Recent jobs numbers came with some footnotes.
The employment numbers were better than expected, but, as so often, they came with some footnotes.
First, the good news (via the Financial Times):
US jobs growth was almost twice as strong as forecast in May, an unexpected sign of labour market resilience ahead of a Federal Reserve decision on whether to hold interest rates steady or push ahead with another increase.
The economy added 339,000 new non-farm jobs last month, according to figures published by the Bureau of Labor Statistics on Friday, compared with expectations of about 195,000. Figures for the previous two months were also revised upwards.
Job gains were broad-based, with strong additions in professional services, healthcare, leisure and hospitality and construction.
“It’s hard based on this and other recent data to conclude that the labour market is slowing enough to take the heat off inflation,” said Nancy Vanden Houten, lead US economist at Oxford Economics.”
But:
[W]hile the headline payrolls data, which is based on responses from businesses, suggested an extremely hot jobs market, the BLS’s survey of households presented more signs of cooling.
It showed a 310,000 reduction in the number of people that are employed, which pushed the jobless rate to 3.7 per cent, from 3.4 per cent in April. Month-on-month wage growth cooled to 0.3 per cent and edged down on an annual basis to 4.3 per cent — though it remained well above the roughly 3.5 per cent level that is generally seen as a requirement for the Fed to hit its 2 per cent inflation target.
The rise in unemployment was largely driven by the self-employed, but those numbers are based on a separate household survey and can be more volatile. Tinker around with them a bit, and the number of people employed can be shown to have increased.
Meanwhile, there continue to be signs that consumers are coming under pressure. For example, after weakness in Dollar Tree comes a disappointing outlook from Dollar General.
A squeeze on budget shoppers has forced US discount retailer Dollar General to cut its sales forecast, sending its shares down 20 per cent in a sign of mounting pressures in the American economy.
The store chain known for dollar-priced goods on Thursday predicted net sales growth in the range of 3.5-5 per cent in 2023, down from a previous estimate of between 5.5-6 per cent.
“Our sales guidance assumes our customer will remain under pressure for the remainder of the year,” Kelly Dilts, chief financial officer, said on a call with investors.
The weaker outlook comes as US consumers are increasingly stretched by months of persistent inflation. Nearly a third of US adults reported they were either “just getting by” or “finding it difficult to get by”, according to a survey taken in late 2022 that was released last week by the Federal Reserve.
Higher inflation and depleted coronavirus pandemic savings have hit lower-income consumers, the core customers of retailers such as Dollar General. Rival Dollar Tree last week cut its profit outlook as it said that customer spending was shifting away from durable goods to lower-margin food.
It’s worth noting that “depleted coronavirus pandemic savings” is given as one of the reasons for the more downbeat outlook.
Here is an extract from a piece that Kevin Hassett wrote for Capital Matters in March:
[T]he stock of excess savings has declined, by my estimate, to about $500 billion, and will likely be fully exhausted over the next few months. The other factor supporting consumption has been a massive increase in consumer borrowing. Back in 2020, when consumers were unable to work because of Covid-19, they made ends meet by borrowing from their credit cards. At the pandemic’s peak, total consumer loans topped out at $1.6 trillion. Today, that figure has climbed to $1.8 trillion.
Many market observers seem to believe (despite some recent jitters) in a soft landing whereby inflation in wages and prices drops down to the Fed’s target range gradually over the next year, and victory is declared. But even if that happens, the real income loss from the initial shock to prices will be locked in.
Putting it all together: Real wages are down, and consumption, which normally follows, has been temporarily boosted by unsustainable factors. The stock of excess savings is about gone, and credit cards are maxed out. Americans are less able to pay their credit-card bills because their incomes are lower and interest rates are higher. Something will have to give, and it will be spending. Consumption, which in the end has to be supported by income, must inevitably tumble.
Meanwhile, there was this from Costco (via Business Insider):
In a call with investors on Thursday, executives from the warehouse chain shared insights into how their members are shopping, what they’re swapping into their baskets, and what’s being left behind.
CFO Richard Galanti said that some of its customers are ditching pricier beef products for cheaper meats such as pork and chicken. This is a trend that has been common in previous recessions, he said.
Others are bypassing the fresh meat aisle entirely and opting for canned meat and fish products. These items cost less and have a longer shelf life.
There are other indicators showing that Costco’s customers are feeling the pinch. For example, the portion of sales from Costco’s private label brand — Kirkland — grew during the most recent quarter. These products cost less than national brands and are a quick way for customers to save money on their weekly shop.
Consumer spending, roughly speaking, accounts for 70 percent of GDP, but even with some clear signs of consumer weakness, the U.S. does not yet seem to be on a trajectory for 2 percent inflation. The question now is whether the Fed pauses to take stock or continues raising rates. My guess is that Fed will want to be seen to be conservative, and with worries about the banking sector passed (for now anyway) and the debt ceiling raised, “conservative” will mean focusing primarily on inflation. If that’s right, the central bank will resume rate increases, more likely, however, in July than in June. That said, if there is a June pause (and that seems to be the current signaling), I’d expect the Fed to be fairly clear that more rate hikes are coming, and sooner rather than later.