THE FULL SCOOP

5/6 - 5/10

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ISM Services

The US economy has not had a broad-based recession just yet, but it appears there has been a rolling recession – ​Meaning certain sectors have gone into recession like Manufacturing. This has been evidenced in the regional ​manufacturing reports and the national ones like the ISM Manufacturing Index, which is in contraction. Meanwhile, the ​services sector has appeared to be resilient.

Last Friday, however, the ISM Services PMI for April fell from 51.4 to 49.4, entering contraction for the first time since ​December 2022. Looking at the internals, the employment component slid from 48.5 to a four-month low of 45.9, ​coinciding with the weaker jobs report.

The Prices paid or inflation component was high at 59.2, but that has been trending lower. This number was 64.0 in ​January and 60.0 a year ago at this time. We also know that almost all of the inflation we are seeing is coming from ​the services sector, so this was somewhat expected.

Bottom line – Don’t write off a recession just yet. If this trend continues, we may still see a slowdown in the economy, ​which would be helpful for inflation and rates.

One interesting point – We won’t know we are in a recession until much after it begins, as the NBER (National Bureau ​of Economic Research) typically calls one following two consecutive quarters of GDP. Those reports don’t start ​coming until the quarter ends, with three readings on it over the following three months. That means it could take 9-12 ​months after a recession starts before a recession is called. Also keep in mind that the NBER changed their definition ​of a recession, and they now look at several other factors like two consecutive negative quarters of GDI, amongst ​other things, so the timing is a bit of a wildcard.

Active Listings

Realtor.com released their active listings figures, showing that ​they increased from 695,000 in March to 734,318 in April, ​which is an increase of 5.7% monthly and 30.4% from last ​year.

Additionally, new listings rose 9.2% in April to 432,028, the ​largest increase since July 2022.

If rates cooperate, the table appears to be set for more ​transactions. There is a lot of pent-up demand – The ​annualized pace of existing sales is only 4.1M, when the norm ​is typically 1M more. With the increase in inventory, and if rates ​continue to trend lower possibly with help from the Fed, ​Treasury, and continued weaker jobs data, we could see ​things start to get better.

Rental Price Data

Camden Property Trust, which is a company that owns and ​rents roughly 60,000 rental properties in the US, reported that ​supply is flooding the market and that blended rents are only ​up 0.6% YoY in April. That is a huge difference from the 5% ​rental increase we are seeing in the CPI and PCE inflation ​reports. Hopefully these figures start to catch up, as that is ​where most of the inflation is coming from.

Looking deeper, new leases are down 1.8% YoY, while ​renewals are up 3.4%. The trend appears to be for even lower ​pricing pressure – If you look at their Q1 figures and annualize ​them, blended rents are down almost 0.9%.

CoreLogic Home Price Insights / ​Black Knight HPI

CoreLogic reported that home prices rose a very strong 1.2% in March after rising 0.7% in February, showing that home price appreciation not only continues, but is ​accelerating. Remember, CoreLogic only forecasted that it would rise by 0.4%, so they have been very conservative.

Year over year, home prices are now up 5.3%, which is a slight decrease from 5.5% in the previous report, but is due to a very tough comparison from last year – ​Meaning it went up 1.4% during the same month last year.

After the last two reports, CoreLogic has bumped up their forecast for next month to 0.8%. They anticipate home prices to rise 3.7% over the next 12 months, up from ​3.1%. Again, they are always conservative, and we will likely see greater levels of appreciation.

Black Knight also reported that home prices also rose 1.2% in March and rose 5.6% year over year, down from 6%. Again, remember that the year over year number ​declined because of a very high comp from last year.

Bottom line – It’s important to educate your customers on the financial opportunity that still exists in home ownership. This report was for March, at the very beginning ​of the spring home buying season. We will likely continue to see strong appreciation in the coming months. It’s not your job to get your customers a low rate, but rather ​to illustrate the wealth they can create through purchasing a home.

Inflation Components

Inflation progress has stalled the last few months, but remains one of the most important economic indicators. Next week we will get the CPI inflation report for April, which can ​have a big impact on the markets.

While there are a lot of factors, The NY Fed Supply Chain Pressure Index, which can influence inflation, fell from -0.3% to -0.85% in April, which is the lowest figure we have seen ​since August of last year, when we were seeing really good progress on inflation. This is just one aspect of inflation, but a good sign.

Oil prices can have a big influence on headline inflation and some influence on the core readings as well. Over the last few weeks, we have seen oil prices decline by roughly ​11%, which is a good sign. Part of the reason for this is an increase in production so far this year, which is running 7.1% higher than last year.

Distortions Make Our Economy Difficult to Forecast

The US economy has been distorted by emergency level spending and strong consumer spending, which we believe has pushed off a recession that would have otherwise ​come much sooner. But, there are now signs that at least from the consumer end, that may be coming to an end. The Government has been spending close to 23% of GDP, ​which is a similar level to the early 1980’s and after the Great Recession, but we are clearly no longer in emergency like conditions. This incredible amount of spending is ​masking a lot of weakness in the economy and is at least partly responsible for keeping the economy out of recession.

The Consumer has also been showing a lot of resilience. The most recent consumer spending data for March showed strength - Core Retail Sales were up 1.1% and Personal ​Spending rose 0.8%. The consumer has been helped in their spending by pandemic savings from stimulus and credit. But there are now reports that all of that may be begin ​to slow. The San Francisco Fed released a report showing that the pandemic savings from stimulus has finally been fully depleted and then some as of this past March. We ​have also seen the personal savings rate drop to 3.2%...the lowest level since October 2022.

