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Services – Much like the recent ISM manufacturing survey, its counterpart service sector index unexpectedly declined. The key measure for activity in the service industry fell to 50.3 in May, the lowest level in five months. All sub-sectors in the index were lower. The two forward-looking indicators, new orders and business activity, declined substantially. Employment fell into contraction territory (below 50) for the first time since December 2022. The one positive in the report was a continued drop in prices paid to the lowest level in three years. The service sector has been carrying the economy for months but is starting to show signs of weakening demand. The accommodation and restaurant industries continue to show positive results, but sectors such as rental and leasing, wholesale trade, health care, fishing and mining (to name a few) declined. Respondents to the survey believe cumulative credit tightening is catching up to consumers and causing a pullback in spending.
Trade Deficit – The U.S. trade deficit widened the most in over a year to the largest level in six months. As of April, the difference between exports and imports increased by $14 billion to -$74.5 billion. Exports fell 3.6% while imports rose 1.5%. The drop in outbound shipments of goods and services was broad based, with significant declines in industrial supplies, consumer merchandise and capital goods. Imports consisted of motor vehicles, industrial supplies, cell phones and other household goods. The message from the data is that Americans continue to spend, while global economies are weakening. The widening deficit, as a result of falling exports, will subtract from the second quarter GDP, potentially shaving off up to 2.5 percentage points, according to economists’ estimates.
FOMC Preview – The FOMC begins a two-day meeting on Tuesday, June 13. Economists and market participants expect the committee to telegraph a “hawkish skip” – not raising rates for the first time in 15 months, while maintaining the current high interest rate strategy. Most Fed officials have spoken out on the need to keep rates elevated for some time to bring inflation down. While the futures market continues to price in a rate cut by year end, the committee has strongly opposed such a move. The FOMC’s median projection in its quarterly “dot plot” Summary of Economic Projections is expected to show the policy benchmark rate at 5.1% at the end of this year, in line with the March projection.
Home Equity Changes – Home prices are still high across the country but homeowners with a mortgage are beginning to see a small amount of lost equity. An average 0.7% was lost in the first quarter of the year, or about $5,400 per borrower, the first decline since 2012. Western states posted the biggest losses, led by Washington, California and Utah. In the San Francisco area, the typical homeowner experienced equity loss of $174,000 year-over-year. By contrast, owners in six states, including Florida, Connecticut and New Jersey, increased their equity positions by $20,000 or more, on average.
Household Net Worth – U.S. household net worth climbed $3 trillion, or 2.1%, in the first quarter. This was the largest quarterly gain in over a year. The bulk of the gain, $2.4 trillion, came from equity holdings in a very strong stock market. Consumer credit, not including mortgages, rose at a 4.3% annual rate, the slowest in two years. Outstanding business debt rose 3.8%.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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