submitted by
Uric Dufrene, Ph.D., Interim Executive Vice Chancellor for Academic Affairs, Sanders Chair in Business, Indiana University Southeast
The past two weeks saw some key data releases, and the trend pointed in the direction of a slowing economy. This is getting us closer to a Fed rate pause, the first step in a reversal of rate hikes.
The national payroll report on Friday showed the economy adding 236,000 jobs in March. The 236,000 number was in line with expectations, coming in just under the consensus estimate of 240,000. The more revealing number was with private payrolls, slowing to 189,000. This is the smallest positive gain in private payrolls since early 2020. The data released showed that the average work week declined to 34.4 hours, from 34.5 the previous month.
One big positive with the report was the jump in the labor force. The nation’s labor force climbed almost 500,000 from the previous month, and the labor force participation rate increased to 62.6%. An expanding labor force will help apply headwinds to average hourly wages. The report did show that average hourly earnings increased by 4.2% on the year, and this was slightly less than expected. This is a number the Fed will closely monitor. A deceleration in average hourly earnings will give the Fed some of the justification it needs to pause interest rate hikes.
National manufacturing continues to point to a slowing economy. The payrolls report showed that manufacturing lost 1,000 jobs nationally, and the latest ISM report showed additional deceleration. The ISM Index slowed to 46.3, down from 47.7 the previous month. A number under 50 points to contraction, and above 50 points to expansion in manufacturing. The ISM Index hit 50 back in October 2022, and has been in negative territory since. A reading of 46.3 is not necessarily consistent with a recession, however. There have been readings in that vicinity absent a declared recession. But if the declining trend continues, this will no doubt put us closer to the start of a recession.
We have been expecting a slowdown on the goods side of the economy for quite some time. The nation saw a surge in goods spending during the pandemic and the year following. At some point, we need to see a slowing of goods spending, and that is exactly what has occurred. While we have been expecting slower growth in goods spending, spending on services has been increasing. The ISM Services Index showed a big surprise, however. The index came in at 51.2, much lower than the consensus estimate of 54.5, and a noticeable decline from 55.1 the prior month. The services economy is still expanding, but the last report showed that the service economy may be reaching a stall, in line with the overall slowing of the economy.
A couple of other labor market reports point to slower growth. Unemployment claims, which have been running consistently under 200,000 for the week, surged to 228,000. This level is still significantly under the number that is associated with a recession, but the gain was noticeable. If we begin seeing unemployment claims increases like the one last week, this will be noticed by the Fed and more calls for a rate pause and ultimately reversal will become more pronounced. The JOLTS report showed that job openings fell to under 10 million. While this is still a very large number, relative to unemployment, the decline reversed the past couple of months that had seen job openings increase.
The other big piece of information over the past two weeks was on the inflation front. The Fed’s preferred inflation gauge, the PCE Deflator, came in less than expected. The Core PCE Deflator, which excludes food and energy, increased by .3%, and this was less than the expected change of .4%. The year-over-year change was 5%, less than the expected change of 5.1%. The stock market responded favorably. The 10-year Treasury yield peaked at 4.2% in November 2022, and has declined to 3.4% since. A declining Treasury yield signals slower growth and a declining premium for inflation.
Markets are still expecting a rate hike of 25 basis points for the next Fed meeting in May. We may see a pause if additional economic reports come in weaker than expected. We are not quite there yet, but it will not surprise me if we see a pause in rate hikes come May.