The week began with Monday’s release of the ISM Manufacturing index. This measure of manufacturer optimism fell from 52.1 in May to 51.7 in June. This decline was smaller than economists expected, but it still brought the index to its lowest level since October 2016. This is a diffusion index, where values above 50 indicate expansion. So, manufacturers still expect growth going forward.
On Wednesday, May’s international trade balance report was released. It showed the trade deficit went from $51.2 billion in April to $55.5 billion in May. This widening of the trade gap was due to faster growth in imports than in exports during the month. Growth from international trade was a strong tailwind for first-quarter economic growth. As such, the continued widening of the trade gap over the second quarter is concerning, but it is not surprising given the ongoing trade wars.
Wednesday also saw the release of the ISM Nonmanufacturing index, which declined by more than expected. It went from 56.9 in May to 55.1 in June, as new orders fell during the month. This disappointing result, combined with the similar move in the manufacturing survey, indicates that economic growth in the second quarter likely slowed from the roughly 3 percent annual growth rate we saw in the first quarter.
On a more positive note, on Friday, the June employment report was released. Overall, 224,000 new jobs were added, which was significantly higher than the 160,000 that were expected. This strong result helps offset a weak May report and calm fears over headline employment growth. The underlying data was also positive. Labor force participation increased and wages grew at 3.1 percent on an annualized basis. The unemployment rate ticked up slightly, from 3.6 percent to 3.7 percent, but this was due to an increase in the number of workers entering the job market who were previously not actively looking for jobs. Unemployment remains near 50-year lows, so this number is nothing to be concerned about for the time being.
Wednesday will see the release of the minutes from the most recent Federal Open Market Committee meeting in June. Many Fed members lowered their interest rate expectations for the year at the June meeting, with nearly half of the officials indicating that they expect to cut rates by the end of the year. The minutes may provide additional insight into the future path of monetary policy, which is especially important given market expectations for a rate cut at the next Fed meeting in July.
On Thursday, the Consumer Price Index for June is set to be released. Economists expect no change in month-over-month inflation, which would bring year-over-year inflation to just 1.6 percent. Consumer inflation has been trending downward this year, despite the strong jobs market and wage growth above 3 percent. One of the major factors holding back consumer inflation is low gasoline prices, which are expected to fall nearly 4 percent on a month-over-month basis.
On Friday, the Producer Price Index for June will be released. This measure of producer inflation is expected to show 0.1 percent monthly growth and 1.8 percent inflation on an annual level. With these expected declines, both producer and consumer inflation are expected to remain firmly below the Fed’s stated 2 percent inflation target.
That’s it for this week—thanks for reading!