ADP payrolls dip 33K.

The payroll data by ADP was revised several years ago. It no longer is meant to predict the official payroll survey that we see at the national level but does add valuable color to our read of the labor market.

Hiring freezes and… …are taking a toll, esp on new entrants into the labor force are struggling.

Hiring freezes are taking a toll even though layoffs remain low.

The losses were largest in Professional business services, health and education.

Funding freezes are playing a role.

Tariffs are playing havoc with economic behaviors & data, triggering the mother of all front-running cycles.

- Imports soared in the first quarter, as companies scrambled to get ahead of tariffs, which when combined with weak exports, caused the largest jump.. ..in the trade deficit on record.

In April, we saw a massive pull-back and plunge in the trade deficit - largest on record.

BUT, pause in most prohibitive of tariffs on China triggered another scramble to get goods into the country.

Much like the pandemic…

The personal income and expenditures report was gut wrenching.

Income tumbled along with spending as the surge in retirees rushing to to get to tap Social Security payments last month reversed. That pushed overall incomes down 0.7% and more than reversed the gains of April. The level of personal income after adjusting for inflation dropped to its lowest level since December, before the start of the year.

The loss in incomes absent the distortions created by social security payments set overall incomes back to March levels. That is still weak.

A $10 per barrel increase in the price of oil is equivalent to about 25 cents per gallon of gas.

The CPI effect is about 0.2% but there are secondary effects if oil price remain elevated on the supply chain.

Those increases are in addition to a surge in shipping… …costs related to on/off tariff decisions.

Shipping costs on Baltic 12 routed jumped at fastest two-day pace on record June 2-3, in a move reminiscent of the pandemic.

Same time break evens in oil for new drilling are higher due to tariffs. That is limiting new drilling.

Inflation figures remained tame today.

However, inventories amassed ahead of tariffs and efforts to shore up cash flow by discounting ahead of the bite of tariffs helped blunt initial boost to inflation.

The PPI tomorrow will revealed whether there was a blow… …to profit margins due to tariffs. We saw some of that in the previous PPI report.

The @NYFedResearch released a survey of firms June 4 regarding the initial effects of tariffs and the results were extremely worrisome.

From our trade & customs
experts on court ruling on emergency tariffs known as IEEPAs

1) The government has 10 days to shut down the reciprocal and Canada, Mexico, China tariffs

2) The gov’t filed an appeal which may result in a stay of the injunction putting tariffs… …back into effect until a decision is reached.

3) Section 232 tariffs on steel, aluminum, and auto tariffs remain in effect. Section 301 tariffs on China unaffected.

4) Section 301 tariffs on China remain in effect.

5) The process for requesting refunds is still unclear.

As we expected, the core measures of PCE inflation, accelerated in February.

We and the Federal Reserve had a good idea that this would occur after the CPI and the PPI appeared to cool for the month of February. The components of those inflation measures that feed into the PCE suggests an acceleration in inflation. This is the same time that other measures of inflation that the Federal Reserve watches to get a better handle on what is happening to underlying inflation measures, such as the Cleveland Fed’s trimmed mean measure of inflation also picked up.

Key points on spending, income & inflation data for Jan.

Winter storms had big effect on mobility in the South - coldest Jan since 1988. That took a toll on foot traffic in stores & on vehicle dealer lots. Consumer spending dropped 0.5% after adjusting for inflation but was revise up in 4Q Weakness in goods; largest drop after adhesion for inflaion since July 2021, height of Delta Wave of COVID.

Services slowed to crawl.

Disposable incomes surged - up 0.6%. A bump in Social Security payment accounted for 0.2% of that gain. Large jump in dividend income.

All eyes on the Federal Reserve.

Markets widely expect a quarter point cut today but debate will be heated. A dissent can’t be ruled out.

The Fed has noted that it would look at a spectrum of data on growth, inflation, the labor market, financial conditions and inflation expectations all into account when making its decision on rate cuts. Growth, inflation and the labor market have surprised to the upside since November. Inflation expectations appear to be less anchored and more unmoored than hoped, while financial conditions have eased.

Some asset prices look downright frothy.

ADP payroll report grew a less than expected 146K in November, after downward revisions to October. However, the ADP data is an independent data series on the labor market. Payrolls grew a record 183K in October vs the 12K in the @BLS estimate for the month. The data no longer acts as a forecast for the @BLS survey but is an important independent look at the labor market. It was not as suppressed by storms & strikes as we saw in the @BLS survey, which means it is likely understating the rebound in the official data.

One of the most missed stories in the downward revision to payroll employment, regardless how big it ends up, it reinforces evident that productivity growth is improving and seems to be sustaining above pre-pandemic trend. That is really important for soft landing scenario. Former Fed Chair Alan Greenspan attempted to preemptively stop inflation in 1994-95. He doubled fed funds rate in a year. The economy stalled out in first half of 1995 and he held rates higher for longer except for a flinch an quarter point cut in July 1995.

Next Friday the employment report for July will be released and there is a very high probability that the unemployment rate triggers what is known as the “Sahm Rule,” a recession indicator named for @Claudia_Sahm.

She herself has warned that it might not be signaling what it did in the past, given the unique nature of the post pandemic economy. Rules, much like Olympic records, are meant to be broken. Much of the rise in unemployment that we have seen thus far in the Federal Reserve’s credit tightening cycle has been due to a rise in the number of people participating in the labor force and seeking work, as opposed to a surge in layoffs.

Still, not all is coming up roses. Those who have lost a job are finding it harder and taking more time to replace it, while the unemployment rate among new college grads has risen more rapidly than that for overall college grads. Unemployment claims have also moved up, exacerbated by Hurricane Beryl and its devastation in Texas the week of the survey for the July employment report.

