Economic Outlook – 5 June 2022


• Retail sales increased 0.9% in April on top of an upwardly revised gain of 1.4% in March. The April increase in sales could not be entirely attributed to higher prices. Overall consumer prices increased 0.3% in April, but goods prices fell 0.3% in the month

• Nonfarm payrolls rose 390K in May, more than the +318K expected by consensus. This positive surprise was partly offset by a 22K downward revision of previous months’ results. Employment in the goods sector jumped 59K, with gains in construction (+36K), manufacturing (+18K) and, to a lesser extent, mining/logging (+5K). Services-producing industries, meanwhile, expanded payrolls by 274K, with notable increases for leisure/hospitality (+84K), professional/business services (+75K), education/health (+74K) and transportation/warehousing (+47K) being only partially offset by a decline for retail trade (-61K). Employment in the public sector advanced 57K. Average hourly earnings rose 5.2% YoY in May, three ticks less than in April but in line with the median economist forecast. MoM, earnings progressed 0.3%

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled declined in April from an all-time high of 11,855K to 11,400K. As a result, the ratio of job offers to unemployed person decreased from a record level of 1.99 to 1.92, which remained extremely elevated on a historical basis. The report also showed that hires declined from 6,645K to 6,586K, a level still 9.3% above this indicator’s pre-pandemic peak. Total separations decreased from 6,248K to 6,033K as quits declined from 4,449K, to 4,424K. The quit rate (i.e., the number of voluntary separations as a percentage of total employment) remained stable at 2.9% for a third month in a row and just short of its peak of 3.0% reached in December 2021. The large number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers

• Employment statistics came in slightly better than expected in May with both the establishment and household surveys showing healthy gains. The details of the reports were also reassuring. Private employment and full-time positions registered sizeable increases, as did the sectors that had been most affected by social distancing measures, notably leisure/hospitality and education/health. The unemployment rate, meanwhile, remained at a 50-year low and broader measures of employment such as the employment-to-population ratio (from 60.0% to 60.1%) continued to improve. Meanwhile, the number of long-term unemployed (27 weeks or more) also trended down, from 1,483K to a 23-month low of 1,356K

• The household survey painted a similar picture of situation prevailing on the labour market, with a reported 321K gain in employment. This came on the heels of a 353K drop the prior month. The improvement, combined with a one-tick increase in the participation rate (to 62.3%), left the unemployment rate unchanged at a post-pandemic low of 3.6%. Full-time employment surged 733K, while the ranks of part-timers shrank 325K

• According to the latest edition of the Fed’s Beige Book, overall economic activity in the United States expanded at a “slight or modest” pace during April and early May, a deterioration from the “moderate” pace reported in the previous report. Manufacturing contacts reported ongoing growth, whereas retail contacts noted some softening as consumers faced higher prices. Residential real estate contacts observed weakness as buyers faced high prices and rising interest rates. The biggest challenge cited most often by the companies surveyed was difficulties with the labour market, followed by supply chain disruptions. The contacts also named rising interest rates, inflation, the war in Ukraine and the increase of Covid-19 cases in some regions as factors negatively affecting their businesses

• In May, the ISM Non-Manufacturing PMI declined for the fifth time in six months, going from 57.1 to a four-month low of 55.9. This was below the indicator’s pre-pandemic level but still consistent with a decent pace of growth in the services economy. Consensus expectations, however, were for the index to slip to a lesser extent (56.5). The new orders sub-index jumped from 54.6 to 57.6. The employment subindex rebounded as well, going back into positive territory (from 49.5 to 50.2). On the other hand, the sub-indices tracking business activity (from 59.1 to 54.5), supplier deliveries (from 65.1 to 61.3), inventory sentiment (from 46.7 to 44.5), and inventory change (from 52.3 to 51.0

• The ISM Manufacturing PMI increased from 55.4 in April to 56.1 in May instead of falling to 54.5 as per consensus. This remained below the indicator’s pre-pandemic level but was still consistent with a decent pace of expansion in the goods economy. The new orders (from 53.5 to 55.1) and output sub-indices (from 53.6 to 54.2) signaled a resumption in growth, as both gauges increased after reaching their lowest levels since the onset of the pandemic. Supplier delivery times, for their part, improved from the prior month (from 67.2 to 65.7), but remained high because of persistent supply constraints amid a tight labour market and restrictive Covid-19 measures in China. The employment gauge fell to an eight-month low (from 50.9 to 49.6), suggesting a slower pace of hiring in May. Price increases moderated but continued to be significant, as the price paid sub-index decreased from 84.6 to 82.2. Of the 18 manufacturing industries surveyed, 15 reported growth in May

