The Bureau of Labor Statistics (BLS) reported strong job growth of 272,000 new jobs in May, exceeding the consensus estimate of 182,000. However, revisions to March and April job creation numbers were down by 15,000 jobs. The unemployment rate rose to 4 percent, the highest since December 2021. The U6 measure, which includes unemployed individuals, those marginally attached to the labor force, and part-time workers for economic reasons, increased to 7.4 percent, indicating a potential slowdown in the economy.
The Household Survey showed 182,000 more people employed in May compared to April, but 250,000 workers exited the workforce. Job creation was predominantly in lower-wage sectors like education, health, social services, leisure, hospitality, and retail.
Despite the positive job numbers, recent reports have cast doubt on the strength of the economy. Bloomberg suggested an overstatement of job growth in 2023, while Standard Chartered Bank analysis indicated that a significant portion of job growth since October 2023 came from asylum-seekers, refugees, and migrants. These factors, along with concerns about government spending fueling GDP growth and elevated asset valuations, raise questions about the sustainability of economic growth.
The Federal Reserve’s projections show modest growth through 2026, with concerns about high asset valuations and financial vulnerabilities. The Fed’s emphasis on using other tools to address financial stability risks suggests a cautious approach to monetary policy. The large balance sheet of the Federal Reserve continues to be a topic of concern in light of the current economic conditions. As of May 27, the Federal Reserve’s balance sheet remained at $7.284 trillion, a figure similar to what it was in December 2020 and only $100 billion lower than it was in January 2021. Prior to the pandemic, the balance sheet was at $4.1 trillion. It is believed that the Fed is easing its quantitative tightening pace due to significant risks in the banking sector, particularly related to commercial real estate loans coming due for refinancing. These loans, many of which were originated after the 2008-09 financial crisis, will require refinancing at much higher rates, leading to potential defaults and foreclosures. The Fed has expressed concerns about overstated commercial real estate valuations, with Moody’s even considering downgrading several regional banks due to their exposure to such loans.
Despite these warnings, monetary policy remains accommodating, with the Fed aiming for a “soft landing” ahead of the 2024 elections. However, this approach is seen as a long-term mistake, given the persistently high inflation rate and the bloated balance sheet. The combination of fiscal and monetary policy measures has artificially boosted asset prices, potentially setting the stage for future economic challenges, such as continued inflation or a severe recession.
There are also several foreseeable risks, or “gray swans,” facing the economy, largely driven by national policy choices. These include de-dollarization, potential oil shocks, municipal bankruptcies, Russian retaliation for U.S.-supplied missile strikes, and troubled clearings of Treasury auctions. These factors could contribute to a slowdown in GDP growth, with the economy potentially entering a period of stagflation.
Recent data points, such as the ISM Manufacturing PMI and Services Index, suggest a mixed picture for the industrial and service sectors, with varying levels of growth and contraction. The Job Openings and Labor Turnover Survey (JOLTS) for April showed a slight decline in job openings, while housing permits in April were at a seasonally adjusted annual rate of 1,440,000. In April, the revised rate of 1,485,000 was 3.0 percent lower than the March rate, and 2.0 percent lower than April 2023. Personal income and outlays for March and April, released on May 31, showed disposable personal income increasing by 0.2 percent in current dollars, while declining by -0.1 percent in chained 2017 dollars. Personal income in current dollars also saw a 0.3 percent increase.
The February Personal Consumption Expenditures (PCE) Index, excluding food and energy, reported a 2.8 percent increase from a year ago, which is considered the Federal Reserve’s preferred measure of inflation. PCE inflation, or “headline inflation,” stood at an annualized 2.7 percent. Despite this, annualized inflation rates have remained relatively stable for months.
The RCP/TIPP Economic Optimism Index, previously known as the IBD/TIPP Economic Optimism Index, dropped by 3.1 percent in June to 40.5. This marks the 34th consecutive month that the index has been in negative territory.
Please note that the views expressed in this article, including future events, represent the opinions of the firm and its management as of June 7, 2024. These views will not be updated for events occurring after this document was submitted for publication. The statements made in this article should not be considered investment advice, and individuals should consult with their own advisers before making any investment decisions. Additionally, the author associates with principals of Technometrica, co-publishers of the TIPP Economic Optimism Index, in certain aspects of their business.
The opinions expressed in this article are solely those of the author and do not necessarily reflect the views of The Epoch Times.
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