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Daniel Richards - MENA Economist
Published Date: 27 May 2022
A round-up of the most widely followed monthly macro data points from the US, compared to expectations and the previous month's results.
Source: Bloomberg, Emirates NBD Research
There has been increased chatter about the possibility of a recession in the US and elsewhere amidst the monetary policy tightening by the Fed, the fallout from the war in Ukraine and ongoing lockdowns in China, with prominent voices attending the WEF in Davos this week highlighting the challenges to growth. Indeed, looking at our scorecard for the most widely followed macro data points from the US over the past month, it is clear that there has been a tangible slowdown in the expansion rate, with almost all of the indicators coming in not only lower than the preceding month, but also missing analyst consensus predictions. Nevertheless, with the labour market standing out in its relative strength, and the data still signaling an expansion, there is nothing within these readings that would deter the Federal Reserve from the more aggressive monetary hiking path that was laid out in the minutes from the May 3-4 FOMC meeting released this week.
Consumer demand has been especially in focus over the past week or so following some disappointing corporate results from the likes of Target which warned that margins would be under pressure amid high input costs and a reduction in spending on discretionary items such as homeware and clothing. CPI inflation did fall back in April, but at 8.3% y/y it remains very high, and this is reflected in the further drop in the University of Michigan consumer sentiment index which fell to just 59.1, from 65.2 in April. This was the lowest level for the index since August 2011 and the view on buying conditions for long-lasting goods was the weakest in the series history back to 1978. In this environment it is unsurprising that retail sales growth has slowed, coming in at 0.9% in April, from 1.4% in March.
This is still a fairly robust expansion rate with the American consumer buying goods despite a deteriorating outlook and a squeeze on real income, but with this spending likely supported by drawing down on pandemic savings, or else on credit cards, the pace will likely slow further in the coming months – especially for larger purchases usually made on credit. There has already been a significant slowdown in new home sales which fell -16.6% m/m to just 591,000 in April, the steepest drop since 2013. With mortgage rates set to rise as the FOMC continues to hike rates, the housing market will likely remain under pressure.
On the production side, total industrial production was a bright spot last month, as the 1.0% m/m growth beat both expectations and the previous month’s expansion rate. Factory output rose 0.8% as some of the constraints around labour imbalances and supply chain issues seemingly eased, and factory capacity utilization rose to a 15-year high. The S&P Global manufacturing survey did slip compared to March but only marginally, and the index continues to indicate a robust expansion rate despite ongoing supply issues which could yet flare up again as the effect of recent lockdowns in China pass through the global supply chain.
Looking at the labour market, this continues to show signs of strength with no indication so far of responding to the headwinds hitting the US economy. The April non-farm payrolls print saw a net gain of 428,000 jobs, with gains across all sectors. The headline unemployment rate remained unchanged at 3.6% while wage growth continues to move higher with average hourly earnings up 0.3% m/m and 5.5% y/y. There were 210,000 initial jobless claims in the US in the week to May 21, in line with consensus 215,000 and little changed from the 218,000 the previous week.
Given this labour market strength, and the fact that the other data, while weakening, is still indicating growth, we expect the FOMC’s focus to remain on curbing inflation for the time being: we anticipate two 50bps hikes at the next two meetings and successive 25bps through the remainder of the 2022 meetings, taking the upper bound to 2.75% at year-end. This is in line with the message given in the FOMC minutes released this week, although there was an acknowledgement that this ‘expeditious’ hiking could potentially lead to a pause or a slowdown later in the cycle if deemed appropriate, leaving ‘the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.’ The macro data is holding up for now, but there remains a risk that too aggressive action by the Fed could see it miss the desired ‘soft landing’ and push the US economy into a recession.
Monthly Insights - July 2022
US macro scorecard - May