Category: Economy

Job creation at companies decelerated to the slowest pace of the pandemic-era recovery in May, payroll processing firm ADP reported Thursday.

Private sector employment rose by just 128,000 for the month, falling well short of the 299,000 Dow Jones estimate and a decline from the downwardly revised 202,000 in April, initially reported as a gain of 247,000.

The big drop-off marked the worst month since the massive layoffs in April 2020, when companies sent home more than 19 million workers as the Covid outbreak triggered a massive economic shutdown.

By ADP’s count — which usually differs somewhat from government figures — payrolls had increased by nearly 500,000 a month over the past year.

May’s slowdown in hiring comes amid fears of a broader economic pullback. Inflation running around its highest level in 40 years, the ongoing war in Ukraine and a Covid-induced shutdown in China, which since has been lifted though with conditions, have generated fears that the U.S. could be on the brink of recession.

Small business took the biggest hit during the month, as companies employing fewer than 50 workers reduced payrolls by 91,000. Of that decline, 78,000 layoffs came from businesses with fewer than 20 employees.

“Under a backdrop of a tight labor market and elevated inflation, monthly job gains are closer to pre-pandemic levels,” ADP’s chief economist, Nela Richardson, said. “The job growth rate of hiring has tempered across all industries, while small businesses remain a source of concern as they struggle to keep up with larger firms that have been booming as of late.”

In other economic data Thursday, initial jobless claims for the week ended May 28 totaled 200,000, a decline of 11,000 from the previous week and below the 210,000 estimate, according to the Labor Department.

Continuing claims fell to 1.31 million, the lowest total since Dec. 27, 1969, and indicative that while hiring may be slowing, the pace of layoffs looks muted.

Also, first-quarter productivity was revised slightly higher but still reflected a decline of 7.3%, the biggest tumble since 1947. Unit labor costs jumped by 12.6%, the biggest increase since the third quarter of 1982, according to the Bureau of Labor Statistics.

The biggest change in the ADP count came in leisure and hospitality, the sector most hit most by restrictions and which has been a leader throughout the recovery. May saw new hires of just 17,000, even as the summer tourism season gets set to hit full swing.

Education and health services led sectors with growth of 46,000, while professional and business services was next with 23,000 and manufacturing added 22,000. Service-providing jobs grew by 104,000, while good producers added 24,000.

Companies with 500 or more workers led with payroll gains of 122,000, while midsize firms contributed 97,000.

The report comes the day before the BLS issues its more closely followed nonfarm payrolls count, which is expected to show a gain of 328,000 following April’s 428,000. The unemployment rate is forecast to edge down to 3.5%, which would tie for the lowest since December 1969.

The BLS count includes government jobs, differing from ADP, which is a tally of private payrolls.

Most of the U.S. has been seeing just “slight or modest” economic growth over the past two months or so, according to a Federal Reserve report released Wednesday.

While all 12 Fed districts reported continued growth, the central bank’s periodic “Beige Book” indicated that four of the regions showed “that the pace of growth had slowed” during the previous period.

The report covers the period from mid-April through about May 22.

In addition to broader views on the economy, the report said most districts showed price increases rising at a “strong or robust” pace. While two districts said “rapid inflation was the continuation of a trend,” three said prices had “moderated somewhat.”

About half the districts reported that companies were still able to pass higher prices on to consumers, though some noted “customer pushback, such as smaller volume purchases or substitution of less expensive brands.”

“Surveys in two Districts pegged year-ahead increases of their selling prices as ranging from 4 to 5 percent; moreover, one District noted that its firms’ price expectations have edged down for two consecutive quarters,” the report stated.

Also, the report noted some weakness in retail as rising prices bit into sales, as well as housing, which also is being affected by higher interest rates.

“Contacts tended to cite labor market difficulties as their greatest challenge, followed by supply chain disruptions,” the report said. “Rising interest rates, general inflation, the Russian invasion of Ukraine, and disruptions from Covid-19 cases (especially in the Northeast) round out the key concerns impacting household and business plans.”

The release comes as the U.S. faces a cloudy economic picture.

First-quarter GDP contracted at a 1.5% annualized pace, and the Atlanta Fed is tracking a second quarter expansion at a 1.3% rate.

And on Wednesday, JPMorgan Chase CEO Jamie Dimon warned of darker days ahead, advising analysts and investors to “brace yourself” against a confluence of factors.