• The Conference Board Consumer Confidence Index slid from 108.6 in April to 106.4 in May, which was still better than the 103.6 print expected by consensus. The decline reflected a less optimistic assessment of the present economic situation. Indeed, the corresponding tracker slipped from 152.9 to a still-elevated 149.6 as the share of respondents who deemed jobs plentiful fell from 54.8% to 51.8%. Alternatively, the percentage of polled individuals with a positive view of current business conditions climbed from 20.8% to a ten-month high of 21.1%

• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices jumped a seasonally adjusted 2.42% in March after climbing 2.39% the prior month. This was not only the 22nd consecutive monthly increase for this indicator, but also the largest since data collection began in 2000. For the 21st month running, all the cities covered by the index saw increases. Such a long streak of perfect diffusion had never been recorded before. Price gains in March were particularly impressive in Dallas (+3.83%), Tampa (+3.43%), Seattle (+3.39%), Miami (+3.27%), and Denver (+3.22%)

• With five months to go before US congressional elections, US President Joe Biden recently increased the White House’s focus on the number-one concern of most Americans: inflation. In a three-point plan laid out in a Wall Street Journal op-ed early this week, Biden first vowed to preserve the independence of the US Federal Reserve, allowing it to lead the fight against inflation. Second, the president said he would seek to lower the cost of everyday goods by asking Congress to pass clean energy tax credits and government investments reducing the cost of prescription drugs and childcare, as well as increasing housing supply. Third, Biden said he plans to cut the federal budget deficit by reforming the tax code. The president also acknowledged that the rapid employment gains made in the earlier phase of the recovery from the pandemic are unlikely to be repeated, with monthly job gains likely to slow to about 150,000 a month from the average of around a half-million experienced lately. Many of the proposals in Biden’s plan were contained in the earlier Build Back Better bill that failed to garner majority support from his own party in the Senate

• After just a tiny decline in the Consumer Price Index in April, Fed Vice Chair Lael Brainard said on Thursday that it is too early to say that inflation has peaked. The vice chair indicated that if demand does not cool, then it might be appropriate to keep hiking at the half-point pace that the Fed has said it will follow at its next two meetings. She rejected the idea of a pause in the central bank’s tightening cycle in September, saying that “we’ve got a lot of work to do to get inflation down to our 2% target.” This week, the Fed began to allow bonds held on its balance sheet to mature, a move that will tighten policy by about 50 to 75 basis points over time, Brainard said

• Stocks surrendered a portion of the previous week’s strong gains as investors continued to question whether the Federal Reserve will be able to rein in inflation without causing a recession. Industrials shares outperformed, helped by a rise in Boeing. Consumer discretionary shares also proved resilient, boosted by gains in

• In terms of data release, Trade Balance is out on Tuesday. Advance data for April show goods exports rose 3% over the month while goods imports slipped 5%. Should this same dynamic occur in total trade flows, it would mark the first narrowing in the trade balance since October 2021, as most of the pandemic period has been defined by strong domestic demand leading imports to far outweigh exports

• CPI is out on Friday. With YoY inflation at 8.3% in April, it is clear that the Fed has its work cut out for it when it comes to restoring price stability. Current year-ago rates are benefiting from base effects, but by mid-summer these will no longer be of help. In addition, gas prices soared in May, taking back the short-lived reprieve that they offered in April. Ending May at nearly 50 cents higher per gallon than when it started, prices at the pump are piling onto high electricity and food prices and making inflationary struggles unavoidable for most consumers


• There are signs in the latest Bank of England money and credit data release that the housing market is beginning to cool down. Net borrowing of mortgage debt by individuals was £4.1bn in April, down from £6.4bn in March. Mortgage approvals for house purchases fell by 3,500 in April to a total of 66,000. Notably, both measures are slightly below their 12-month pre-pandemic averages up to February 2020. The effective interest rate on newly drawn mortgages continues to increase, rising in April by 9 basis points to 1.82%.

