The May business surveys are consistent with an ongoing economic expansion, while the JOLTS report suggests a cooling labor market with lower wage inflation.

Highlights for This Week Include:

  • The May business surveys are consistent with an ongoing economic expansion, while the JOLTS report suggests a cooling labor market with lower wage inflation.
  • The Personal Income and Outlays report showed overall inflation making little progress toward the Federal Reserve’s (Fed’s) 2.0% target, suggesting that the Fed will be in no rush to cut interest rates.
  • The global business surveys suggest global growth hit a 12-month high in May. The upturns in business activity and new orders also showed improved breadth across industries and countries, which bodes well for sustaining future growth.
  • The S&P 500 advanced 4.8% in May, marking the highest return for the month of May since 2009, with all sectors except for Energy registering a gain. Encouragingly, major U.S. stock indexes remain near all-time highs, and further economic growth supports the outlook for profit growth. This suggests stocks remain well supported.

May Business Surveys Consistent With Economic Growth

At the beginning of each month, we get important readings on private sector business activity through service and manufacturing sector business surveys for the U.S. The ISM Services PMI jumped in May to a nine-month high. It was the first increase in four months and the most since January 2023, as services activity rebounded strongly. All PMI components increased last month, led by a surge in business activity to the highest level since November 2022. Importantly, the services prices index fell, indicating some easing in cost pressures, which are now basically in line with their pre-pandemic level.

Separately, the ISM Manufacturing PMI fell in May to a three-month low. It has been below the expansion/contraction 50 mark in 18 of the past 19 months, reflecting continued sluggish factory activity. The combined business surveys are consistent with continued economic expansion. The ISM estimates that the latest readings correspond with about 1.6% annualized economic growth.

Labor Market Shows Further Signs of Cooling

The Bureau of Labor Statistics JOLTS report showed job openings fell 3.5% in April, down in four of the past five months, to 8.1 million, the lowest level since February 2021, and below the consensus of 8.4 million. Job openings are down 18.6% from a year ago and 33.8% from the peak level in March 2022. As a result, the job openings/unemployed ratio continues to come down, posting 1.24 in April, its lowest level since June 2021. It suggests some easing in labor market tightness, consistent with continued moderation in wage growth.

Despite fewer job openings, the labor market remains healthy. Hires picked up 0.4%, while layoffs dropped 5.4%, down in three of the past four months, to 1.5 million. This was the lowest level of layoffs since December 2022, and lower than at any point in the previous two expansions. The quit rate was unchanged at 2.2%, where it has been for the past six months, basically in line with its pre-pandemic level.

This report reflects continued labor market rebalancing, with somewhat cooler labor demand without a hit to the unemployment rate. It suggests that the Fed can hold monetary policy steady for now, allowing higher-for-longer interest rates to squeeze inflation without causing a recession.

Inflation Remains Sticky

Although Personal Consumption Expenditure (PCE) inflation (a measure closely watched by the Federal Reserve) did not make much, if any, progress in April toward the Fed’s 2.0% target, it came in broadly in line with expectations. The PCE Price Index increased 0.3%, while its core rose a slightly smaller 0.2%. On a y/y basis, PCE prices rose 2.7%, while the core was up 2.8%, both practically the same as in the previous month. This suggests that the Fed will be in no rush to cut interest rates.

Global Backdrop Continues to Show Improvement

The J.P. Morgan Global Composite PMI (a service and manufacturing survey that includes over 40 countries) posted its seventh straight monthly gain to its highest level in a year, consistent with 3.4% annualized global economic growth.

Gains in the new orders, employment, and future activity indices also bode well for sustaining the recovery in the coming months, as does a broadening of the base of the upturn. All six sub-sectors covered by the survey saw output rise and improvement was seen in key regions such as the US, Eurozone, China, and Japan.

May Stock Market Performance

The S&P 500 advanced 4.8% in May, marking the highest return for the month of May since 2009. While all sectors except for Energy registered a gain, it was Technology and Communication Services that did the heavy lifting, contributing 3.5% points of the index’s 4.8% return. Utilities (a small sector at just 3.0% of the overall S&P 500 index) kept its positive momentum going in May, gaining 8.5% during the month, second best among all sectors.

In aggregate, first quarter earnings have been solid. With 95% of S&P 500 companies reporting, 82% have beaten consensus estimates, up from 78% last quarter. Among sectors, better-than-consensus earnings have been highest for Technology and Health Care and lowest for Energy, Utilities, and Financials. Given healthy economic growth as noted above, profit growth should continue, which provides the ultimate support for stock prices.

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