors added only 23,000 jobs. Large firms led in job additions, with small firms adding just 18,000 jobs. The South added 119,000 jobs, followed by the Northeast, which added 559,000, and the West 13,000. Meanwhile, the Midwest lost 15,000 jobs in August. Wage growth for job stayers slowed to 5.9% over the past year, the slowest since October 2021, while job changers experienced decelerated pay growth at 9.5%. The softening job growth suggests a potential economic slowdown, which the Federal Reserve might view favorably. While ADP data showed stronger job gains in recent months than official government employment data, economists expect the Labor Department to report 170,000 new jobs in August. ADP’s chief economist, Nela Richardson, described the report as “pretty solid,” indicating a transition toward more sustainable employment and wage growth as the pandemic’s economic effects wane.3
Also on Wednesday, the National Association of REALTORS reported that U.S. pending home sales increased by 0.9% in July, marking the second consecutive monthly rise. However, the Northeast and Midwest experienced monthly declines, while the South and West saw growth. Despite these gains, all four U.S. regions reported year-over-year decreases in home sales transactions. The Pending Home Sales Index (PHSI) reached 77.6 in July, with a 14.0% drop in pending transactions compared to the previous year. NAR Chief Economist Lawrence Yun noted that while there is potential for further increases, rising mortgage rates and limited inventory have temporarily constrained homebuying opportunities for many.4
In the week ending August 26, initial jobless claims dropped by 4,000 to reach 228,000, as reported by the Labor Department on Thursday. The latest data represents the lowest level of claims since the week ending July 29. Meanwhile, the number of individuals receiving unemployment benefits across all programs decreased by 11,433 to 1.82 million during the week ending August 12.5
In July, the cost of goods and services in the U.S. experienced a modest increase of 0.2%, aligning with economists’ expectations. However, overall inflation persisted at an elevated level, with the annual price rise climbing to 3.3% from 3%. Despite some moderation in inflation throughout the year, returning to pre-pandemic levels of 2% or lower may take some time. The core Personal Consumption Expenditures (PCE) inflation rate, which excludes volatile food and energy costs, also advanced by 0.2%. This core rate, closely monitored by the Federal Reserve for predicting future inflation trends, increased to 4.2% from 4.1% annually. While the report did not trigger alarm at the Fed, it did not demonstrate significant progress in aligning inflation with the central bank’s 2% target. July saw a surge in U.S. consumer spending, marking its most significant increase in six months. It was driven by various factors such as the record-breaking Amazon Prime Day, blockbuster movies like “Barbenheimer,” and a highly attended Taylor Swift concert tour. This exceeded expectations, with Wall Street Journal analysts anticipating a 0.7% growth. Consumer spending is a crucial driver of the U.S. economy, with households maintaining a solid 1.7% annual spending pace in the second quarter, adjusted for inflation. However, there are emerging signs that this robust summer spending may show signs of potential weakness, as retailers reported lukewarm results in the recent quarter. Incomes only increased by 0.2% in July. Americans directed their spending toward dining out, hotels, recreation, consumer electronics, new vehicles, and housing. Slower income growth has led households to dip into their savings, resulting in a reduced savings rate of 3.5%, down from 4.3%. The latest contraction in the savings rate suggests that Americans may still be grappling with the impact of inflation despite some moderation. Overall, while Americans have managed to sustain their spending due to a low unemployment rate and income growth outpacing inflation for the first time in years, concerns about inflation persist, and the Fed is carefully weighing its policy decisions to navigate the economic landscape.6
In August, the U.S. added 187,000 new jobs, marking the third consecutive month with fewer than 200,000 new hires and signaling a cooling labor market. Concurrently, the unemployment rate increased to 3.8% from 3.5%, its highest level in 18 months. This data and recent signs of slowing inflation suggest that the Federal Reserve may delay interest rate hikes. August’s job gains were primarily concentrated in healthcare, hospitality, and construction, while employment in transportation declined due to the bankruptcy of Yellow Inc., and the information sector saw a drop due to a Hollywood strike. Hourly wages increased modestly by 0.2% in August, with the yearly wage growth reaching 4.3%, exceeding the Fed’s target of 3% or less. Despite a cooling labor market, the acute worker shortage continues to increase wage growth and contribute to inflation pressures. In August, the labor force participation rate increased by 0.2 percentage points to 62.8%, breaking a flat trend observed since March. The employment-population ratio remained unchanged at 60.4% during the same month. These statistics indicate a slight improvement in the proportion of people actively participating in the labor force. At the same time, the ratio of employed individuals to the overall population remained steady in August. Increasing labor force participation could help reduce inflation, as more people entering the workforce may lessen employers’ need for significant wage increases. The labor market’s cooling, coupled with anticipated interest rate hikes, is expected to slow economic growth and potentially raise unemployment, ultimately aiding the Fed in reducing inflation to its 2% target from 3% to 4%.7
The U.S. manufacturing activity index, measured by the Institute for Supply Management, increased by 1.2 points to 47.6 in August, surpassing economists’ expectations of 46.6%. Despite the improvement, any figure below 50% indicates a contracting economy, and manufacturing has experienced contraction for ten consecutive months. However, August’s reading is the highest since February. New orders dipped 0.5 points to 46.8%, continuing a year-long trend of contraction, while production and employment showed improvement. Only five out of thirteen manufacturing industries reported growth in August. A separate measure, the S&P Global U.S. manufacturing sector index, recorded a final August reading of 47.9, up from the initial estimate of 47, which marked a two-month low.8 Manufacturing has faced challenges due to the Federal Reserve’s rapid interest rate hikes and a weakening global economy. Despite some signs of improvement, experts remain cautious about the sustainability of the manufacturing sector’s recovery in the face of ongoing global economic uncertainty and potential domestic demand slowdown.
Statistics Canada reported on Friday that the Canadian economy contracted at an annualized rate of 0.2% in the second quarter, with factors like falling housing investment contributing to the decline. Housing investment decreased by 2.1%, marking its fifth consecutive quarterly decrease, primarily driven by an 8.2% drop in new construction and a 4.3% fall in renovation spending. This economic slowdown also saw lower inventory accumulations, sluggish export and household spending growth, and increased borrowing costs due to interest rate hikes by the Bank of Canada aiming to control inflation.9 The unexpected economic stall may prompt discussions on whether further rate hikes should be postponed, given the potential impact on consumer spending. The construction sector has already experienced a slowdown, particularly in high-rise projects.
Sources:
1https://www.bls.gov/news.release/pdf/jolts.pdf
2https://www.conference-board.org/topics/consumer-confidence
5https://www.dol.gov/ui/data.pdf
6 https://www.bea.gov/news/2023/personal-income-and-outlays-july-2023
7https://www.bls.gov/news.release/empsit.nr0.htm
9https://www150.statcan.gc.ca/n1/daily-quotidien/230901/dq230901b-eng.htm
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Warren Gerow is an independent investment wealth consultant to Sightline
Wealth Management.
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