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Unpacking Recent Macro Headlines

Unpacking Recent Macro Headlines

October 27, 2023

The first two weeks of May were filled with macro headlines and data releases. Bank turmoil is back in the headlines, the Fed is hiking rates, and data indicates the U.S. economy remains stronger than expected. Below is a summary of recent macro developments:

Manufacturing PMI – The bottom line: Manufacturing activity continued to contract in April but at a slower pace from March. New orders continue to decline, employment is improving, prices remain volatile, and inventory drawdowns continue. Additional Details: Headline PMI was 47.1, the 6th consecutive month in contraction but also a +0.8 increase from March. New Orders increased +1.4 to 45.7 but remained below 50 for an 8th consecutive month. Prices rose +4 to 53.2, signaling higher input costs and some price instability. Inventories fell -1.2 to 46.3, marking the 2nd month below 50 and the 4th consecutive monthly decline and indicating manufacturers are drawing down inventories.

April Services PMI – The bottom line: Services activity expanded for the 4th consecutive month in April, with Services remaining stronger than Manufacturing. New Orders continue to grow, but businesses continue to face higher input costs, suggesting inflation remains sticky.

April Nonfarm Payrolls – The bottom line: U.S. job growth was stronger than expected with widespread gains across industries. While the gains are a sign of the U.S. economy's resilience, the prior two months' job gains were both revised sharply lower. Additional details: Nonfarm payrolls rose +253k (vs +180k estimate) with widespread gains: Health Care & Social Assistance +64k; Professional & Business Services +43k; Leisure/Hospitality +31k; and Construction +15k. However, Figure 4 shows March saw a big downward revision from +256k to +165k, while February was revised down to +248k from +326k. The participation rate held steady at 62.6%, a post-pandemic high, and unemployment fell to 3.4%.

May Federal Reserve Meeting – The Fed raised interest rates +0.25% to 5.25% at its May meeting. Figure 1 shows the Fed has hiked rates by a cumulative 5% since March 2022, the fastest pace since the 1980s. The Fed also opened the door to a pause, with Chair Powell saying there are signs that supply and demand are coming into balance. However, Powell warned the labor market remains tight and stressed it will take time to bring inflation down to 2%. The meeting was a mixture of a dovish hike (i.e., things are starting to break) and a hawkish pause (i.e., the Fed needs more progress on inflation to feel confident pausing).

Q1 2023 Senior Loan Officer Survey – There was no change in overall lending standards. Banks continued to tighten in the form of wider loan spreads, lower credit line sizes, higher collateral requirements, and more restrictive covenants.

Consumer & Producer Prices – There is no change to report, both consumer and producer price indices continue to trend lower. Our view continues to be that inflation is an old story and receiving too much attention. However, markets need something to focus on near-term, and inflation is a compelling storyline. Our Take: The U.S. economy remains resilient despite the Fed's aggressive tightening, particularly the services industry, consumer spending, and the labor market. The data indicates there is significant momentum from pandemic monetary and fiscal policies and that it will take time to bring inflation down. Absent definitive evidence of a slowdown prior to the June 13-14 FOMC meeting, the conditions are present for the Fed to raise rates at least once more in June, and potentially July.

Our Views – While it’s impossible to predict what will happen in the near or intermediate term, we are cautiously optimistic about the future. These data points point to an economy that is resilient, even if still subject to the business cycle.