One of Dimon’s biggest concerns is the Fed beginning its “quantitative tightening” program, which technically started Wednesday. The central bank is beginning to reduce the $9 trillion in assets it is holding on its balance sheet, a process that disrupted markets and raised growth concerns during its last iteration from 2017 to 2019.

This time around, the Fed is taking an even more aggressive approach, eventually allowing up to $95 billion a month in bond proceeds to roll off each month, starting in September. The initial phase of the program will see up to $47.5 billion roll off.

The Fed also is raising interest rates to combat the highest inflation the U.S. has seen in more than 40 years.

“Shrinking central bank balance sheets add another element of ambiguity to what is already a period of heightened uncertainty,” Jonas Goltermann, senior markets economist at Capital Economics, said in a note. “After all, QT is something of an experiment: it has only been tried once before in recent times. And central bankers generally seem a lot less sure about how their balance sheet policies affect the economy and financial markets than they are about the impact of raising or lowering interest rates.”

One important element that has kept the economy afloat has been the rapid pace of job gains.

The Beige Book noted that employment was up “modestly or moderately” across all districts, though there were some reports of a slowing or freeze in hiring.

“However, worker shortages continued to force many firms to operate below capacity. In response, firms continued to deploy automation, offer greater job flexibility, and raise wages,” the report said.

Corporate executives are taking a dim view of their prospects, with a majority now expecting a recession ahead, according to a closely watched business survey released Wednesday.

The Conference Board measure of CEO sentiment showed that 57% of respondents expect inflation to come down “over the next few years” but the economy to sustain a “very short, mild recession.”

Those results reflect an overall pessimistic tone from the quarterly gauge, as the board’s Measure of CEO Confidence fell to 42, a steep drop from the first quarter’s 57 and the lowest since the early days of the Covid pandemic. Anything below 50 represents a negative outlook, as the number measures the level of respondents expecting expansion over those seeing contraction.

That reading “is consistent with slowing for sure,” Roger Ferguson, vice chairman of the Business Council and a trustee of The Conference Board, told CNBC’s “Squawk Box” in an interview following the report’s release.

“All of this is telling us that the combination of inflation that is much too high, to quote [Federal Reserve Chairman] Jay Powell, wages that are increasing but not keeping up with inflation, and then the inability to pass all this along is creating a very, very challenging dynamic,” said Ferguson, a former Fed vice chair.

The recession expectation reading wasn’t the only bad news out of the report.

Just 14% of CEOs reported that business conditions had improved in Q2, down from 34% in the first quarter. Sixty-one percent said conditions were worse, compared with 35% in the prior reading. Only 19% see improvement ahead, down from 50%, while 60% expect things to worsen, up from 23%.

One piece of good news was that 63% expect to hire in the next quarter, down only slightly from 66% in Q1. However, some 80% said they were having problems getting qualified workers, down just slightly, while 91% see wages rising by more than 3% over the next year, up from 85% in the first three months of the year.

Also, just 38% expect to increase capital spending, a sharp decline from 48% previously. Some 20% see stagflation conditions of low growth and high inflation.

Powell said in an interview Tuesday with The Wall Street Journal that he remains determined to tamp down inflation, insisting that he will need to see conditions change “in a clear and convincing way” before the Fed stops raising rates and tightening monetary policy.

Ferguson said the survey “suggests that this set of circumstances is not likely to get better anytime soon and consequently pressures on the middle line and the bottom line for businesses, pressures on the household sector, pressures at CEO level, and, frankly, pressures on the Federal Reserve.”

U.S. households are now spending the equivalent of $5,000 a year on gasoline, up from $2,800 a year ago, according to Yardeni Research.

In March, the annual rate of gasoline spending was at $3,800, Yardeni noted. During the week of May 16, the national retail price for gasoline reached a record $4.59 per gallon, the firm said.

“No wonder that the Consumer Sentiment Index is so depressed. The wonder is that retail sales have been so surprisingly strong during April and May,” Yardeni said in a note.

Yardeni said consumers’ inflation-adjusted incomes are barely growing, but they have accumulated a lot of savings, and they are charging more on credit cards.

But Yardeni said don’t bet against the U.S. consumer: “When we are happy, we spend money. When we are depressed, we spend even more money!”

Retail sales data for April, released Tuesday, was surprisingly strong. On a year-over-year basis, retail sales rose 8.2% for the month.

