Weekly Economic Commentary

Is this the calm before the storm? Preparing for a busy data week

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Markets seem to have been basking in the spring sun as they wait for the approaching summer heat, so to speak. During a week that provided very little extra information on the state of the U.S. economy, the markets seem to be hanging on to what little data was released this week, which seems to have been in line with the weaker-than-expected employment report released on Friday as well as the weaker than expected ISM Services Index.

However, as we argued last week, although the nonfarm employment number last week was lower than expected at 175,000, it was a still strong number compared to the historic monthly average (~125,000). The most disappointing number last week was the ISM Services Index, which fell slightly into contraction. And since it has been the strength of the service economy that has continued to drive the U.S. economy, that was, for us, the most important data point we got last week.

This week we got consumer credit, initial jobless claims, and the preliminary University of Michigan Consumer Sentiment Index for May, which also included inflation expectations, both one-year and 5-years head. We will talk about consumer credit in the next section, but initial jobless claims came in higher than expected for the week ending on May 4 and we will continue to follow it along with other signs (e.g., ‘Hiring Plans’ in next Tuesday’s NFIB Small Business Survey) for further labor weakness—the ‘last shoe to drop’ before the Fed kickstarts a rate easing cycle.

The preliminary Index of Consumer Sentiment for May from the University of Michigan’s Survey of Consumers came in much lower than expected, at 67.4 compared to expectations for a 76.9 print. April’s Index of Consumer Sentiment was 77.2. Both components of the Index were down in April, with the Index of Current Economic Conditions declining from 79.0 to 68.8 while the Index of Consumer Expectations came down from 76.0 in April to 66.5 in May, according to the release. The deterioration in consumer sentiment in May brings it to its lowest level since November and adds to the deterioration in the Consumer Confidence Index over the last several months. Moreover, despite the decline in energy prices, gasoline prices have remained elevated, pushing one-year ahead inflation expectations higher from 3.2% in April to a preliminary reading of 3.5% in May. While this is not good news for the Federal Reserve (Fed), five-year ahead expectations only increased slightly, and we expect June’s one-year ahead inflation expectations to be lower and the disinflation trend to continue.

Next week is a very busy economic data week. On Monday, we have the release of the NFIB Small Business Index and the Producer Price Index (PPI). On Wednesday we have the release of the Consumer Price Index (CPI), the retail and food sales index, business inventories and the NAHB Housing Market Index. On Thursday we get the release of initial jobless claims, building permits and housing starts, import and export prices as well as industrial and manufacturing production. On Friday we get the release of the Leading Economic Indicators.

Expectations for the CPI is for an increase of 0.4% during the month of April while we have a slightly lower expected increase of 0.35%. Any number above expectations for the CPI could mean trouble for markets. We will also get the April number on retail and food services sales. Within this number we are going to look for “control group” retail and food services sales to see if consumer demand started the second quarter at a strong or weak pace. Furthermore, the industrial production index will include the state of the manufacturing sector and thus we will be looking to see if the April ISM Manufacturing sector’s contraction picture is supported by the release of the manufacturing index.

On Tuesday we get the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York for the first quarter of this year, which will allow us to see if delinquency rates on credit cards and other credit instruments have continued to increase.

Consumer credit card borrowing: What say you?

We hear that Americans continue to increase their credit card balances and in some sense that is true. However, the story behind this data series is not so simple. It is true that credit card borrowing has continued to grow. But is that something that could bring the U.S. economy down? Yes, it could, especially if we go into a recession and Americans start losing their jobs. Credit card borrowing commands the highest interest rate of almost all traditional credit vehicles while, at the same time, it is unsecured debt, which means that institutions that lend in this space do not have many ways to prevent large losses if consumers cannot pay back.

But we want to make several points on this issue. First, although nominal credit card borrowing is at an all-time high, one of the reasons for this is inflation. If we deflate credit card borrowing using the PCE price index, we see that real credit card borrowing is very close, but not at an all-time high. The all-time high in real credit card borrowing was just before the Great Recession in 2008. Another way of looking at this is to look at per-capita credit card borrowing. This also shows that, in real terms, we are below the all-time high (see graph below).

Second, a better picture of credit card borrowing is to look at it as a percentage of disposable personal income, which tends to confirm that, although credit card borrowing has increased considerably, incomes have increased even more and, credit card borrowing is still very low as a percentage of disposable personal income. This also confirms that today, Americans’ financial conditions are still in relatively good shape.

Perhaps one caveat to this credit card borrowing picture is that we don’t have a clear picture on the distributional impact of credit card borrowing, that is, it is possible that lower income individuals, who typically borrow more on credit cards as a percentage of income, are in much worse shape than what the aggregate numbers are showing. Thus, although the overall, or aggregate, picture is not as concerning as many continue to indicate, it is true that credit card lending effects over different income level sectors are much different than the aggregate numbers show. For this, we will have to continue to look at credit card delinquency rates for the first quarter of this year, which will be released on Tuesday of next week.

On the other hand, there is a segment of non-traditional credit for which we have very little information available as lenders aren’t obliged to report data. We are talking about the ‘Buy Now Pay Later’ (BNPL) programs, which have been growing in popularity in recent years. These programs allow consumers to purchase products and repay the balance in multiple interest-free biweekly installments. A recent poll published by Bloomberg suggests that 43% of borrowers in BNPL programs are behind on their payments, while 28% are delinquent.1 Overall, the average balance on these programs is estimated to be much lower than that on credit cards, but if inflation persists and/or the labor market weakens, many lower-income households could start to look for ways to space out payments to make ends meet. As of today, and with the limited data available, this does not seem to be an issue. However, it will be imperative to remain vigilant about the topic going forward, especially if the economy and labor market slow down as we expect.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023