Economic Outlook – 21 May 2023

Retail sales edged up 0.4% in April, half as much as expected by consensus. Sales of motor vehicles and parts rose 0.4% after falling 1.4% the previous month. Without autos, retail outlays increased 0.4% as increases for miscellaneous retailers (+2.4%), non-store retailers (+1.2%), health and personal care items (+0.9%), general merchandise (+0.9%), and building materials (+0.5%) more than offset declines for sporting goods (-3.3%), gasoline stations (-0.8%), furniture (-0.7%), and electronics (-0.5%), among others. Sales progressed in 7 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, increased 0.7% and were tracking a robust 4.7% on a three-month annualized basis. This suggests that goods consumption could contribute to GDP growth in the second quarter of the year. However, a still negative hand-off could limit prospects for Q2 The Empire State Manufacturing Index of general business conditions recorded its largest monthly loss since January 2023, declining 42.6 points to -31.8, far worse than expected by consensus (-3.9). The shipments (from 23.9 to -16.4) and the new orders (25.1 to -28.0) sub-indices turned around sharply back into contractions territory. Delivery times (from 0.0 to -5.7) and unfilled orders (from 0.0 to -13.2) began pulling back again after a break the month before. This stoked a fourth consecutive decline in employment (-8.0 to -3.3). Input prices (from 33.0 to 34.9) began retracting for the first time since January 2023. Business expectations for the six months ahead edged up (from 6.6 to 9.8) but remained at a level well below their long-term average (36.4), suggesting business continued to anticipate little improvement over this period The Philly Fed Manufacturing Business Outlook Index moved from -31.3 in April to -10.4 in May, its ninth consecutive negative reading. New orders (from -22.7 to -8.9) and shipments (from -7.3 to -4.7) continued to contract at factories operating in eastern Pennsylvania, southern New Jersey, and Delaware, but they did so at a slower pace than in March. The employment index fell from -0.2 to -8.6, the index’s third consecutive negative reading. Supplier delivery times (from -25.0 to -9.3) reduced less rapidly, and input price inflation (from 8.2 to 10.9) increased after a significant drop the previous month. The prices received gauge (from -3.3 to -7.0) remained below 0 for a second consecutive month for the first time in nearly three years, signaling a rapid moderation in price pressure in the manufacturing sector. The index tracking future business activity, meanwhile, dropped from -1.5 to -10.3, further below its long-term average (~34.0) In April, industrial production increased 0.5% on a monthly basis, a tick more than the median economist forecast of 0.4%. After decreasing 0.5% in March, manufacturing output grew 1.0% on gains for both durable (+1.0%) and nondurable (+0.4%) goods. Production in the motor vehicles segment was up 11.2%. Utilities output, meanwhile, slipped 11.8% on a 26.9% loss for natural gas and an 8.8% loss for electricity. Finally, production in the mining sector grew 1.9% Housing starts increased for only the second time in eight months, edging up 2.2% to 1,401K (seasonally adjusted and annualized), as expected by consensus (1,400K). However, the improvement was somewhat tarnished by a downward revision to the previous month’s print (from 1,420K to 1,371K). The increase in starts in April was due to an improvement in both the single-family segment (+1.6% to 555K) and the multi-family segment (+3.2% to 846K). Homes under construction, too, rose in the month. They went from 1,668K to 1,675K for a second increase in six months. However, seeing how this indicator tends to follow the trend in housing starts with some delay, the number of homes under construction could begin to decline again in the coming months given the recent weakness in starts. If so, it could translate into job losses in the sector down the road Building permits, for their part, fell 1.5% in April to 1,416K on a steep decline in the multi-family segment (-7.7% to 561K). Permits delivered for construction of single-family dwellings, meanwhile, progressed 3.1% to 855K. Although it remained close to the 50-year high reached back in October (302K), the number of authorized residential projects for which construction had not yet begun decreased from 293K in March to 290K in April Existing-home sales retraced for the 14th time in 15 months in April, sliding 3.4% to 4,280K (seasonally adjusted and annualized). This was slightly weaker than the median economist forecast calling for a 4,300K print. Contract closings declined 3.5% in the single-family segment (to 3,850K) and 2.3% in the condo segment (to 430K). Thanks to lower sales, the inventory-to-sales ratio jumped from 2.6 in March to 2.9 in April (<5 indicates a tight market for the National Association of Realtors) as the number of homes available on the market remained extremely low. Indeed, there were only 1040K properties on sale in the month (not seasonally adjusted), the second lowest level ever recorded in a month of April. Properties that sold in April 2023 had been on the market for 22 days on average, 7 days less than in the prior month The Conference Board’s index of leading economic indicators (LEI) declined for the 13th straight month in April, sliding 0.7 point to a two-and-a-half-year low of 107.5. Six of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from consumer expectations (-0.26 pp), ISM new orders (-0.21 pp), and interest rate spread (-0.17 pp). Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. Both conditions were met in April: The LEI index dropped 8.7% annualized over six months and the six-month diffusion index stood at 20% The odds of a June rate hike by the US Federal Reserve rose this week, with several members of the Federal Open Market Committee worried that inflation is not falling fast enough to allow the Fed to pause its hiking cycle, as had broadly been expected. Futures markets now reflect about a 25% chance of a June hike while several rate cuts that had been priced in have not been priced out. Traders now see the first cut coming at the November FOMC meeting after just days ago pricing one in as early as September. However, on Friday morning, Fed Chair Jerome Powell indicated that credit stress stemming from the regional banking crisis suggests rates may not need to rise as high as they otherwise would have. Those comments reduced the odds of a June hike. Powell also said that the FOMC hasn’t made a decision about future policy tightening Market concern eased late in the week, with investors less worried that the Department of the Treasury will default on its debt in early June if the nation’s statutory debt limit is not raised before it exhausts its cash on hand. On Thursday, investors cheered comments from Speaker of the House of Representatives Kevin McCarthy, who said he hopes to have legislation raising the debt cap on the House floor next week, though talks appeared to stall on Friday morning. After a meeting at the White House on Tuesday hosted by President Joe Biden and attended by congressional leaders, the negotiating teams were pared down to proxies of McCarthy and Biden who are empowered to make decisions. Budget Director Shalanda Young and Counselor to the President Steve Ricchetti are handling negotiations for the White House while McCarthy has tapped Louisiana Representative Garrett Graves, sidelining House Democrats as well as the majority and minority leaders of the Senate. As the week progressed, McCarthy’s public comments became more optimistic over the prospect of an agreement, helping raise hopes that a crisis can be avoided. Biden left Washington on Wednesday to attend the summit of G7 nations in Japan but plans to cut short his trip by forgoing visits to Papua New Guinea and Australia. He is scheduled to return to Washington on Sunday to oversee negotiations. News reports early Friday morning indicated that White House negotiators told Biden that steady progress toward an agreement was being made Stocks recorded solid gains for the week, with the S&P 500 Index breaching the 4,200 level in intraday trading for the first time since late August. The index has remained notably range-bound over the past few months, and the previous week marked the sixth consecutive one in which it failed to move by more than 1%—the longest such stretch since November 2019. The market’s advance remained notably narrow as well, however. The equal-weighted S&P 500 Index (SPEXW) lagged by 77 basis points (0.77%) and ended the week up only 0.93% for the year to date, 825 basis points behind the weighted index In terms of data release, new home sales print is out on Tuesday. As housing demand stabilizes, low existing home inventory has nudged buyers toward new construction. March marked the third increase in new home sales in the past four months, indicating a trend improvement in buyer demand. In fact, the 9.6% leap in March brought new home sales to its highest sales pace since March 2022 when the Fed had just started tightening and mortgage rates averaged 4.2%. Builders have rallied in response, leading to three consecutive monthly upturns in single-family building permits Personal income and spending is out on Friday. The resilient consumer is alive and well, but momentum appears to be fading. Personal spending was essentially flat in March, increasing by a modest $8.2 billion. Save for a pop in January, real personal spending has contracted in four of the past five months. Retail sales, alternatively, rose a respectable 0.4% in April. While consumers seem to be exercising caution on discretionary purchases, nondiscretionary spending on categories like healthcare and household utilities propelled a 0.7% rise in control group sales, likely to translate into a solid April PCE print. 