Gasoline sales actually declined in April from March, as prices temporarily fell before ramping up to record levels in May. Spending on gasoline in April surged almost 37% from a year ago, according to Commerce Department data.

The price of gasoline was $3.04 per gallon a year ago, according to AAA. This week, the average price rose above $4 a gallon in all 50 states, according to AAA data.

The national average Wednesday was $4.57 per gallon, according to the AAA website.

Mortgage rates actually fell slightly last week, but the damage has already been done to housing affordability. Both refinance and purchase loan demand dropped, pulling total mortgage application volume down 11% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index.

Mortgage applications to purchase a home declined 12% week to week and were 15% lower compared with the same week one year ago. That was the first weekly drop in homebuyer demand since the third week in April. Mortgage rates have risen over 2 full percentage points since the start of the year, and home prices are up more than 20% from a year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.49% from 5.53%, with points increasing to 0.74 from 0.73 (including the origination fee) for loans with a 20% down payment.

Inflation isn’t helping consumers feel particularly flush either.

“General uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search,” said Joel Kan, an MBA economist.

Applications to refinance a home loan continued their landslide, falling another 10% week to week. Refinance demand was 76% lower than the same week one year ago. Two years of record-low interest rates during the Covid pandemic incited a refinance boom which has now gone bust. There is simply a very small pool of borrowers who can now benefit from a refinance.

While dropping very slightly from the week before, the adjustable-rate mortgage share of total applications remained high at 10.5%. It was around 3% at the start of this year. ARMs offer lower interest rates and can be fixed rate for up to 10 years.

Mortgage rates moved higher again Tuesday, after strong retail sales data and comments from Federal Reserve Chairman Jerome Powell, who said the Fed would not hesitate to continue boosting interest rates until inflation came down.

The weekly drop in homebuyer mortgage demand concurs with another report out Tuesday from the nation’s homebuilders. They reported a considerable drop in both buyer traffic and current sales conditions, according to the National Association of Home Builders. Builder sentiment dropped to the lowest level in nearly two years.

Federal Reserve Chair Jerome Powell emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.

“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told The Wall Street Journal in a livestreamed interview. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.

“We’ll go to that point. There won’t be any hesitation about that,” he added.

Earlier this month, the Fed raised benchmark borrowing rates by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high.

Powell said following that increase that similar 50 basis point moves were likely to come at ensuing meetings so long as economic conditions remained similar to where they are now.

On Tuesday, he repeated his commitment to getting inflation closer to the Fed’s 2% target, and cautioned that it might not be easy and could come at the expense of a 3.6% unemployment rate that is just above the lowest level since the late 1960s.

“You’d still have a strong labor market if unemployment were to move up a few ticks,” he said. “I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”

The U.S. economy saw growth contract at a 1.4% pace in the first quarter of 2022, due largely to ongoing supply side constraints, spread of the omicron Covid variant and the war in Ukraine.

However, tighter monetary policy has added to concerns about a steeper downturn and has sparked an aggressive sell-off on Wall Street. In addition to the 75 basis points in interest rate hikes, the Fed also has halted its monthly bond-buying program, which is also known as quantitative easing, and will begin shedding some of the $9 trillion in assets it has acquired starting next month.

Powell said he still hopes the Fed can achieve its inflation goals without tanking the economy.

“You’d still have a strong labor market if unemployment were to move up a few ticks. I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that,” he said.

He added that “there could be some pain involved to restoring price stability” but said the labor market should remain strong, with low unemployment and higher wages.

Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief.

Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined.

It’s the lowest reading since June 2020, when builders had a brief, quick negative reaction to the beginning of the Covid pandemic before rapidly bouncing back. As the economy shut down, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builder sentiment hit a record high of 90 by November 2020.

Taking out that pandemic effect, this month’s reading is the lowest since September 2019, when the U.S. trade dispute with China was taking a hard toll on building material supply chains.

“Housing leads the business cycle, and housing is slowing,” said NAHB Chairman Jerry Konter, a builder and developer in Savannah, Georgia.

Of the index’s three components, current sales conditions fell 8 points to 78, and sales expectations in the next six months dropped 10 points to 63. Buyer traffic fell 9 points to 52.

Buyers in April saw the average rate on the 30-year fixed mortgage jump from 4.88% to 5.41% and then hit a high of 5.64% in the first week of May, according to Mortgage News Daily. The rate started this year at just 3.29%. At the same time, builders saw inflation hit their costs hard.

“The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.”

