Macroeconomic Overview: The latest International Monetary Fund’s (IMF) World Economic Outlook report highlighted divergence in economic growth and policy. While GDP growth and inflation rates in major economies followed different trajectories in 2023, recent decisions by central banks demonstrate a separation in interest rate policy. In early June, the European Central Bank (ECB) made its first rate cut since the fight against inflation began in early 2022. The move by the ECB followed rate cuts in Canada and a couple of other European countries outside the Euro Zone. ECB officials have not outlined a clear path for European interest rates. Economic growth in Europe has been sluggish, but the latest inflation figures remain above the target of two percent.
The decisions by central banks to cut rates in Europe and a few other locations contrast with the evolved outlook for Federal Reserve policy. A series of rate cuts were widely expected to occur in 2024, but those projections have been revised due to a combination of stronger-than-expected economic growth and stronger-than-expected inflation. The core inflation measure targeted by the Fed remains above the target of two percent (the latest reading for April was 2.7%).
Meanwhile, economic growth has expanded at an average annual rate of 3.1% over the past four quarters (the average annual growth rate in the five years before COVID was 2.7%). In addition, the labor market continues to be solid. The unemployment rate ticked up to four percent in May, but it held below that historically low level for 27 months, which is the longest stretch in at least 50 years. Control over inflation is just one of the Federal Reserve’s mandates. The other is to maintain employment at its maximum sustainable level. Persistent strength in the labor market has supported consumer spending and overall economic growth and has given the Federal Reserve room to hold rates higher-for-longer in pursuit of price stability.
This differs from other markets, such as those in Europe, where other central banks are facing slower economic growth. The emerging divergence in interest rate policies may cause instability in exchange rates. Shifts in exchange rates can influence trade flows and can also influence inflation.
Employment: The U.S. economy is estimated to have added +272,000 new jobs in May. This was significantly stronger than the +165,000 positions added in April (current figure is -10,000 relative to the estimate released last month) but below the +310,000 jobs added in March (current figure is -5,000 relative to the estimate released last month). The current twelve-month average is +230,000.
The unemployment rate increased marginally from 3.9% to 4.0% month-over-month in May. This is the highest rate in more than two years, but four percent is a low level by historical standards. Since the Federal Reserve began increasing interest rates in March 2022, the unemployment rate has shifted about 0.4 percentage points higher.
Wages increased +4.1% year-over-year in May. This is higher than the +4.0% growth registered in April, but it may just represent an upward bump in the longer-term downward trend in wage growth that has been in place since the Fed began increasing interest rates. When rates started to rise in March 2022, wages were up +6.0% year-over-year. During that time, inflation was surging and the rate of increases in salaries was lower than the rate of increases in consumer prices. Since then, price increases have slowed faster than wage growth, and a result has been that wages have been rising at a faster rate than inflation since May 2022.
Consumer Confidence & Spending: After three months of decreases, the Conference Board’s Index of Consumer Confidence increased in May (+4.5 points). The current value of 102.0 is a little lower than the mid-point of the range between 95 and 115 that has contained values since the second half of 2021. The long-term average for the index is near 93.0.
In inflation-adjusted terms, overall consumer spending was essentially flat month-over-month in April (-0.1%). Year-over-year, overall spending was +2.6% higher. The average annual growth rate over the past twelve months is +2.4%.
Consumer spending on apparel decreased -1.5% month-over-month in April but was +1.5% higher year-over-year.
Consumer Prices & Import Data: The CPI for garments rose +1.5% month-over-month in April. This followed a +0.7% month-over-month rise in March. These represent the strongest rates of price increases since late 2021, when inflation was surging. Year-over-year, average retail prices for apparel were +1.4% higher. Relative to the average in 2019 (pre-COVID), prices for clothing were +6.4% higher in April.
Average import costs, represented by the price per square meter equivalent (SME) of cotton-dominant apparel, increased +1.9% month-over-month in April (seasonally-adjusted). Year-over-year import prices were down -5.1%. Relative to the average in 2019, sourcing costs for cotton-dominant apparel in March were +6.2% higher.
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