State of economy is in the eye of the beholder

The Rohrschach test is alive and well when it comes to interpreting the economy. Enough economic data was released last week to convince skeptics the U.S. economy was indeed slowing. At least, until more data came out. 

For one, manufacturing appears to be slowing. The ISM manufacturing report noted that demand remains subdued due to current monetary policy and other conditions, as production declined. This has, in turn, crimped margins. But two surveys of service activity were mixed. The ISM nonmanufacturing report pointed to lower business activity, new orders, order backlogs and supplier deliveries, while the S&P Global survey saw higher employment in this, its 17th consecutive month of expansion. 

The labor market remains the key to how long growth can keep up. Job openings unexpectedly increased in May, even as weekly jobless claims continue to edge slowly higher. But the granddaddy of jobs data is the monthly employment situation report, and the latest showed the U.S. added 206,000 new jobs—a slight decline from a downwardly revised 218,000 in May—as 111,000 jobs were revised away from the last two months’ results. The unemployment rate ticked up from 4.0% to 4.1%, and average hourly earnings rose 3.9% at an annual rate, down from 4.1% last month.

Markets interpreted this information as confirmation the labor market is cooling, but, more importantly, that the Federal Reserve is more likely to cut its fed funds rate. Continued progress on reducing inflation is the other part of the Fed’s mandate. All these data points will factor into the Federal Reserve’s thinking ahead of its next meeting on July 31.