April’s Showers Bring May’s Economic Flowers
So much for the summertime blues.
The Conference Board’s monthly measure of consumer confidence is another piece of evidence suggesting that the economy accelerated in May. Confidence rose for the first time in four months, defying expectations for another decline, according to the report released Tuesday.
Dana Peterson, the chief economist at the Conference Board, reports that labor market strength bolstered consumers’ overall assessment of current conditions. Although the share of consumers saying jobs are plentiful slipped to 37.5 percent from 38.4 percent, this was overshadowed by the larger move downward to 13.5 percent from 15.5 percent in the share saying jobs are hard to get.
What’s more, consumers got a bit more optimistic. In May, fewer consumers expect worsening of future business conditions, job availability, and income.
“Compared to last month, confidence improved among consumers of all age groups. In terms of income, those making over $100K expressed the largest rise in confidence. On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100K) consumers,” Peterson reports.
PMIs and Claims Show Signs of Acceleration
This comes on the heels of last week’s flash purchasing managers indexes (PMI) from S&P Global showing an unforeseen burst of activity and a revival in manufacturing. According to the surveys, business activity accelerated to its fastest pace in two years in May. The service sector drove the upturn, reporting the largest output rise in a year, but manufacturing also displayed stronger growth.
“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signalling the fastest expansion for just over two years in May. The data put the US economy back on course for another solid GDP gain in the second quarter,” Chris Williamson of S&P Global wrote last week.
The data on initial claims for jobless benefits are telling the same story. Claims spiked to 232,000 in the week ended May 4, but this was largely due to some unresolved seasonality around school spring breaks. Since then, claims have been falling, to 223,000 in the following week and 215,000 last week. The labor market appears very strong.
(Photo: Ümit Yıldırım/Unsplash)
The picture these real-time reports on the economy are telling is one of resurgent growth after a short period of relative sluggishness in March and April. If this is borne out in the hard data—which we will not see until June and July—then that will probably be enough to put the Fed decisively on hold for the rest of the year. Even with the soft-data we have now, it strikes us as very unlikely that the Fed would be confident enough to start cutting in July or September.
Don’t Worry That Consumer Sentiment Sank
But what about that consumer sentiment report from the University of Michigan last week? It showed a decline in consumer sentiment in May, which at first glance runs against the grain of the PMI, jobless claims, and confidence reports. But the divergence may not be as large as it looks.
In the first place, the final reading for the University of Michigan consumer sentiment metric was better than the mid-month, suggesting some improvement as the month went on. What’s more, the University of Michigan survey is far more prone to be pulled down by inflation expectations and the difficulty small businesses have due to rising costs and labor shortages. In other words, factors that might depress the consumer sentiment figure might actually be signs of an inflationary acceleration.
Importantly, both the University of Michigan and the Conference Board measures indicated an increase in inflation expectations. That is definitely something that is likely to catch the eye of Fed officials at their next meeting in mid-June.
We’ll have a clearer picture of May’s economic conditions when the Department of Labor releases the nonfarm payrolls report next week. A strong report would probably be enough to kill off hopes for a July rate cut and perhaps even snuff out the odds of a September cut.