Entry-level buyers are being hardest hit by rising rates, but the drop in demand is showing up across all levels. Some surveys are also showing an increase in cancellation rates for new construction.

“We’re seeing an inflection point,” housing analyst Ivy Zelman said in an interview on CNBC’s “Closing Bell” on Monday.

“Our survey did see a pickup in cancellation rates,” Zelman said. “We did see a tick up in incentives, and some of the cancellations, we’ve heard from some of the hotter markets, were actually private investors.”

Regionally, on a three-month moving average, builder sentiment in the Northeast was unchanged at 72. In the Midwest, it fell 7 points to 62, and in the South it fell 2 points to 80. In the West, sentiment fell 6 points to 83.

April’s consumer price index report is expected to show inflation has already reached a peak — a development that some investors say could temporarily soothe markets.

But economists say, even with a reprieve in headline inflation, core inflation could gain on a monthly basis and stay elevated for months to come. Core inflation excludes food and energy costs.

The CPI report is expected to show headline inflation rose 0.2% in April, or 8.1% year-over-year, according to Dow Jones. That compares with a whopping 1.2% increase in March, or an 8.5% gain year-over-year. The April data is expected at 8:30 a.m. ET Wednesday.

Core CPI is expected to rise 0.4% or 6% year-over-year. That compares with 0.3% in March, or 6.5% on an annualized basis.

Stocks gyrated Tuesday ahead of the much-anticipated data. The S&P 500 ended the day with a 0.25% gain, and the Nasdaq added 0.98%. The Dow Jones Industrial Average lost 84.96 points.

The closely watched benchmark 10-year Treasury yield retreated to about 2.99% Tuesday after a sharp run up to 3.20% Monday. Bond yields — which move opposite price — have been running higher at a rapid pace on expectations of aggressive Federal Reserve interest rate hikes.

“I wouldn’t say tomorrow’s CPI matters by itself. I think the combination of March, tomorrow’s and May’s data will kind of be the big inflection point,” said Ben Jeffery, a fixed income strategist at BMO.

But Jeffery said the report has a good chance of being a market mover, no matter what.

“I think it will either reassert the selling pressure we saw that took 10s to 3.20% … Or I think it will inspire more dip-buying interest for investors who have been waiting for signs that inflation is starting to peak,” he said.

In the stock market, some investors say the data could signal a turning point if April’s inflation comes in as expected or is even weaker.

“I think the market, from a technical standpoint, is very focused on trying to divine how much the Fed is going to move,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.

A hotter report would be a negative since it could mean the Fed will take an even tougher stance on interest rates. Last week, Fed Chair Jerome Powell signaled the central bank could hike rates by 50 basis points, or a half-percent, at each of the next couple of meetings.

The market has been nervous about inflation and that the Fed’s response to it could trigger a recession.

“I don’t think this is the end of the drawdown in the market … The market needs to go down 20% at a minimum. If we get a series of better inflation data, then I think 20% could be the bottom,” Roth said. The S&P 500 is off nearly 17% from its high.

“If the inflation data is not as good as we think it will be, not just this month but consecutive months, then I think the market prices for a recession, and then it’s down 25% to 40%,” said Roth.

Roth said there are two potential exogenous risks in inflation data, and either could prove to be a problem for markets. One is the unknowns around the oil and gas supply strains and price shocks caused by Russia’s invasion of Ukraine, and the other is China’s latest Covid-related shutdowns and the impact on supply chains.

“Nobody knows how they’re going to play out … Either one of these could be a bigger problem than the market is anticipating right now,” Roth said.

Aneta Markowska, chief financial economist at Jefferies, said she is expecting a hotter-than-consensus report, with 0.3% gain in headline CPI and a 0.5% jump in core. She thinks the market’s focus is wrong and investors should be concerned more with how much inflation can decline.

“I think a lot of folks are focusing on the year-over-year rate slowing, and I think that helps consumers because it looks like real wages will actually be positive for a change in April on a month-over-month basis,” she said. “But if we get that acceleration in core back to 0.5% that we are projecting, that’s a problem for the Fed. If you annualize that, you’re running at 6%, and that would really mean no slowdown.”

Markowska noted the central bank assumes inflation will slow to 4% this year and 2.5% next year. “The question we have to ask is are we on track to hit that forecast and if not, the Fed could have a bigger policy overshoot than they envisioned,” she said.

The perception is that inflation problems are supply chain-driven, but those issues are going away, Markowska added.

