The analogy that best describes current economic conditions is that we are in a race to recover from COVID-19 while a European war is raging. The U.S. economy has slowed from a warp speed of 100 mph as it shot out of the pandemic to 60 mph, as it returns to a more normal growth mode.
The headlines are telling us growth could slow down even more, and the race come to a grinding halt, either later this year or sometime next year. Why? Because the Fed may continue to raise short term rates, and that may not be necessary since 60 mph is the speed we will need to maintain for more sustainable, long term growth.
The U.S. economy is cooling off, but the labor market is still red hot. Job openings in the latest JOLTS report fell slightly in May to a still extremely high 11.3 million (from 11.4 the past 2 months) and layoffs remained near a record low.
Job openings have slipped two months in a row after peaking in March at 11.9 million, but they have topped 11 million for six straight months. Layoffs are also extremely low, the Labor Department said Wednesday.
It’s most meaningful component, hires, and total separations, were little changed at 6.5 million and 6.0 million, respectively. This means there were 500,000 more new hires than separations (those leaving a job). It is a sign that Friday’s June unemployment report will probably be strong and in line with past months.
Both business sectors, the manufacturing and service industries, are returning to more normal growth levels. Their measure, surveys of Supply Managers, have shown incredible growth over the past two years.
An Institute of Supply Management (ISM) barometer of business conditions at service-oriented companies (see above graph) such as restaurants, hotels and retailers dipped to a two-year low of 55.3 percent in June — yet any number over 50 percent indicates expanding activity.
The Trading Economics graph shows how it soared since July 2021 and reached a nose-bleeding altitude of 69 percent in November 2021.
A similar ISM survey of American manufacturers also showed business slowing to a two-year low to 53 percent in June. The ISM index dropped 3.1 points from 56.1 percent in May, yet that is still a good number.
The decline in Q1 GDP was mainly due to a massive rise in imports overshadowing a slowdown in exports. But with the value of the U.S. Dollar at all-time highs the trend has reversed. Exports now exceed imports resulting in the lowest budget deficit this year. Import totals are subtracted from exports in the GDP tally.
Manufacturers and other businesses are restocking their shelves, which will probably boost second quarter economic growth back into the positive column, though economists are uncertain as to how much.
Tomorrow’s unemployment report will give us another indication whether we can maintain that 60 mph speed, or will the Fed keep their feet on the brakes and slow growth further?
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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