Looking to the credit side of the equation – Credit Card debt is at record highs, with record high rates thanks to the Fed hiking 525bp. But we are now seeing charge offs ​from credit card companies at much higher levels, delinquencies at the highest level since 2012, and less new demand for credit card debt, signaling they may be at their ​credit limit.

We are also seeing auto loan delinquencies rise and demand for auto loans fall. The SLOOS survey earlier this week showed weaker demand across the board for consumer ​credit.

Another venue for consumers to spend has been the relatively new Buy Now Pay Later programs. And while this type of debt is hard to track because it’s not reported to the ​credit bureaus, those too are starting to show weakness. A recent survey conducted for Bloomberg News by Harris Poll found that 43% of those who owe money to BNPL ​programs were behind on their payments.

Also, within the survey, it was shown that more than 50% said they bought more than they could afford, and over on third said they turned to these programs after maxing ​out their credit cards. And it’s not just impacting lower income earners - 42% of those with household income of more than $100,000 report being behind or delinquent on ​BNPL payments. Additionally, 50% are either considering or already using it to pay bills or buy essential items, including groceries.

Bottom Line – Consumer spending may begin to slow as pandemic savings have been depleted and credit appears to be getting maxed out. Consumer spending makes up ​70% or so of GDP, so a slowdown would be significant and could point to a slower US economy, weaker inflation, and lower rates. This will take time to come to fruition but ​is something to keep an eye on and see if we see further evidence.

More Insights on Buy Now Pay ​Later

The Head of Bank of America Institute, Liz Everett, said that consumer ​spending was up 1% YoY in April, up from 0.3% in March, and that consumers ​were gaining momentum. It’s important to note that during this time of year we ​typically see an increase because of tax refunds, and while that may prolong ​spending, the breakdown yesterday shows that it may not last too long.

She also spoke about the Buy Now Pay Later programs. 8.5% of their customers ​had at least one transaction in March, and considering they have 69M ​customers, that’s a huge figure at 5.865M. And remember they are not the only ​big bank…so the nationwide figure is much larger.

Looking deeper, 50% were lower income consumers, explaining how they ​continue to spend. She explained that heavy users, which they define as using ​BNPL 20 times or more in a month, was not a problem because it’s only 0.5%. ​That’s still 345,000 people, and if you use it 15 times in a month that’s not a ​heavy user? This sounds like a bigger problem and one that supports the ​thought that the consumer is under pressure and spending beyond their means ​with new programs that don’t get reported to credit agencies.

Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that ​purchases increased 2% last week. Purchases are now down 17% from this time ​last year. Interest rates fell from 7.29% to 7.18% and are 0.68% higher than this ​time last year.

Initial jobless claims

Initial Jobless Claims, which measures individuals filing for unemployment ​benefits for the first time, rose 22,000 to 231,000, the highest level since ​August 2023. This is a breakout for this metric as it has been extremely stable ​at low levels for the last several months.

We may be seeing a change in the labor market, as the BLS reported what we ​believe to be more realistic jobs figures in their last Jobs Report that reflect ​what other reports have been showing. And now the BLS reported this morning ​that Initial Claims rose to the highest level since last August.

Continuing Claims, or those that continue to receive benefits after their initial ​claims, rose 17,000 to 1.785M.

BLS JOBS REPORT

The Bureau of Labor Statistics (BLS) reported that there were 175,000 jobs created in April, which was well below the ​243,000 expected. The previous two months were revised lower by 22,000, adding to the miss this morning.

The faulty Birth/Death model added 363,000 jobs to the headline figure – Imagine what the number would be without ​this…-188,000. This is where the BLS tries to figure out how many businesses came online vs offline and how many jobs that ​accounted for – But it really is getting small business data, which for comparison, ADP said there was only 38,000 in April.

The biggest contributor to job growth was Healthcare, which added 56,000 jobs, followed by Social Assistance, which ​added 31,000. Transportation and warehousing and Retail trade each added roughly 20,000 jobs each as well….and that’s ​pretty much where most of the gains came from.

Leisure and Hospitality only added 5,000 jobs, coinciding with the drop in new openings from the JOLTS report.

Average hourly earnings, which measures wage pressured inflation, rose 0.2%, which was below the 0.3% expected. Year ​over year, average hourly earnings fell from 4.1% to 3.9%, which was below the 4% expected.

Average weekly hours worked decreased from 34.4 to 34.3. Average weekly earnings fell 0.1%, with the YoY figure ​decreasing from 4.1% to 3.9% year over year.

Remember, there are two surveys within the Jobs report, the Business Survey and the Household Survey. The Business Survey ​is where the headline job creation number comes from the and the Household Survey is where the unemployment rate comes ​from.

The Household Survey has its own job creation component, and it showed only 25,000 job gains. The labor force increased ​by 87,000, and since there were fewer job gains than the increase in the labor force, the unemployment rate moved higher ​from 3.8% to 3.9%. This matches the unemployment rate we saw in February, which is the highest figure since January 2022.

If you look at the u-6, which is a broader measure of unemployment within the BLS report and does not remove people, the ​unemployment rate increased from 7.3% to 7.4%. This is the highest u-6 reading since November 2021.

Looking deeper at the 25,000 job creations in the household survey – There were 949,000 full time job gains, with 914,000 ​part time job losses. Additionally, multiple job holders fell by 93,000.