July 8, 2022

The June employment report was stronger than what the market had expected.  The steady employment gains that continue to average 374 thousand are not painting a picture that says the U.S. economy is currently in recession.  During a recession employment declines.  It is not doing that.  During a recession industrial production declines.  It is not doing that.  What seems to be  happening in the labor market is that there are a few less job openings and a slight increase in the number of layoffs.  The economy has slowed somewhat and the labor market is not immune to that.  But that does not leave the U.S. economy close to a recession.

What about the inflation rate?  Is it showing any sign of slowing down?  We expect the CPI to increase 0.6% in June which would raise the year-over-year increase to 8.5%.  The core CPI is also projected to increase 0.6% which would bring the year-over-year increase to 6.0%.  This suggests that through June there has been no meaningful slowing in the rate of inflation.  The June CPI report will be released on Wednesday morning, July 13.

The next important event coming up this month is the FOMC meeting on July 26-27.  The results of that meeting will be available at 2:00 EST on Wednesday afternoon, July 27.  The debate is about whether the Fed will raise the funds rate by 0.5% or 0.75% at that meeting.  At the last FOMC meeting Powell threw out the possibility of a 0.75% hike.  The markets appear to have priced in a 0.75% hike.,  We are currently looking for an increase of 0.5% which would boost the funds rate to 2.0-2.25% but we would certainly not discount the idea of a 0.75% increase.  The outcome will clearly be influenced by what happens to the CPI for June and second quarter GDP (which the Fed will know about at the time of its meeting).

With respect to the economy, there are a number of economists and market participants who believe the economy is already in recession.  Second quarter GDP estimates seem to range from -1.2% to +1.5%.  We are essentially in the middle of that range with an estimate of +0.5%.  If it should register a second consecutive decline in Q2, that would fit the unofficial definition of a recession.  The mystery variable in the GDP equation is trade.  Economists generally expected an increase in Q1 GDP of about 1.0%.  Instead, GDP printed at -1.6% because trade subtracted 3.2% from GDP growth in that quarter.  That was a huge surprise.  I do not ever remember a GDP miss of that magnitude.  In Q2 the trade deficit has narrowed considerably and we could find that trade adds a considerable amount to GDP growth in that quarter — in which case our +0.5% estimate is likely to be too low.  Our first look at Q2 GDP will be on Thursday morning, July 28.  Obviously, an important date.

Back in town later today.  Will get caught up over the weekend.

Stephen Slifer


Charleston, S.C.