Lots of back and forth on inflation. A lot can be true all at once. First, let’s back up and acknowledge that the CPI & wage measures are aggregate measures - they represent everyone but no one individual. Hence, the importance of having the break down that.. ..stats agencies, Federal Reserve system and independent groups doing by income strata.

Inflaion has cooled but the level of prices remains elevated & people feel as though they are losing ground. Low income hh struggling most.

🥶The ice is thinning…red flags are emerging for the US economy.

A 🧵”Sahm Rule” & how elusive soft landings truly can be. What is often touted as a victory, the 1994-95 tighten and easing cycle was more about luck than skill. The employment report showed we added 206K jobs after downward revisions to May. More than a third of those gains were in state and local hiring; gains were less broad based than I would like and we tend to get a lot of layoffs in June and July in the public sector, which makes for easy seasonal adjustment of the data.

Soft landing or not…many point to the 1994 hiking cycle, which culminated with a once unheard of .75% bump in the fed funds rate at one meeting as a model for soft landing.

I remember it differently. Former Chairman Greenspan was focused on checklist… …of things he believed caused inflation. They spanned unemployment to factory utilization. As we crossed those thresholds, he started to GRADUALLY raise rates. The gradualism was his thing.

Then the economy cratered. We had two months in a row of red ink in employment in 1995 & the Fed cut.

Real GDP revised down to 1.3% in 1Q from an initial report of 1.6%. The trade
deficit widened & shaved 0.9% from growth alone. Another 0.5% was lost to a drop in inventories; those losses should provide a tailwind for manufacturing. The largest downward revision was consumer spending. An acceleration in spending on services, where inflation remains hottest, was tempered by a ⬇️ in spending on goods. This echos challenges retailers cite. Big ticket durable goods, which require financing, contracts the most. Credit card usage flatline, as subprime & young borrowers hit limits.

More on the break between economic data & perceptions.

New Harris Guardian Poll reveals that majority of Americans believe we are in a recession. This despite other measures which show greater personal job security, with desire & confidence increasing in ability to switch jobs.

Here is the link to the poll results and story

theguardian.com/us-news/ng-int… I have written a lot about differences in perceptions vs aggregate data. They are odd but I do think it is importantly to acknowledge that this has been an extraordinary time. Problems that were simmering pre pandemic came to a boil with pandemic.

Ok. Sorry for confusion. Here is a corrected & hopefully more straight forward version.

The inflation data on CPI was a relief because it was not as bad as many feared after a hot read on the producer price index (PPI).

What matters is where inflation is & is not. Shelter costs moderated on a drop in hotel room rates. The shelter component is expected to roll over more “convincingly” for the Fed as we move into Spring and Summer. However, Fed is a bit worried that improvements in rents and owner’s equivalent rent might stall.

Data & perspective

Inflation peaked in June 2022

The deceleration we have seen since is the fastest in 50 years,
w/o brutal rise in unemployment.

The length of time that prices accelerated was short in historically but the first such acceleration in decades. Still painful.

Wages have outpaced inflation since mid 2023, but we need to do more than regain what was lost to inflation - consumers want to feel improvements in living standards above and beyond 2019 levels. Hard to do when costs of essential such as shelter and vehicle to get to jobs so high. Between 2019 & 2023, home prices up 50%, rents up 30% and wages up ~ 18%. Everything is no longer rising all at once but disinflation does not equate to price cuts across the board.

Low-wage workers who went from invisible to essential saw their wages leveled up, moved from the shadows into the sun, only to be burned by inflation.

Wealth increased at the fastest inflation-adjusted 3-year pace on record - ⬆️37% - from 2019 to 2022; the gains were across income strata. However, inequality worsened and the ranks of those in poverty increased.

Relativity mattes as does keeping up with the Joneses.

Momentum & heat

Real GDP rose at a 1.8% pace in the first quarter, a sharp slowdown from the 3.4% pace of the fourth quarter. Much of that slowdown could be attributed to a widening of the trade deficit, a DROP in federal spending and a further liquidation of inventories. The latter two will be reversed in the second quarter. Underlying demand remained solid. Consumer spending grew at a 2.5% pace with spending on services offsetting a drop on spending on big ticket goods that need be financed, notably vehicles. People are catching up on their medical care, having families and struggling with long COVID. Others are stepping out, traveling and reengaging with large in-person group events.

Big GDP and PCE data in week ahead:

We will get the first estimate of the GDP for the first quarter.

Growth could come in ~ 2.5%, with many bracing for an upside surprise given the @AtlantaFed GDP nowcast running at 2.9%:

-Consumers remained defiant, posting solid if not spectacular gains after accelerating in the second half of 2023.
-Business investment likely picked up, aided by investment in chip plants, new tech and intellectual property.
-Residential investment picked up after a soft fourth quarter, aided by temporary drop in mortgage rates. Single family home builders continue to move downscale to tap pent up millennial demand. Higher rates could crimp second quarter gains. Multifamily construction hit hardest.
-Inventories were rebuilt after drawdown in fourth quarter.
-Federal gov’t spending was constrained by the continuing resolution. State & local (lion’s share) held up better.
-BIGGEST NEGATIVE => Trade deficit widened as U.S. outperformed major trading partners. The PCE inflation index by our estimate is expected to rise less than the overall consensus due to weight for food.

Action is in the core and super core services.

-Core up 0.3% in Mar, same as Feb. That translates to a slight tick down on Y/Y to 2.7% but the 3M annualized accelerates a bit 6M cools slightly but still too hot.
-Super core 0.2% in Mar, same as Feb. That translates to 3.2% Y/Y from 3.3% last month. 3M annualized cools slightly along w/6M but both still too hot for Fed.