In The Know – May 31, 2024

We help you stay informed about the financial issues of the day, keeping you abreast of what’s happening in the economy and the markets, and helping you understand how these developments impact your financial issues. A significant amount of data came out this week.

The Fed released its Beige Book report, covering twelve districts for the six weeks ending May 20. I’ll highlight some key findings from that report, which surveyed all twelve districts across the country. Most districts reported slight or modest growth, while two noted no change in activity.

This report highlights the widening ideological divide among Americans, as well as the increasing disparity in financial prosperity. Now, moving to the Fed’s Beige Book, it noted that retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers.

According to the Fed, the high cost of borrowing has led to flat auto sales, with few districts noting that manufacturers are offering incentives to spur sales. Travel and tourism strengthened across most of the country, though there was mixed sentiment about the summer outlook. In the struggling manufacturing sector, activity was characterized as flat to slightly up, though two districts cited declines. In banking, tight credit standards and high interest rates continue to constrain lending growth.

That’s the intended effect of the Fed’s rate increases, aimed at slowing economic growth. It seems to be working fairly well. Regarding commercial real estate, the Fed reported that conditions have softened due to supply concerns, tight credit conditions, and elevated borrowing costs. Overall, the Beige Book indicated a somewhat more pessimistic outlook amid rising uncertainty and greater downside risks.

On inflation, the Beige Book mentioned ongoing price pressures and consumer pushback, which is forcing some businesses to absorb increased costs. This could result in compressed profit margins in future earnings seasons if inflation does not ease further.

If companies face higher production costs and consumers resist price increases, profit margins will shrink, potentially leading to lower share prices. In the labor market, hiring has slowed, and there are ongoing difficulties in filling some skilled positions, consistent with recent unemployment reports. And finally, the “apolitical” Fed refers to politics. But just to repeat what businesses are echoing. Some businesses, they reported, were expected to cut back on spending or postpone their plans until after the election outcome. So what does that mean for the Fed?

There’s a low chance the Fed will start cutting rates in July, despite expectations that the ECB will cut rates soon without waiting for more data. The Fed wants to see more consistent signs that inflation is under control before making such a move. I published a commentary on that highlighted a potential surprise in next week’s job release, so Financial Issues partners should check that out.

The first quarter GDP was revised down from 1.6% to 1.3%, which was expected. On our TV program we displayed a chart showing GDP trends over the last few years, highlighting the two negative quarters in 2022, a rebound, and then a downward trend. This slowdown is what the Fed needs to see as proof that their rate hikes are cooling the economy. This is the lowest growth since the contractions in the first half of 2022, less than half the pace of the fourth quarter of 2023.

Consumer spending, which drives 70% of our economy, slowed more than initially anticipated, reflecting both goods and services consumption declines, according to the US Bureau of Economic Analysis.

In summary, the economy is slowing, and the labor market is cooling. Initial jobless claims rose to 219,000 from 216,000, slightly above the estimate. The four-week moving average increased from 220,000 to 223,000, the highest since September 2023. Continuing claims are just below the critical 1.8 million level, indicating slowed hiring and moderated labor demand. Despite historically low unemployment rates, the Biden administration may still claim victory.

The Core PCE number, the Fed’s preferred inflation gauge, rose by 0.2% from the previous month after a 0.3% increase in March, showing that inflation’s pace is slowing. However, prices are still more than 20% higher than three years ago.

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