Economic data reports were few and far between in the May 6 week. What there was mostly reflected a healthy labor market and mild inflation. Some of that was obscured by two events.
First, the Federal Reserve’s semiannual Financial Stability Report was released on Monday. It showed corporate debt levels have exceed those in the pre-financial crisis period. The Fed’s conclusion wasn’t immediately alarmed by this as defaults remain low but warned that is remains a risk to the financial system. Calling attention to the situation is likely to address some of the risks, but as long as interest rates are low investors may prefer corporate debt to safer assets that pay less. The Fed also released the Senior Loan Officer Opinion Survey for April around the same time. It got much less attention. It did indicate that lenders are paying attention to risks for C&I loans, but overall standards and terms were not much changed from the prior report. Demand for C&I loans was down a bit. Household lending standards and terms were also little different from the prior report, while demand for most types of consumer loans were off, especially for autos.
Second, President Trump finally stopped jawboning and imposed higher punitive tariffs on about $200 billion in goods from China, and China responded by promising to retaliate. Worries that the tariff increase was imminent hurt equity markets early in the week. Ending the uncertainty about the arrival of new imposts brought no relief.
In March, the US trade deficit in goods and services was $50.0 billion, a small increase from the $49.3 billion in February. Exports of goods were up 1.0% while imports were up 1.1%. Some of the increase on both sides reflected concerns that increased tariff costs were imminent and orders were placed to ensure supplies were in the pipeline at a lower cost.
Uncertainty always increases calls for rate cuts. However, Fed policymakers did not hold out any strong possibility that that might happen. While some policymakers offered that they would be willing to adjust rates up or down depending on developments, on balance the outlook is for rates to remain on hold. Rates will be set according to the FOMC’s assessment of the US economy in the context of the dual mandate, i.e. maximum employment and price stability. The FOMC will not change rates due to a few uncomfortable moments for markets but take a broader view against a longer timeframe unless there is a real exogenous shock to respond to.
Labor market indicators were yet more evidence of robust conditions.
The JOLTS data for March was off historic readings, but not much. The job openings rate was 4.7%, only a tenth below the 4.8% record high, hiring continued on trend with a 3.8% rate, and separations remained on the low side of the recent range at 3.6%. The quits rate – a subset of separations – remained at 2.3% where it has been since June 2018. Workers are displaying confidence in switching jobs at sustained record. The Beveridge curve – the rate of job openings compared to the unemployment rate – continues to express very little slack for the labor market.
Claims for unemployment benefits for the May 4 week suggest that new filings are consistent with a healthy labor market with few layoffs overall in spite of the contraction in a narrow selection of industries. The insured rate of unemployment held at 1.2% as of the April 27 week, where it has been for a year now. The upshot is that relatively few workers are losing their jobs, and those that do are spending less time on the unemployment rolls as businesses snap up qualified applicants.
The numbers for the April Consumer Price Index and Final Demand PPI actually suggested that inflation was indeed running close to the Fed’s 2% objective over the medium term. If the March core PCE deflator was a surprise that excited anticipation that the FOMC might have to lower rates to stimulate prices, those who thought so are likely to be disappointed. The April data for consumers and producers point to sufficient upward pressure in prices that the core PCE deflator readings over the January-March period should prove to be due to the sorts of transitory factors that Chair Jerome Powell cited at this May 1 press briefing.
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