Markets with Megan

The recent labor market report brought weaker than expected April employment numbers and a curious uptick in the unemployment rate. This episode peels back the layers of these statistics to reveal the true state of our economy.

Amidst the economic currents, we examine average hourly earnings, a key factor in the Federal Reserve's battle against inflation, and explore the perplexing signals from the ISM services index. The juxtaposition of a slowing economy with stubborn inflationary pressures suggests we should keep the champagne on ice regarding any imminent rate cuts.

For all of my listeners. I sure did miss you. I hope you missed me as well. This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, and we apologize about the kind of lull in that we've had in releasing these podcasts. We had a massive flood in our building so our podcast studio has been basically out of touch. But we're back and we're back this week and it was quite disappointing to me that I couldn't report on Friday because, for those of you that know economic data, the first Friday of every month is like Christmas Day to me. This is when we get the labor market report and we have lots to cover with that.

So we're going to just kind of do this a little bit differently today. Instead of focusing on one data report, I'm going to try and quickly go over the past three that we've gotten that were pretty important and also market movers. So let's start with that employment report that we got last Friday. We got the employment for the month of April. It came in weaker than expected at 175,000 jobs, and that was also after the prior two months were revised down by about 22,000 jobs. The markets were looking for 240,000 jobs. So a week on that headline number, the unemployment rate also increased slightly from 3.8 to 3.9.

Let's look at the average hourly earnings though. This is what the Fed's looking at, and the Fed wants to see that those earnings are trending lower, not completely deteriorating, but that they're trending lower because of the fact that they are very inflationary. So on a year-over-year basis, earnings were up 3.9%. That was compared with an expectation of 4%. So that was good news for the Fed, but let's also put this in perspective. 3.9% is moving in the right direction. It's one month One month does not make a trend and also the 20 years leading up to the pandemic. The average year over year wage growth we had was two and a half percent. That's how we were able to keep inflation anchored around 2%. So still a long way to go there for the Fed.

The work week this is another thing that is a leading indicator for the future of the labor market, because typically employers will cut hours worked before they cut workers. That is in a trend lower again slipped down slightly, and then, within the jobs report, temporary help this is another thing that will be cut before actually cutting jobs, and that declined again at a pretty big pace. The leaders here that we did see for the month, though, we saw gains in education and health trade and then goods producing jobs, so this report was relatively soft. The market liked it. The expectation for Fed rate cuts have now been moved from December back up to July, or I'm been moved from December back up to July or, I'm sorry, from December back up to July or September, although it's kind of like the tale of two inflations here, because then we received that very same day, on Friday, the ISM services index, and we have often talked about the two areas of sticky inflation wages and services.

This service index was not good by any metric that you look at it. Not only did the index itself fall into contraction territory, it's only been the second time that it's been in contraction territory, and that's a level below 50. It's only been the second time since the pandemic, so services are slowing. It's only been the second time since the pandemic, so services are slowing. But when you look within this, the prices paid for services shot up and this is inflationary. So you have a weakening economy and inflation that continues to be stuck and stubborn. That was at a four-month high, and it's only the second time it's been this high in the past eight months and when you look at employment again, this is an indicator for the future readings we'll get. On that unemployment report, the employment part of services slipped into contraction, tori a level below 50. It was the second worst reading we've had since the pandemic. So we're seeing slowing here. You've got an economy slowing, you have a labor market slowing, but you still have inflation pressures. So we aren't getting too optimistic yet on these.

Rate cuts are imminent this summer. This is one month here we're going to again. One month doesn't make a trend. Two months gets us a little bit more conviction. Three months is an even higher conviction.

The last report I'll just touch on was consumer credit. We like to look at this because it does give some idea of what the consumer, how they're spending. Considering savings is so extraordinarily low Consumer credit revolving credit, which includes credit cards, that is. Now it did tick a little bit higher and made a new, fresh new record high. So consumers may be spending they're spending it on credit cards. Inflation is stubborn and the economy's weakened. The Fed is in a pickle here and we will continue to look at this data going forward. This week we'll be back out with the preliminary reading on consumer sentiment and that has been a market mover in the past and also helps us give us some indication not only how they feel about inflation, but also possibly future spending trends. That's all we have today. Sorry that we missed out the past few days, but we will be back, I promise, and if you have any questions or comments, please feel free to reach out to podcast at Verdence. com. Thank you.