Last week saw a number of important economic updates, with May’s business confidence and employment reports serving as highlights. This week will be relatively quiet, with only a few major releases scheduled. Given recent concerns about rising inflationary pressure, the focus will be largely on Thursday’s release of the Consumer Price Index for May.
Last Week’s News
We started the week with Tuesday’s release of the ISM Manufacturing index for May. This widely followed measure of manufacturer confidence increased by more than expected. It rose from 60.7 in April to 61.2 in May, against forecasts for a more modest increase to 61. Driven in large part by new order growth due to strong consumer demand, this result brought the index to its second-highest level on record. This is a diffusion index, where values above 50 indicate expansion. The improvement in May is a positive signal that manufacturing output has continued, despite headwinds created by rising prices and supply chain constraints. Manufacturer confidence has increased notably since hitting a lockdown-induced low of 41.7 in April 2020. Overall, this encouraging report showed a continued manufacturing recovery driven by sky-high levels of demand as reopening efforts accelerated.
On Thursday, the initial jobless claims report for the week ending May 29 was released. The report showed that 385,000 initial unemployment claims were filed during the week, down from 405,000 initial claims the week before and slightly below economist estimates for 387,000 claims. This result brought the pace of weekly layoffs to a new pandemic-era low, marking the first time we’ve seen fewer than 400,000 initial claims in a week since the start of the pandemic. Although claims can be volatile on a week-to-week basis, we’ve made steady progress in getting them down this year. Improvements have been driven in large part by good news on the public health front that has supported nationwide reopening efforts. Despite the fact that claims remain relatively high on a historical basis, the progress made so far this year demonstrates that the labor market recovery is on the right path.
Thursday also saw the release of the ISM Services index for May. As was the case with manufacturer confidence, service sector confidence improved by more than expected during the month. The index rose from 62.7 in April to 64 in May, against forecasts for a more modest increase to 63.2. This result brought the index to its highest level since records began in 1997. This is another diffusion index, where values above 50 indicate expansion, so this strong report indicates that the service sector growth accelerated. After declining during initial lockdowns last year, the rebound in this index now marks 12 straight months with service sector growth. Continued reopening efforts across the country have helped spur increased demand for services. The rise in demand led to an increase in business owner confidence and business spending. Looking forward, service sector confidence is expected to remain in healthy expansionary territory as mass vaccinations and the easing of state and local restrictions continue.
We finished the week with Friday’s release of the May employment report. The pace of hiring increased during the month, with 559,000 jobs added in May. This result is up from the 278,000 jobs added in April but below economist estimates for 675,000 additional jobs. This solid result now marks five straight months with job growth. The continued reopening efforts throughout most of the country helped support the monthly pickup in job growth. Businesses scrambled to hire workers to meet the surge in demand. The hard-hit leisure, hospitality, and teaching sectors all saw strong job gains, after facing pandemic-induced headwinds earlier in the year. This report was an encouraging signal that the April slowdown in hiring was a temporary lull rather a signal of a stalled labor market recovery. The underlying data was also positive. The unemployment rate fell from 6.1 percent to 5.8 percent, against calls for a decline to 5.9 percent. Ultimately, this report signals an accelerating labor market recovery, which is a good sign for the pace of the overall economic recovery.
What to Look Forward To
We’ll start the week with Tuesday’s release of the April international trade report. The trade deficit is expected to narrow, with economists calling for a decline from $74.4 billion in March to $68.8 billion in April. March’s deficit was the largest single-month trade deficit on record, but the anticipated result for April would bring the deficit close to levels last seen in January. The previously released advanced report on April’s trade of goods showed that a rise in exports and a decline in imports caused the trade deficit for goods to decline. This explains the anticipated decline for the overall trade deficit during the month. The increase in exports of goods in April was impressive given the month’s 8 percent decline in automobile exports, which was driven by the global semiconductor shortage. Overall, if estimates hold, this report would signal that the global economic recovery has started to bring internal trade closer to pre-pandemic levels.
On Thursday, the Consumer Price Index for May is set to be released. Economists expect consumer prices to increase by 0.4 percent during the month, following a 0.8 percent increase in April. Core consumer prices, which strip out the impact of volatile food and energy prices, are also expected to increase by 0.4 percent. On a year-over-year basis, headline consumer inflation is set to rise by 4.7 percent, while core prices are expected to go up by a more modest 3.4 percent. Part of the large annual growth is due to the comparison with numbers from last May, when the initial lockdowns put downward pressure on prices. Rising prices for consumer goods have also contributed to the growth. Reopening efforts have caused a surge in demand, and supply chain constraints and low business inventories have put upward pressure on prices. The Fed has indicated that it sees the recent rise in inflationary pressure as largely transitory. Still, given this year’s swift increase in prices and rising investor concerns about inflation, this release will be widely monitored.
Thursday will also see the release of the initial jobless claims report for the week ending June 5. Economists expect 365,000 initial claims to be filed during the week, in a modest improvement from the 385,000 initial claims filed the week before. If estimates hold, this report would demonstrate that the labor market recovery in May has accelerated in June. Weekly claims have fallen notably since hitting a 2021 high of 904,000 in early January. With further improvement in June, we could see claims approach pre-pandemic levels. Very real work remains to get the labor market all the way back, but the improvements so far this year show we’re heading in the right direction.
We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This widely followed gauge of consumer confidence is expected to increase from 82.9 in May to 84 to begin June. This result would represent an encouraging rebound. The index hit a pandemic-era high of 88.3 in April, but rising inflation fears in May led to a pullback. Consumer confidence has improved notably since the index hit a pandemic-induced low of 71.8 in April 2020. Nonetheless, the index sits well below the pre-pandemic high of 101 recorded in February 2020, indicating further room for gains. Historically, improving confidence levels have supported faster sales growth, so any uptick would be seen as a positive sign for June’s consumer spending reports. Ultimately, if estimates prove accurate, this release would demonstrate that consumer confidence remains at healthy levels.
That’s it for this week—thanks for reading and stay safe!