A look behind at the June 8 week begins with many analysts continuing to try to make sense of the surprise 2.5 million rise in non-farm payrolls in May in the report released on June 5. Given the disparity between the increase and expectations for a large decline, it isn’t surprising. However, the desire to read it as a signal that the economy wasn’t nearly as bad as previously thought is probably overly optimistic. As the saying goes, one month does not make a trend. From my perspective, such a large disconnect between expectations and the number reported has to be read with skepticism. If the increase was indeed a result of many workers returning to payrolls due to the availability of funds in the Paycheck Protection Program, then these jobs are only going to last until the funds run out unless there is a sudden and large uptick in economic activity. Right now we appear to be faced with another increase in infections and the possibility of renewed restrictions on movement. More workers may be covered in the June data when that is released at 8:30 ET on Friday, July 3. However, the money will be exhausted by the time July’s report rolls around unless Congress acts to extend the program.
Chair Jerome Powell’s press briefing on Wednesday after the FOMC meeting highlighted that Fed policymakers are very cautious on the outlook for the economy. The latest Summary of Economic Projections (SEP) looks for a rebound in activity in 2021 (GDP up 5.0%) and into 2022 (GDP up 3.5%) after a severe contraction in 2020 (GDP down 6.5%). However, the unemployment rate is expected to come down only slowly and remain above the longer run expectation of 4.1% for several years. Powell was upfront about the risks to the forecast and that the SEP was based on more than usual levels of uncertainty. What was clear was that the Fed isn’t anticipating lifting short-term rates anytime in the foreseeable future. “We’re not even thinking about thinking about raising rates,” Powell said. From this it is no stretch to say that the Fed expects the economy will need a lot of support for long time.
One of the keywords in the Fed’s forward guidance for monetary policy is “confidence”. Confidence on the part of businesses and consumers appears to have improved after the initial shock of the necessary measures to combat COVID-19 basically shutdown the economy starting in mid-March and through April. As businesses adapted and some restrictions on public activity were ease, a little confidence has crept back in. This is going to be fragile and soon lost if the realities of the COVID-19 pandemic reassert themselves in the form of re-imposed quarantines. I note that the confidence surveys were taken before Chair Powell’s remarks on Wednesday which painted a much less rosy picture of the economic outlook and which took the wind out of a lot of more upbeat expectations after the May employment data.
The NFIB Small Business Optimism Index for May was up to 94.4 after falling to 90.9 in April when it was the lowest in just over seven years. Businesses were generally more positive in their outlook for conditions in the near future with a strong gain in expectations for higher sales and plans to bring workers back on payrolls. However, some of this was due to government programs to guarantee paychecks and provide loans to see businesses through the lean months. Many businesses have found ways to provide goods and services that are consistent with limiting transmission of the novel coronavirus, so some activity will continue even after government aid expires.
The preliminary University of Michigan Consumer Sentiment Index for June rose a solid 6.6 points to 78.9 after 72.3 in May. The index level is still one consistent with sluggish economic conditions and the mild increase should not spark anticipation of renewed consumer spending. It just means that consumers are a little less worried about the labor market and prospects for personal income than they were. This gain could easily be revised down in the final report on Friday, June 26 at 10:00 ET as reports of more elevated infection rates heighten concerns about renewed lock-downs on activity.
Inflation expectations looked a bit more normal in the June data. The University of Michigan’s 1-year inflation expectation measure dipped two-tenths to 3.0%, still reflecting consumers’ worries that their household incomes were going to lose pricing power but more in line with the recent trend. The 5-year inflation expectations measure – better aligned with the Fed’s “medium term” for price stability – was down a tenth to 2.6%. It also has been a bit higher of late as consumers fret that growth in personal income is going to lose steam.
The Atlanta Fed’s Business Inflation Expectations mean estimate for June was up two-tenths to 1.7% as energy prices started to rise again after plunging in recent months. While the expectation remained below the Fed’s 2.0% goal for price stability, it was less of a gap than it had been and supported the Fed’s forecast that inflation will gradually rise back toward the goal over time. However, I note that the FOMC forecast doesn’t think that will happen in 2020, 2021, or even 2022.
The May indexes for the CPI, Final Demand PPI, and import prices all told remarkably similar stories. Prices were starting to rise again for energy with higher oil prices, food costs were up in large part due to meat prices, and continued softness in travel and leisure were keeping prices down there. Services prices – which have been the main driver in upward price pressure – have lost upward momentum. Commodities prices remained moribund.
Data on initial jobless claims in the week ended June 6 continued to see an ebbing of new filings. The unadjusted level was down 82,886 to 1.537 million in the week. This was lower for a ninth week in a row but perhaps indicating that filings are reaching a plateau with the decrease only about a third of the number in the prior week, a significantly milder decline than recent weeks. The continuing claims rolls fell 178,671 in the May 30 week to 18.920 million. The level in the last three weeks seems to have started to stabilize around 19 million. The unadjusted insured rate of unemployment dipped a tenth to 13.0% but is still not far below the series’ historic highs.
The numbers on Job Openings and Labor Turnover for April were much as expected with a sharp decline in job openings and new hires, abundant numbers of layoffs, and reductions in the number of workers voluntarily leaving jobs. Perhaps the most dramatic illustration of the contraction in the labor market was the Beveridge Curve which compared the rate of job openings to the unemployment rate.
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