The Week in Review
Initial unemployment insurance claims in the week ending July 23rd fell 5,000 to 256,000 from 261,000 in the previous week (revised up 10,000). Markets expected 250,000. Continuing unemployment insurance claims in the week ending July 16th also decreased, by 25,000 to 1.359 million from 1.384 million (unrevised).
The 4-week moving average—smoothing out week-to-week volatility—rose for both initial and continuing claims, further evidence of a softening labor market. The 4-week average of initial unemployment claims rose by 6,250 to 249,250, and the 4-week average of continuing claims increased by 8,750 to 1.362 million. The labor market is expected to cool further after GDP contracted in the first half of 2022.
Personal income in current dollars rose 0.6% in June, above market expectations for a 0.5% gain. Disposable income in current dollars rose 0.7%. However, real disposable income, which adjusts for inflation, declined by 0.3%. Real disposable income is a better predictor of future consumer spending than headline personal income, and it was weak in the second quarter, falling a seasonally adjusted annualized 0.5%. Chair Powell, in the press conference following the July interest rate decision, partially attributed weak consumer spending to lower real disposable income.
Personal consumption expenditures (PCE) rose 1.1% in June, above market expectations for an 0.9% increase and a hair below Comerica’s 1.2% forecast. Impressive, but inflation-adjusted PCE rose just 0.1%. There was a notable divergence in real expenditures on durable and non-durable goods, with the former rising by 0.9% and the latter declining by 0.4%. Expenditures on nondurable goods in real terms have declined every month since January, as American households cut back on spending on gasoline and food amidst sharp increases in prices.
The PCE Price Index, the Fed’s preferred inflation gauge, rose 1.0% last month, matching our expectations and a notch above the 0.9% market consensus. Headline PCE inflation jumped to 6.8% on an annual basis from 6.3% in May, and core inflation also rose in those terms, to 4.8% from 4.7% in May. Annual durable, nondurable, and services inflation last month were 6.1%, 13.0%, and 4.9%, respectively. Annual nondurable and services inflation accelerated on the month.
Overall, the personal consumption and outlays report points to further weakness in consumer spending, but not an outright decline. Inflation definitely went the wrong way in June. Big box retailers, manufacturers, and service providers report that demand has been weakening in the face of surging prices, compelling them to limit further price increases or discount products. If gasoline and diesel prices continue to trend lower, discounting is likely to slow inflation in the coming months.
Preview of the Week Ahead
The upcoming week’s biggest release is the July jobs report, which likely showed slower payroll job growth than in June but an unchanged unemployment rate. The ISM manufacturing and services indices likely moved lower in July, mirroring drops in other business surveys during the month.