Market turmoil has grabbed headlines in recent weeks, but the economy remains healthy if we look beyond the market swings. Jobs growth, corporate earnings, healthy consumers, increasing spending, and China lockdowns starting to thaw are all reasons for optimism for the economy. The macro data released over the past few weeks supports our view that the U.S. economy is in a good place overall, despite the recent selloff.
The first-quarter GDP report came out on April 28th, and for the first time since the second quarter of 2020, the headline number came in negative, indicating that the economy contracted in the first quarter of this year. The -1.4% number looks bad, but it paints a picture of a strong economy with context. Both personal incomes and disposable personal incomes increased sharply, as did consumer spending and investments. What dragged the headline number into the negatives was a decrease in inventories, and a decrease in net exports, primarily resulting from increased consumer spending and a strengthening U.S. dollar.
The jobs report that came out on Friday, May 6th also aided the narrative of a strong U.S. economy. In April, the U.S. added 428,000 jobs, with leisure and hospitality, manufacturing, and transportation leading the way. Overall, the unemployment rate remains near its pre-pandemic lows, and the sectors adding the most jobs indicate some more easing of supply chain constraints may be on the way. This coupled with decreasing Covid cases in Asia, namely in China, where case counts are down 2/3 from their peak levels, should assist the Fed’s efforts to ease inflation.
The Federal Reserve was slow to tackle inflation, believing its own rhetoric that inflation was transitory for too long. It is now acting to correct its past inaction, and the economy’s underlying strength is allowing for them to move more aggressively to tame inflation. On Wednesday, May 4th, Chairman Powell announced that the Fed would once again be raising interest rates and indicated that an accelerated pace of rate hikes, 0.50% per month as opposed to the traditional 0.25% per month, will continue through at least July. He also announced the schedule of the Fed balance sheet run-off, which will be capped at a maximum of $95 billion per month. The aggressive rate hike and balance sheet reduction schedules, along with the easing of supply chains, should help pull back the elevated level of inflation. Meanwhile, strong consumer demand in the face of high inflation and a tight labor market should allow the Fed tightening to proceed without inducing a recession. We will be closely monitoring the inflation data and broader macroeconomic environment over the coming months and remain prepared to adjust our positioning accordingly.