“I think that ship has sailed. We’re past supply chains. This is the services sector. This is the labor market,” she said. “Just because we peak and core goods inflation is coming down, that doesn’t fix the problem. The problem is now everywhere. It’s in services. It’s in the labor market, and that’s not going to go away on its own … We need core inflation to get down to 0.2%, 0.3% month-over-month pace, and we need it to stay there for a while.”

Barclays U.S. economist Pooja Sriram said she does not think investors should get too excited about inflation peaking, since what will matter is how quickly the level comes down.

“For the Fed to be pacified that inflation is coming down, we need to get a really weak core CPI print,” she said. “Headline CPI is going to be hard to come down because the energy component is swinging.”

The energy index was up 11% in March, and it may be less of a contributor to overall inflation in April because gasoline prices fell. Economists say energy will be a bigger issue in May data, since gasoline is rising to record levels again.

Some economists expect used-car prices will come down in April, but Markowska said data she monitors shows increases at the retail level.

Federal Reserve Governor Christopher Waller pledged Tuesday that the rate-setting group wouldn’t make the same mistakes on inflation that it did in the 1970s.

Back then, he said during a panel chat with Minneapolis Fed President Neel Kashkari, the central bank talked tough on inflation but wilted every time tighter monetary policy caused an uptick in unemployment.

This time, Waller said he and and his colleagues will follow through on its intentions to raise interest rates until inflation comes down down to the Fed’s targeted level. The central abnk has raised rates twice this year, including a half percentage point move last week.

“We know what happened for the Fed not taking the job seriously on inflation in the 1970s, and we ain’t gonna let that happen,” Waller said.

The remarks came with inflation running at its hottest pace in more than 40 years. Earlier in the day, President Joe Biden called inflation the economy’s biggest challenge now and noted fighting price increases “starts with the Federal Reserve.”

Though he noted the central bank’s political independence, Biden said, “The Fed should do its job, and it will do its job. I’m convinced of that in my mind.”

While Waller drew the comparison to the Fed of the 1970s and early ’80s, which eventually defeated inflation with a series of massive interest rate hikes when Chairman Paul Volcker took over, he said he doesn’t think the current policymakers need to be as aggressive.

“They had zero credibility, so Volcker just basically said, ‘I’ve got to just do this shock and awe,'” Waller said. “We don’t have that problem right now. This is not a shock-and-awe Volcker moment.”

The Volcker moves took the Fed’s benchmark interest rate to close to 20% and sent the economy into recession. Waller said he had a conversation with the former chair before his death, and Volcker said, “If I had known what was going to happen, I never would have done it.”

Waller said he thinks the economy can withstand the path of rate hikes this time that will be much gentler than the Volcker era.

“The labor market is strong. The economy is doing so well,” he said. “This is the time to hit it if you think there’s going to be any kind of negative reaction, because the economy can take it.”

Earlier in the day, Richmond Fed President Thomas Barkin also backed the goal of getting inflation under control, saying the likely path will get the fed funds rate to a range of 2% to 3% and “we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not.”

Consumers grew a little more optimistic about inflation in April, though they still expect to be spending considerably more in the year ahead, a Federal Reserve survey released Monday shows.

Inflation expectations over the next year fell to a median 6.3%, a 0.3 percentage-point decrease from the record high in March, according to data going back to June 2013. On a three-year basis, expectations rose 0.2 percentage point to 3.9%, which itself is 0.3 percentage point off the record.

The data comes with 12-month inflation in March running at 8.5%, the highest level since December 1981. April consumer prices are due to be reported on Wednesday.

Responding to the surge in prices, the Fed last week raised benchmark interest rates by a half percentage point, the biggest hike in 22 years and the second increase of the year.

“We have our job to do and we have to bring inflation back down,” Minneapolis Fed President Neel Kashkari told CNBC’s “Squawk Box” in a Monday morning interview.

Americans are still leery about the high cost of living. Household spending is projected to rise 8% over the next year, according to the New York Fed survey. That’s a 0.3 percentage point increase from a month ago and another series high.

However, there also was some optimism, as consumer expectations for gas price increases fell to 5.2%, a 4.4 percentage point drop that came as oil prices edged lower in April. Respondents also grew more secure in their jobs, with just 10.8% expecting to lose their employment over the next 12 months, tied for an all-time low.

Expectations for home prices were unchanged, but the 6% anticipated increase is still higher than the long-term average.