Labor Market Remains Resilient, Though Other Indicators Point to a Slowing Economy

Key Takeaways:

• Nonfarm payroll employment increased by 390,000 in May, according to the Bureau of Labor Statistics (BLS). The unemployment rate was unchanged at 3.6 percent, and the labor force participation rate ticked up one-tenth to 62.3 percent. Employment gains were strong in leisure and hospitality and professional and business services, gaining 84,000 and 75,000, respectively, though retail trade employment fell by 61,000. Residential construction employment including specialty contractors rose by 16,700. Average hourly earnings increased 0.3 percent for the second consecutive month and were up 5.2 percent on an annual basis, a deceleration of three-tenths from April.
• Personal income, adjusted for inflation, rose 0.2 percent in April, its largest gain since October 2021, according to the Bureau of Economic Analysis. Real disposable income was flat, an improvement from the previous five monthly declines. The PCE price index rose 0.2 percent over the month, the smallest increase since November 2020, and was up 6.3 percent annually. Core PCE increased 0.3 percent for the third consecutive month and rose 4.9 percent over the year.
• The ISM Manufacturing Index increased 0.7 points to 56.1 in May after two consecutive monthly declines. The new orders index increased 1.6 points to 55.1 and the production index rose 0.6 points to 54.2. The supplier deliveries index declined 1.5 points to 65.7, perhaps indicating a slight easing of supply chain issues.
• Factory orders increased 0.3 percent in April, according to the Census Bureau. Nondurable goods orders were up 0.2 percent and orders for motor vehicles and parts increased 0.6 percent.
• Light vehicle sales dropped 12.1 percent in May to a seasonally adjusted annualized rate of 12.8 million units according to Autodata, the lowest level since December 2021 and about 26 percent below the level in May 2019.
• The Conference Board Consumer Confidence Index declined 2.2 points in May to 106.4, the second lowest level since February 2021. Confidence in the present situation was down 3.3 points to 149.6 and consumer expectations for the future declined 1.5 points to 77.5.
• Private residential construction spending rose 0.9 percent in April, according to the Census Bureau. Spending on single-family construction rose 0.5 percent and multifamily construction spending rose 0.8 percent. Spending on improvements rose 1.5 percent after two months of declines.
• The FHFA Purchase-Only House Price Index increased 19.0 percent from a year ago in March, a slight deceleration of four-tenths from the series record in February.

Forecast Impact:

Hiring continued at a steady pace in May, largely in line with our expectations. The one notable exception to another otherwise strong job report was the decline in retail trade employment, though we should note that employment in this sector is still above its 2019 levels.

Real disposable income and the topline PCE price index were helped in April by a pullback in oil and gas prices, a trend that has since reversed. We expect energy and food prices will remain elevated and perhaps rise even further in the near- to medium-term. This will continue to cut into consumers’ disposable incomes, forcing them to shift spending away from other discretionary categories. This could help in part to explain the weak light vehicle sales number, especially given auto sales are sensitive to rising interest rates. Combined with tighter monetary policy and somewhat slower wage growth in May, we expect this effect will help cool core PCE, and we will likely downgrade our forecast for near-term core inflation. However, this is likely to come with a more than offsetting increase to our forecast for topline inflation, as risks of disruptions to the global food supply chain and a prolonged spike in oil prices become more likely. Further, new factory orders slowed in April, and the ISM manufacturing index, despite a small uptick in May, has trended downward and will likely be affected by tighter monetary policy and global growth headwinds. When combined, we believe these indicators are supportive of our near-term forecast for slower GDP growth.

In housing, home prices continued to climb in March as borrowers rushing to lock in lower rates ran up against an extremely limited inventory of homes for sale. Housing activity has since slowed dramatically, and we expect home price growth to cool in the coming quarters. Residential construction grew impressively in April, though this is offset partially by higher input prices. Also, the strong increase in May residential construction employment is a positive sign for the industry. As monetary policy continues to tighten, we expect that residential fixed investment will slow from its recent boom.

Nathaniel Drake
Economic and Strategic Research Group
June 3, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.