This week, Tom Weary, CFA®️, shares interesting news on the economy regarding inflation, economic growth, and the labor market.


Welcome to the Weekly Market Update. Given the shortened holiday week and the fact that we will be jumping into the thick of earning season in a couple of weeks, I will give you a break and we will have a relatively short update this week. There was some very interesting news on the economy regarding inflation, economic growth and the labor market, so I want to make sure that we touch on each of those important topics.  Let’s dive in! 

The economic topic on the top of everyone’s mind these days is inflation. The Federal Reserve has made it very clear that their top priority is bringing inflation down rapidly from its highest level in 40 years. The problem is that the Fed has a very blunt tool in terms of raising and lowering interest rates, which really only acts on the demand side of the equation when the current inflationary pressures have more to do with problems on the supply side, and has a lag of 12 to 18 months. However, we did have some encouraging news on that front recently when the government announced Core Personal Consumption Expenditures for May rising 4.7%, as we see in this first chart, which was below expectations. The chart seems to indicate that inflationary pressures may be rolling over and the worst is behind us. Certainly, the bond market is not very concerned about inflation getting out of control. As we see in the Treasury yield curve in this next chart, the curve is becoming lower and flatter. Longer term rates are coming down because bond investors are less worried about inflation, while the curve is becoming flatter indicating they are increasingly concerned about slow economic growth.  

Turning to economic growth, we can see in this next chart where the Institute for Supply Management Manufacturing Purchasing Managers Index for June came in at 53.0 versus expectations of 54.5. While any reading above 50 indicates expansion, the graph clearly shows that the rate of growth has been coming down. This seems at odds with what we see in the next chart on Manufacturing New Orders for May, where growth was triple expectations. Perhaps supply issues, both labor and physical inputs, are holding back manufacturing activity even in the face of record high new orders. Turning to the larger Services side of the economy, the ISM Services PMI index for June came in above expectations at 55.3, which was still lower than the recent past. The Fed does seem to be succeeding in slowing down the economy. Let’s just hope that they don’t make a policy error and slow it too much.  

And finally, turning to the labor market we can see in this next chart from this week’s JOLTS survey that the number of job openings in May at 11 1/4 million are still very high even if down a bit, and still roughly double the number of unemployed job seekers. On Friday the government reported Nonfarm Payrolls increased by a strong 372,000, while a separate survey showed that the unemployment rate remained steady at 3.6% for the fourth straight month, as we can see in this final chart. The labor market continues to be very strong, making it difficult to believe that we are in a recession, and will have to cool off some if we are to make further gains on the inflation front. 

So, what does it all mean? While the Federal Reserve is using very crude tools, there are early signs that they are succeeding in their campaign to bring down inflationary pressures and slow the economy. Recent surveys of consumer confidence indicate that many people believe The Fed will be too successful in slowing the economy and throw us into recession. We don’t know yet how things will unfold. While supply chain bottlenecks invariably will ease, we don’t know how the war in Ukraine will go, which is impacting commodity markets. We will stay on top of all the developments on your behalf. So, please, sit back, relax, have a great weekend, and join us next time for the weekly market update. 

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