There were several important economic data releases last week, with a focus on the minutes from the Fed’s June meeting and the June employment report. The jobs report showed that hiring remained strong in June, which was an encouraging sign for the overall economy and a reminder that the labor market remains healthy. This will be another busy week of updates, with a focus on the June inflation and retail sales reports as well as a look into industrial production and consumer sentiment.
Last Week’s News
On Wednesday, the ISM Services survey for June was released. This measure of service sector confidence fell less than expected during the month, as the index dropped from 55.9 in May to 55.3 in June against forecasts for a larger decline to 54. This is a diffusion index where values above 50 indicate growth, so this result still signals continued expansion for the service sector despite the drop in the index. Service sector confidence has remained in healthy expansionary territory since summer 2020, but we’ve seen sentiment cool since the index set a record high of 68.4 last November. Inflationary pressure and labor shortages have negatively affected confidence throughout the year; however, even with these headwinds, service sector confidence is expected to remain in expansionary territory in the months ahead.
Wednesday also saw the release of the FOMC minutes from the Fed’s recent June meeting. The central bank raised the federal funds rate 75 bps at this meeting, which was the third meeting in a row with higher interest rates. The Fed’s decision to hike 75 bps rather than 50 bps was largely anticipated by markets due to the higher-than-expected level of consumer inflation in May, which caused concern among most Fed members. The minutes also indicated that the central bank remains committed to slowing the economy through tighter monetary policy throughout the year to combat inflation. The central bank is expected to remain data-dependent with a focus on seeing sustained progress in tamping down inflationary pressure throughout the economy. The June inflation and jobs reports are expected to play a major role in shaping the Fed’s decision at its July meeting, and the minutes indicate that the Fed could hike rates another 75 bps at this meeting as well.
On Thursday, the May international trade report was released. The report showed that the trade deficit declined less than expected during the month, as the monthly trade deficit fell from a downwardly revised $86.7 billion in April to $85.5 billion in May against calls for $84.7 billion. This result still brought the trade gap to its lowest level this year despite the smaller-than-expected decline. The narrowing of the deficit was caused by a 1.2 percent increase in exports in May, which was more than enough to offset a 0.6 percent rise in imports. This now marks two consecutive months with shrinking monthly deficits, which is a good sign for second-quarter GDP growth after widening deficits in the first quarter subtracted 3.2 percentage points from overall economic growth to start the year. International trade is expected to serve as a tailwind for overall growth in the second quarter. But, looking forward, high levels of global inflation may lower demand for U.S. exports in the second half of the year.
We finished the week with Friday’s release of the June employment report. It showed that more jobs than expected were added during the month, as 372,000 jobs were created in June against calls for 265,000. This better-than-expected result now marks 18 consecutive months with strong job growth on a year-over-year basis and is a good sign for the overall health of the economy. The gains were widespread, led by hiring in the business services, education, and health sectors. The job market has remained impressively resilient over the past year and a half despite rising inflationary pressure. Additionally, businesses have continued to hire to try and meet high levels of demand for goods and services. The underlying data was also largely positive, as the unemployment rate remained unchanged at 3.6 percent for the fourth month in a row. Given the continued strength of the labor market and the high levels of inflation throughout the economy, the Fed is expected to focus on slowing the pace of economic growth throughout the rest of the year with tighter monetary policy.
What to Look Forward To
On Wednesday will see the release of the June Consumer Price Index report. Consumer inflation is expected to increase in June, with headline prices set to rise 1.1 percent following a 1 percent increase in May. Consumer prices are expected to rise 8.8 percent on a year-over-year basis, up from 8.6 percent in May. If estimates hold, this would bring the pace of year-over-year consumer inflation to its highest level in more than 40 years. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase 0.6 percent during the month and 5.8 percent on a year-over-year basis in June compared to the 0.6 percent monthly and 6 percent year-over-year increases we saw in May. Overall, if estimates hold, this report would indicate that inflationary pressure remains high across the economy, and it would likely support another 75 bp hike at the Fed’s meeting at the end of the month.
On Thursday, the June Producer Price Index report is set to be released. Producer prices are expected to increase 0.8 percent during the month and 10.4 percent on a year-over-year basis in June, following a 0.8 percent monthly increase in May and a 10.8 percent year-over-year increase during the month. If estimates hold, this would mark three consecutive months with slowing year-over-year producer price increases; however, it would still leave headline producer inflation at very high levels on a historical basis. Core producer prices, which strip out the impact of food and energy prices, are set to increase 0.5 percent, which would be in line with May’s 0.5 percent increase in core prices. Producer inflation has been driven by supply chain issues and rising material and labor costs throughout the year. But, if we see a modest slowdown in headline producer prices, it could indicate that the Fed is starting to see minor signs of sustained success in its fight against inflation.
On Friday, the June retail sales report is set to be released. Retail sales are set to increase 0.9 percent during the month following a 0.3 percent decline in May. If estimates hold, this would be the largest increase in monthly sales growth in three months. It would also be an encouraging sign that the lull in spending in May was temporary rather than the start of a sustained slowdown in spending growth. Part of the anticipated rebound in headline retail sales is due to rising gas prices in June. Core retail sales, which exclude the impact of auto and gas sales, are expected to remain flat for the month after increasing 0.1 percent in May. Consumer spending has remained relatively resilient throughout the year despite the challenges created by inflation and declining consumer confidence. Looking ahead, slower spending growth is anticipated as the Fed continues to tighten monetary policy to combat rising prices.
Friday will also see the release of the June industrial production report. Industrial production is expected to remain unchanged during the month following a downwardly revised 0.1 percent increase in May. If estimates hold, this would mark the first month without industrial production growth this year. Production has been supported throughout the year by high levels of demand for manufactured goods, but we’ve started to see signs that demand may be softening, which, in turn, may serve as a headwind for significantly faster production growth in the months ahead. Additionally, rising economic uncertainty could lead to further pullbacks in production. This will be an important area to monitor throughout the second half of the year, as a slowdown in production could negatively affect efforts to cut down on inflation in the price of goods.
We’ll finish the week with Friday’s release of the preliminary estimates of the University of Michigan consumer sentiment survey for July. Consumer sentiment is set to decline during the month with economists calling for a modest drop from 50 in June to 49 to start July. If estimates hold, this would bring the index to a new record low and would mark three consecutive months with declining confidence. Consumer confidence has been challenged over the past year by rising prices, with inflation remaining a key concern for consumers. The shaky stock market and rising economic uncertainty have also weighed on consumer sentiment and contributed to the notable declines in the index. While the drop in confidence this year has not yet directly translated to a slump in consumer spending, weakening demand could serve as a headwind for faster sales growth in the future.
That’s it for this week—thanks for reading!