Signs of Resilience in Uncertain Times

Right now, Americans are endeavoring to heal wounds caused by a health crisis, an economic crisis and deep, racial injustice — all at once. And in times like this, when so many people are grieving, angry, and fearful about the future, this weekly market digest can almost feel … trivial. An analysis of raw economic data and stock market moves seems clinical, detached from current circumstances, but beneath the numbers there’s a deeper story. And if there’s one word to describe what we’re seeing, it’s resiliency.

The numbers we study tell us the United States economy is showing resiliency amid historic, unprecedented challenges. But this isn’t a testament to some “magic hand” or a single persona. It’s a testament to the American people who are beginning to reopen the businesses they built. The doctors and scientists determined to dispatch the coronavirus. And the Americans aiming to build a more just, equitable society. And as we dig into the numbers this week, the resiliency of the country’s people and economy, should offer hope the we can climb out of this valley together.

WALL STREET WRAP

May Jobs Report Sparks Friday Rally: The May jobs report was a positive surprise for markets on Friday with the unemployment rate unexpectedly dropping to 13.3 percent — many analysts figured the rate would swell to 19 percent. May payrolls grew by 2.5 million jobs, driven by furloughed workers coming back to their jobs, according to the U.S. Bureau of Labor Statistics report.

Leisure and hospitality employment, among the hardest-hit sectors, increased by 1.2 million following losses in April of 7.5 million. Food services and drinking places (a subset of leisure and hospitality) rose 1.4 million, accounting for about half of job gains in nonfarm employment. Notable employment gains also showed up in construction, education, health services and retail trade.

Permanent job losses rose 295,000 to 2.3 million, while the number of long-term unemployed (jobless for 27 weeks or more) increased by 225,000 to 1.2 million, representing 5.6 percent of the unemployed. While the jobless rate for white workers (12.4 percent) and Hispanics (17.6 percent) declined in May, the jobless rate for black (16.8 percent) and Asian (15 percent) showed little change.

Markets rallied on Friday, which tends to happen when key data surprises to the upside. Given there hasn’t been a significant coronavirus-related setback so far in June, markets were perhaps baking in expectations that the employment situation continues to improve in June. Keep in mind, May’s figures may be revised up or down in the coming weeks.

The Start of a Rebound: American manufacturing remains sluggish, but the situation improved in May. The Institute for Supply Chain Management said its manufacturing index climbed to 43.1 percent in May, up 1.6 percentage points from April’s 11-year low of 41.5. Although the manufacturing sector still contracted in May (a read below 50 indicates contraction), it’s doing so at a slower pace than in April. Six of the 18 industries tracked by ISM rose (compared to just two in April). Companies that make groceries, paper products and minerals in health-care goods are among those that expanded.

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The ISM’s nonmanufacturing index told a similar story, rising to 45.4 percent in May, from 41.8 percent in April. As we saw in the unemployment data, restaurants and other service-oriented companies are beginning a slow recovery from the depths of the pandemic. Financial companies and suppliers of materials used in consumer staples fared well.

While the economy is still in a deep recession, what matters most is that the two reports indicate that business activity is turning in the right direction.

Good News in Global Markets: A private survey of manufacturing activity in China, known as the Caixin/Markit Manufacturing PMI, came in at 50.7 in May. That shift into expansion territory was another upside surprise as analysts had expected the reading to come in a hair under 50. Output, one of the index subcomponents, rose at its fastest clip since January 2011. Adding to positive news from China, the Caixin/Markit Services PMI rose to 55 in May from 44.4 in April, the fastest growth in this metric since October 2010.

Meanwhile, the European Central Bank stepped up its bond-buying program (a.k.a. quantitative easing) to $1.5 trillion (€1.35 trillion), a stimulus measure that brings the ECB more in line with the Federal Reserve’s swift, aggressive policy actions. Bonds and stocks in Europe rallied as the euro pushed to its highest level against the dollar since March. The bond-buying program should help ease pressure on eurozone governments as they steer their respective economies through a deep slowdown in activity.

THE WEEK AHEAD

Check on Small Business: Small businesses have been hit hardest during the pandemic, as they don’t always have the balance sheet strength and borrowing capacity to weather deep economic storms. However, policymakers have replenished PPP funds and adapted the program to better support the immediate needs for business owners. And, as we saw in May’s data, re-opening efforts are having a tangible impact. We’ll see this week how these factors carried over into the NFIB’s Small Business Optimism Index. Are business owners seeing those PPP funds work? Has re-opening gone smoothly?

Inflation Today or Tomorrow? We’ll get a look this week at May’s consumer price index, a key measure of inflation. Consumer expectations for inflation have been rising this year. Last week, we learned consumers are expecting inflation to rise 6.2 percent over the next 12 months, a jump from expectations of 5.4 percent in April and 4.6 percent a year ago. Consumer expectations typically trend higher than reality and have never matched the actual inflation rate. Core inflation in April, for example, fell 0.4 percent and is only up 1 percent year-over-year.

Still, expectations for high inflation can, reflexively, manifest higher inflation. This week we’ll see how far the current gap is between expectations and reality.

The Road to a Vaccine: Every week that passes, we’re a little closer to a vaccine — the critical final step to getting past the coronavirus scourge. We’ll dig into any fresh news on that front this week, and we’ll wrap up the vaccine landscape next Monday right here in the market commentary.

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