Welcome to the first REDW Wealth Bytes, where we will review the prior week’s main economic news and provide some commentary.
ISM Manufacturing
The first piece of news is the ISM (Institute for Supply Management) released its manufacturing number. It came in at 46.9. Any number below 50 is an indication of contraction. ISM Manufacturing has been below 50 or in contraction since November 2022. Moreover, ISM Manufacturing declined from last month’s number of 47.1. Historically, the level and persistence of the number below 50 indicates a recession, but the ISM services number has been above 50 for the most part over the last year, and that appears to have buoyed the economy. During the week of June 5th, we will get an updated number for ISM Services, and that will be another piece of the puzzle.
US Non Farm Payrolls
One of the most anticipated releases comes with the payrolls number in the first week of each month. According to the stat, the US added 339,000 jobs in May, much higher than the consensus estimate of 195,000. With the increase in the labor force, the unemployment rate rose to 3.7%, which is still relatively low by historical standards. Chairman Powell has indicated in the past that he would like to see some weakening in the employment sector before he believes the Federal Reserve can pause raising rates. Given the overall strength in the economic data and the persistence of inflation, I would expect the Fed to raise rates again at their June meeting.
We see some weakness when we look more closely at the payrolls report. Average hourly earnings growth month over month weakened to 0.33%, and given the elevated levels of inflation, any decline in the growth of earnings has an impact. Moreover, the average weekly hours declined to 34.3, which means that the creation of household wealth has weakened, and given elevated inflation, the total growth of household wealth is weakening.
Looking Ahead
For the week of June 5th, two of the most significant economic releases will be ISM Services and data on trade. However, the debt ceiling issue was perhaps the most significant news as Congress sent a bipartisan bill to the White House, which averts the US from default.
The bill raises the debt ceiling until 2025, caps domestic discretionary spending in 2024, and only allows a 1% increase in 2025. While there was much consternation about the debt ceiling in the news, we and the markets generally held that it was more political theater and that both sides would reach an agreement. Also, we continue to disagree with the idea that we should permanently suspend the debt ceiling. Governments raise funds through either direct taxation or debt, which is future taxation. Therefore, the taxation and spending levels of any government need to be debated periodically by the elected representatives.
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