Slower increases in wages, inflation indicate economic growth is less than expected.
Economic data are mixed. Today’s report shows April consumer spending rose at an 11 percent annual rate, consistent with our forecast of strong demand. However, the report also shows wages rose by 7.4 percent and inflation by only 3 percent to 4 percent rates. These numbers indicate the economy could be slowing more than our forecast indicates.
The Week That Was
Today’s April report shows consumer spending, incomes, and inflation increased at annualized monthly rates of 11 percent, 7.4 percent, and 3½ percent, respectively.
The slower increases in wages and inflation are a significant departure from the soaring rates of recent months. The numbers point to a potential slower pace of activity than called for in our forecast.
This week’s other economic numbers were also mixed. Markit’s advanced business survey for mid-May was 53.8, down one point from April. While manufacturing scored well, the service sector brought the index down.
Overall, Markit says the report is consistent with an overall growth rate of 2 percent. Even so, the report shows an increase in new orders and business confidence.
April new orders for durable goods showed a rise of only 2 percent to 3 percent annualized. The slowdown followed a prior surge in orders, which has new orders for durable goods up at double-digit annual rates over the past six months.
Initial weekly unemployment claims continue to drift slightly higher. Claims were 206,000 for the past four weeks, up from 188,000 in April and 175,000 in March.
Things to Come
On Wednesday, the final May business survey from Markit and the ISM survey of manufacturing companies can provide more insight into the extent of any slowdown.
The preliminary Markit report registered May manufacturing activity at 55 to 57.5, indicating a real growth rate of 3 percent. We expect the ISM manufacturing survey to have similar readings.
Friday’s May employment picture likely will show private payroll jobs continuing to slow from the gains of 400,000 in recent months to roughly 200,000 to 300.000.
Money, Money, Money
The Fed Minutes indicate the fed funds target rate will increase by only 50 basis points at the next two meetings. Thus, monetary policy remains expansive.
Although the Fed has not added significantly to its holdings of securities since March, banks have shifted $600 billion from the Fed into the economy. That means more liquidity, and more money for investment and for consumer purchases of goods and services.
To Market, to Market
After a relentless downturn in April and May, stocks rebounded this past week. Led by the Dow, all major indexes joined in the rally, with gains of 3 percent to 4½ percent.
The economic news has been mixed, so the rebound could be due to traders covering their shorts. Encouraging reports from Macy’s and discount retailers helped to offset some of the disappointing reports from bigger retailers.
The upward move provided little improvement in the market’s technical indicators. Even so, there were two encouraging technical developments.
The S&P500 found support right at its key level of 3,800. A second positive development is IBD’s contrary indicator. It measures the spread between bears (41 percent) and bulls (28 percent). The latest spread is greater than it was near the bottom of the Covid stock crash in late March 2020.
The S&P500 moved to 23 percent above its fundamental value. Hence, stocks remain overvalued and are subject to sharp swings in either direction.
If investor psychology changes, the recent increase in liquidity caused by banks shifting money into the economy could send stocks sharply higher.
Outlook
Economic Fundamentals: weakening
Stock Valuation: S&P 500 overvalued by 23 percent
Monetary Policy: expansive
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