The Federal Reserve is walking a fine line with its current restrictive policies, as concerns about a looming recession grow louder. Recent discussions among Fed members like Austin Goolsby have highlighted the need for a fresh look at their strategies. Just last week, the Atlanta Fed slashed its GDP growth forecast from 3% to 1.7%, signaling a more cautious outlook.
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Inflation and Housing
Fed Chairman Jerome Powell pointed out that shelter costs are distorting inflation figures. While actual rental inflation is around 3%, official data shows it at 5.5%. This discrepancy, due to the heavy weight of shelter costs in inflation calculations, is pushing overall numbers higher than they should be.
Labor Market Wobbles
The latest Job Openings and Labor Turnover Survey (JOLTS) reveals a steady number of job openings at 8.1 million for May, with notable gains in government and manufacturing. However, the leisure and hospitality sector, once a job growth powerhouse, has seen openings fall below pre-pandemic levels. The low quit rate of 2.2% suggests workers are less inclined to switch jobs, indicating reduced job mobility.
Manufacturing Sector Slump
The Institute for Supply Management (ISM) reported ongoing contraction in U.S. manufacturing, with weak employment and falling prices, indicating lower inflation pressures. This contradicts the JOLTS data showing job openings in manufacturing, highlighting inconsistencies in the labor market.
Housing Market Resilience
May saw modest home price increases, with ICE and CoreLogic reporting month-over-month gains. Year-over-year, home prices are up by 4.9% (CoreLogic) and 4.6% (Black Knight), although these figures are slightly down from the previous year's robust gains.
Upcoming Economic Indicators
Key reports are on the horizon, including the ADP employment report, jobless claims, and the much-anticipated BLS jobs report. The forecasts suggest 160,000 new jobs from ADP and 190,000 from the BLS, with the unemployment rate expected to hold steady at 4%. Rising continuing claims hint at a softening labor market.
Bond Market Volatility
The bond market has been volatile, reacting to economic data and political speculation. Recent sell-offs were driven by hedge fund trades betting on potential inflationary impacts from political changes. However, the bond market is showing signs of recovery, with ten-year yields and mortgage-backed securities stabilizing.
Economic indicators point to vulnerabilities, especially in the labor and manufacturing sectors, while the housing market remains relatively strong. As the Fed reassesses its policies, the upcoming economic data will be crucial in shaping the path forward.
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