We’re squarely in the dog days of summer, which in Hellenistic astrology is connected to bad luck, lethargy, and, of course, hot and humid weather.
These are the days when economists and market watchers would love to shut down and go away for the summer. But for the Federal Reserve and its chairman, Jerome Powell, there is a lot of work to be done.
So far, this year has confounded market experts. Heading into the year, many expected an economic recession and the stock market to tumble. Those factors, along with moderating inflation, would encourage the Fed to plateau and even cut interest rates.
But just about the opposite has happened. Many economist factors continue to run hot, forcing the Fed to boost rates. Meanwhile, the stock market has enjoyed a tech-led rally all year.
Economic policymakers are now stuck in a month-to-month lurch of reading the economic data tea leaves.
The policy-making Federal Open Market Committee holds its next meeting during the last week of July. And most economists and the market agree that another quarter-percentage-point increase in the federal funds rate target is in store after a pause last month.
But after that? Experts are divided. Morgan Stanley analysts, among others, believe that inflation will be moderating in a way that pushes the Fed to ease off of more hikes. But each time we think economic indicators are cooling off, something comes along to suggest otherwise.
Among the most conflicted recent data is June’s employment report. A 209,000 increase in payrolls were just slightly under expectations after 14 months of straight beats.
The official report from the Bureau of Labor Statistics was less than half of ADP’s estimate of 497,000 for June, released a day before the government’s report. One would generally think the private payroll provider’s figures are more accurate than the BLS’s estimates, given that ADP actually cuts checks for millions of workers in nongovernment sectors.
The official unemployment rate trickled down slightly, to 3.6 percent, while the underemployment rate—which counts folks who work part time due to an inability to land their desired full-time job—ticked up to 6.9 percent.
Another data point is temporary employment. Bloomberg recently reported that employers have cut back on temps in June, a move typically seen just before recessions. The metric has been contracting for several months on a year-over-year basis. Temporary help is usually a leading indicator, as companies would let go of temp staff before cutting full-time staff en masse.
Morgan Stanley analysts recently dove into some of the difficulties in bridging the public versus private payroll numbers gap.
The analysts found that public payrolls generally lag private payroll numbers.
“This occurs because as private sector wages slow, public sector compensation becomes more competitive, and, as a result, backfilling in the public sector is underway,” Morgan Stanley analysts wrote in a July 7 note to clients.
What this means is that the official BLS payroll numbers may yet swell going forward as laid-off private sector employees find more work in state and local government supported roles. This trend is supported further by the Infrastructure Investment and Jobs Act, which was signed into law in November 2021 that provided around $2 trillion in federal funding into large-scale infrastructure projects.
This so-called “backfilling” could exist until end of 2023.
Aside from strong wages and jobs, there are plenty of economic factors suggesting against a healthy economy.
The resumption of payments on millions of student loan debt expected later this summer and the fall is expected to have a “knock-on effects to other categories of debt,” according to a note from Bank of America’s U.S. chief economist Michael Gapen.
Repayment on student loan debt could mean lower payments toward auto loans, credit card debt, and consumer discretionary spending toward the back half of the year.
These signs all seem to suggest one thing: a recession is still coming. The recession we all forecasted from last year may be delayed, but it’s not cancelled.
And less important, there may not be too many interest-rate hikes after July. Perhaps one or two more, before economic indicators really begin to turn.
The bond market confirms that suspicion. The yield curve is still inverted—meaning, near-term yields are higher than longer-term yields—and the gap between the two-year and the 10-year remain its widest since the 1970s and 1980s, when the U.S. economy wrestled with periods of high inflation, rising interest rates, and bouts of recession.
