Crystal Ball
As the world watches the cyclical waltz of the US economy, we sat down with Morgan Slade, an expert in alternative data from CloudQuant, for his perspectives on the state of the economy in light of falling home prices, declines in active job postings, and the specter of inflation.
Gary Drenik: Good day, Morgan. Given the prevailing climate, how do you foresee changes in the CPI, specifically with regard to home prices and energy?
Morgan Slade: Hello Gary. We're expecting to see a significant decline in the CPI and Core CPI due to recent trends in home prices and energy costs. The decline is anticipated by many, but there's potential for it to be larger than expected. A key contributing factor is the fall in housing prices that we've observed over recent months, which we expect to be reflected in the CPI soon.
Drenik: Have you seen any interesting trends in your alternative data sources this month?
Slade: Yes, jobs posting data from one of our data partners, LinkUp, has shown a trend shift in April. After an increase in active job listings in March, we saw an April decrease of 2.6% in active job listings, and new job listings declined by 7.8%. We think that employers are trying to balance the possibility of a recession against the need for growth. While there's still a surplus of openings in relation to labor supply, the trend seems to be moving toward normalization. Actual hiring velocity is down as well as postings are filled more slowly.
Difference Between Created and Deleted Job Postings
Drenik: Turning to the general state of the economy, is there a sense that the Fed is becoming more content with the slowing of inflation?
Slade: The Fed does seem more at ease with the slowing of inflation. Futures markets are currently pricing in a pause in rate hikes at the next meeting. We just had our 10th straight rate hike, bringing us to the highest level in 16 years. The speed of this increase is also noteworthy - it's the most rapid since the 80s. The difficulties faced by regional banks, the commercial and to some degree residential real estate markets may also be playing into the Fed's decisions on rate hikes.
Drenik: The Fed may have a positive outlook on where we’re at, but how are consumers fairing?
Slade: According to consumer survey data from Prosper Insights & Analytics, consumers aren’t sharing the Fed’s optimism. We saw a clear decline in consumer confidence across all income levels this month. Potentially driving that fall in confidence was a 5% increase in responses from low- and mid-income groups indicating they no longer believe they’re saving enough for future needs. The gap between what respondents say they plan to spend, and actual expenditures continues to persist which suggests that consumers are still not incorporating the impact of inflation in the spending plans. An economist might view this as a positive sign that inflation is transient, but a family shopping for groceries and paying more than they expect to certainly wouldn’t share that enthusiasm.
Saving Enough For Future Needs
Drenik: Seems as though the Fed and consumers have opposing viewpoints. There's been talk of a contraction in economic activity and a potentially mild recession. What can we infer from the Leading Economic Index (LEI)?
Slade: The LEI slipped 0.6% in April following a 1.2% decline in March. These numbers were in line with expectations and do indicate a probability of future contraction in the economy. This could point towards a mild recession in the middle or end of this year. Remember that the LEI is based on factors such as unemployment claims, new building permits, manufacturer orders, and stock prices, among others. In April, only new manufacturer orders and stock prices improved.
Drenik: Could we touch upon the labor market again? Reports suggest a drop in job openings and a rise in layoffs.
Slade: That's correct. U.S. job openings dropped to the lowest level in about two years in March, and layoffs rose sharply, according to the March Job Openings and Labor Turnover Survey (JOLTS). The number of unemployed people looking for work was still outpaced by job openings, though. In contrast, the April Jobs Report showed a slight increase in added jobs but also revised the February and March numbers even lower, with February being revised down for the second time now. We’ll get a bit more color on this situation when April’s JOLTS is released on May 31st. There’s uncertainty about whether the labor market will stop at a normal level or continue contracting into a recession, so expect a lot of interest in that release.
Drenik: Now, the housing market seems to be going through a significant shift. Could you delve a bit more into that?
Slade: Certainly. We saw the largest drop in previously owned home sales in 11 years this past April, a year-on-year change of -1.7%. Overall sales volumes were down 23.2% YoY. The western half of the U.S. experienced the most significant price drops, while prices are still rising in many parts of the East. Home sales have declined in 14 of the last 15 months, down about a third since the start of 2022. Higher mortgage rates discourage new buyers by making housing less affordable, and they also discourage sellers because they don't want to give up their lower rates. Mortgage rates hit 20-year highs above 7% last October and November, and as of the week ending May 11, they are around 6.35%.
Drenik: Could you speak about the relationship between these rising rates and the number of homes currently for sale?
Slade: The number of homes for sale has increased from a year ago, but this is mainly because homes are staying on the market longer. New listings actually fell 21% in April from the previous year. It's worth noting that homes typically go under contract a month or two before the contract closes, so the April sales data describes purchases made in March and February.
Drenik: It seems there are many moving pieces in the current state of the U.S. economy. How do these threads come together in terms of the overall economic outlook?
Slade: Indeed, it's like a multi-dimensional jigsaw puzzle. Right now, we see a potential slowing of inflation, a slowdown in the jobs market, and falling home prices. We anticipate that Core CPI will drop to 5.1% YoY indicating the continued and evolving impact of the blistering pace at which the Fed has raised rates. We anticipate the economy entering a tipping point later this year and current data suggests that the fed will ultimately achieve its goal of reining in the two-headed Covid shock and Fiscal Stimulus from whence it came.
Drenik: Thank you, Morgan. Your insights on the current state of the U.S. economy are invaluable.
Slade: It's been a pleasure. I look forward to our next discussion.
