ECONOMY: U.S. ECONOMY MODERATES, FED SHIFTS IN JUNE

U.S. economic data moderated in June as trade tensions plagued the global economy.

Leading indicators slowed, but remained largely resilient against trade headwinds. The Conference Board’s Leading Economic Index (LEI) rose 2.5% year over year in May, its slowest pace of year-over year growth since January 2017. Still, the LEI is squarely in positive territory, signaling future growth.

The June jobs report was weaker than expected, fueling worries that trade tensions have infiltrated an otherwise solid U.S. labor market. Nonfarm payrolls growth fell well short of consensus estimates [Figure 1], and job gains for March and April were both revised down as well. Still, the average pace of payroll gains has remained steady this year, and slowing job creation is typical late in the business cycle.

The pace of consumer inflation continued to soften. The core Consumer Price Index, which excludes food and energy, increased 2% year over year, matching a 15-month low. Core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.6% year over year in April, below policymakers’ 2% target.

Wage and input pricing pressures faded. Average hourly earnings rose 3.1% year over year in May, an eight-month low. However, current wage growth is at a level that should continue to bolster consumer confidence without concerns of overheating. Growth in the core Producer Price Index (PPI), which excludes food and energy prices, fell to 2.4% year over year, its fourth straight decline.

U.S. manufacturing deteriorated further. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to its lowest point since October 2016. Markit’s PMI ticked up slightly, according to preliminary June data, but the gauge remained less than a point away from contractionary territory (which is below 50).

Consumer sentiment faltered, as the Conference Board’s Consumer Confidence Index fell to its lowest level since 2017. However, heightened trade tensions didn’t faze corporate sentiment. The National Federation of Independent Business’s measure of business confidence climbed for a fourth straight month. Retail sales rose for a third straight month in May, while new orders for nondefense capital goods climbed. Year-over-year growth in both measures was tepid, suggesting long-term demand is slowing.

Fed Language Shifts

On June 18 the Fed chose to keep rates unchanged, but policymakers prepared investors in a measured fashion for an eventual policy shift [Figure 2]. The Fed dropped its “patient” policy stance in the post-meeting announcement and instead reiterated Fed Chair Jerome Powell’s June 4 comments that policymakers will “act as appropriate to sustain the expansion.”

Still, Powell emphasized in his post-meeting press conference that the U.S. economy is performing “reasonably well” with solid economic fundamentals. The Fed kept its gross domestic product (GDP) growth projection unchanged at 2.1% for the year, in line with average output growth in this expansion.

Financial markets are now overwhelmingly pricing in a July rate cut, with fed fund futures implying a 100% chance of lower rates at the Fed’s July meeting.

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