• Households deposited an additional £6.3 billion with banks, building societies and National Savings and Investment accounts in April, which is higher than the average monthly net flow of £5.5 billion during the 12-month pre-pandemic period up to February 2020. This highlights that households in April remained cautious about spending, supporting data from the GfK measure that shows consumer confidence plunging. UK non-financial businesses withdrew £14.6 billion in April (compared to a net deposit of £12.4 billion in March), suggesting businesses may now be drawing down on savings to cover ongoing business expenses


• Eurozone inflation in May rose more than expected to 8.1 percent y-o-y, compared to 7.5 percent the month before. Energy is expected to have the highest annual rate in May (39.2, compared with 37.5 percent in April), followed by food, alcohol & tobacco (7.5, compared with 6.3 percent), non-energy industrial goods (4.2, compared with 3.8 percent) and services (3.5, compared with 3.3 percent). Meanwhile, core inflation rose above expectations to 3.8 percent this month, compared to 3.5 percent in the previous one. The HICP releases in May (April) for major eurozone countries were as follows: France 5.8 percent (5.4), Germany 8.7 percent (7.8), Italy 7.3 percent (6.3) and Spain 8.5 percent (8.3)

• The ECB looks set to raise rates in July by 25bp, and in September by another 25bp, based on recent communication by ECB Executive Board members. President Lagarde, in a blog post last week, laid out a roadmap signalling the end of net asset purchases in July and the end of negative interest rates in September. Philip Lane more specifically said this week that two quarter-point hikes, one in July and one in September, would be a “benchmark pace”. A few other members of the Governing Council have been more hawkish, suggesting that a 50bp hike in July would be more appropriate, but although this would not be impossible, it still appears less likely

• Inflation in the 19 countries comprising the euro area accelerated more than expected in May to another record high of 8.1% and spread more broadly across the economy, the Eurostat data agency reported

• European shares fell in thin volume as the UK market closed early to celebrate Queen Elizabeth II’s 70th year on the throne. Investors continued to struggle with concerns about elevated inflation, slowing economic growth, the pace of central bank policy tightening, and the invasion of Ukraine. The pan-European STOXX Europe 600 Index ended the week 0.87% lower. Major indexes were generally weaker. Germany’s Xetra DAX Index was little changed, France’s CAC 40 fell 0.47%, and Italy’s FTSE MIB lost 1.91%


• The Caixin/Markit manufacturing PMI for China came in at 48.1 in May, a third consecutive month in contraction territory but up from April’s 26-month low (46.0). Output remained in contraction territory for the third consecutive month despite rising to 43.2 from 38.5 the month before. New orders fell for the third straight month, while the average supplier’s delivery time grew longer. Employment, for its part, was one of the only sub-indexes to show negative growth in the month. “Covid outbreaks in several regions across China continued to weigh on the economy [but] the rate of contraction in manufacturing was lower than the previous month,” according to the Markit report. Cost pressures moderated in the month but remained high, with firms affirming that “expenses had risen due to higher cost for raw materials, transport and fuel”. Selling prices, for their part, cooled in an attempt to boost demand. Finally, business expectations regarding future output shrank to a five-month low, with companies citing “concerns over the time it will take to contain the virus as well as the Ukraine war

• Headlines regarding China’s debt-laden property developers turned slightly positive. A private survey showed that new home prices rose slightly in May from April. The May sales data showed a year-on-year decline of 59.4%, slightly worse than the 58.4% drop recorded in April, but sales for the top 100 developers advanced 5.6% month on month. Separately, property data provider CRIC issued data showing that property sales in 30 major cities measured by gross floor area rose 4% month on month. China’s central bank requested meetings with banks in several cities to discuss why loans to property developers remain soft despite pleas by regulators to increase lending, Bloomberg reported

• China’s government unveiled more details of the stimulus programs it announced the previous week, with 33 measures covering fiscal, financial, investment, and industrial policies. Demand for Chinese bonds—already weakened due to rising U.S. Treasury yields—received a further setback amid reports that the government plans to accelerate the issuance of local government special bonds for funding various project

• Chinese stocks rallied in a holiday-shortened week after Beijing unveiled a raft of support measures to cushion an economic slowdown triggered by the country’s zero-tolerance approach to the coronavirus. For the week ended Thursday, the broad, capitalization-weighted Shanghai Composite Index rose roughly 2.1%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.2%. China’s stock and bond markets were closed Friday for the Dragon Boat Festival

Sources: T. Rowe Price, MFS Investment Management, National Bank of Canada, Wells Fargo, M. Cassar Derjavets