Employment and Earnings data for March has been released. Unemployment rose only marginally to 3.9 percent, while the more up to date, but less accurate, April claimant count of 1,527,400 has risen by 46.7 thousand. As to pay, in nominal terms average earnings (including bonus / excluding bonus) were up 5.8 / 6.7 percent, with inflation taken into consideration, these numbers are still negative, -3 percent for total pay including bonuses and -2 percent for regular pay, although these numbers are rising fast While overall these employment figures remain good, there has been a degree of quibbling around some of the measurements, over 5 million people remain out of work on some form of benefits, most notably there has been, since 2019, a sharp increase in long-term sickness (now standing at 2.5 million); more positively while job vacancies (a less accurate figure than it once was) peaked in March 2022, in Feb 2023 it was still over one million, although it is on a clear downwards trend. Barring some major shock (something similar to the US Commercial real estate troubles hitting Europe, the Ukrainian crisis flaring up in a new and unexpected way) that employers and employees in general will show the necessary flexibility to keep unemployment levels well below the heights seen in past economic slowdowns Bank of England (BoE) Governor Andrew Bailey reiterated in a speech that monetary policy would have to tighten further if there was evidence of more persistent inflationary pressures. He predicted that inflation could start to slow significantly in April as energy increases drop out of the annual calculations. But policymakers “still judged the risks to inflation to be skewed significantly to the upside,” he said, noting that second-round effects would take longer to unwind than they did to emerge. 

Official data provided further signals that Europe might be sliding into an industrial recession. Eurozone industrial production sank 4.1% sequentially in March, after rising 1.5% in February. On a year-over-year basis, industrial output declined 1.4%, after increasing 2.0% in the preceding month. While Irish production led the drop—mainly due the transfer pricing practices of multinationals—German, French, and Italian output also weakened In Germany, the ZEW economic research institute said investor morale fell for a third consecutive month in May. Its sentiment index entered negative territory for the first time since the end of 2022 amid concerns about rising interest rates. ZEW President Achim Wambach said Germany could slip into a mild recession The European Commission raised its forecasts for eurozone economic growth this year and next and predicted inflation would remain stubbornly high. The latest projection calls for gross domestic product (GDP) to expand 1.1% this year and 1.6% in 2024, up from the previous forecast for growth of 0.9% and 1.5%, respectively. Wage increases are expected to drive inflation higher to 5.8% in 2023 and 2.8% in 2024, up from the previous estimates of 5.6% and 2.5%, respectively Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.72% higher. Among major markets, Germany’s DAX climbed 2.27%, while France’s CAC 40 Index gained 1.04%.  

Official data showed industrial output, retail sales, and fixed asset investment grew at a weaker-than-expected pace in April from a year earlier. Unemployment fell to 5.2% in April from March’s 5.3%, but youth unemployment jumped to a record 20.4%, raising concerns that the post-pandemic recovery is not strong enough to attract new talent. Investors found the latest figures disappointing, although the data were helped by the comparison over the prior-year period, when China was still under lockdown New home prices in 70 of China’s largest cities rose 0.4% in April in the fourth consecutive monthly gain but slowed from March’s 0.5% growth, Reuters reported, citing official data. The month-on-month slowdown in home price gains came after data earlier in the week showed property investment and sales fell sharply in April, adding to worries about a key sector for China’s economic health The People’s Bank of China (PBOC) injected RMB 125 billion into the banking system via its one-year medium-term lending facility compared with RMB 100 billion in maturing loans. The medium-term lending rate was left unchanged, as expected. In its quarterly monetary policy report released on Monday, the PBOC pledged to maintain sufficient credit growth and liquidity in the economy, raising expectations that the central bank would step up easing measures in coming months On Friday, China’s yuan currency depreciated at the fastest pace in almost three months after the PBOC cut its central parity rate below RMB 7 per dollar for the first time since December. Signs of slowing growth in China and a surge in the U.S. dollar driven by hopes that the U.S. government would raise its debt ceiling in time to avoid a default have pressured the local currency Chinese equities were mixed amid concerns that the country’s post-COVID recovery is losing steam. The Shanghai Stock Exchange Index gained 0.34% while the blue-chip CSI 300 added 0.17% in local currency terms. In Hong Kong, the benchmark Hang Seng Index declined 0.90%.
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets.