First Indications Will Need To Be Confirmed

Evidence is mounting that the U.S. economy has slowed, largely driven by the previously booming services sector. Despite this slowdown, overall economic activity remains robust, and the moderation could be good news for investors, as it may pave the way for potential interest rate cuts by the Federal Reserve.

  • A key indicator of this trend was the most recent employment report, which revealed that the economy added 175,000 jobs in April, significantly fewer than the 315,000 jobs added in March.
  • The most striking change was in the leisure and hospitality sector, which gained just 5,000 jobs, a dramatic decrease from 53,000 in March.

Confirmation From Big Brands

This pattern aligns with recent earnings reports from food-service providers like Starbucks and McDonald’s, both of which reported increased consumer caution. Kraft Heinz also noted reduced orders from out-of-home venues like restaurants.

  • Christopher Kempczinski, CEO of McDonald's, stated that the consumer is certainly being discriminating in how they spend their dollar. He added that the inflation that has occurred over the last couple of years in the U.S. has certainly created that environment.
  • Starbucks also experienced a 3% drop in North American comparable-store sales in the first quarter, contributing to a 15.9% stock price decline.

Additionally, a monthly survey by the Institute for Supply Management indicated that services-sector activity slipped into contraction in April for the first time in 15 months. Goldman Sachs economists noted that the composition of the report was weak, as the employment, new orders, and business activity components all declined.

Economy Is Still Robust

However, not all signs are negative. Although the unemployment rate rose to 3.9% in April from 3.8% in March, this rate has fluctuated between 3.7% and 3.9% since last August. Bank of America economists suggest this signals the end of the "catch up" in services-sector employment following the pandemic, which isn't entirely negative for the economy.

  • A positive sign from the Fed's perspective is the continued deceleration in wage growth, with average hourly earnings rising 3.9% annually in April, compared to 4.1% in March and 4.3% in February.
  • This indicates that pricing pressures may continue to ease, despite recent persistent inflation.

Friday’s weak jobs data reignited investor speculation about rate cuts. Stocks rose and bond yields fell, with the S&P 500 climbing 1.3% and yields on 10-year Treasurys declining by 0.07 percentage point. Although a cut at the Fed’s June meeting is unlikely, the odds of a cut by September increased to 67.1% from 61.6% the previous day, according to CME Group.


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