Key Economic Indicators for US Investors

Investing in international companies in the US? Understanding key economic indicators is crucial for informed decisions. From jobless claims to housing market trends, these signals offer valuable insights into market movements and investment strategies. EasyAssetManagement highlights important updates and indicators that can impact the US economy.

Jobless Claims and Labor Market Stability
New filings for unemployment benefits edged down slightly in the week ending May 18th. Claims fell to 215K from 223K the previous week, which is a bit lower than the consensus. The earlier rise in claims seems to be mostly due to temporary disruptions in certain states caused by spring break and holidays.

These disruptions appear to have subsided as claims in those states also decreased last week. There was a small increase in the number of people already receiving unemployment benefits for the week ending May 11th, reaching 1,794k. However, this increase brings continuing claims back in line with the average levels seen earlier this year.


 
The labour market continues to show signs of strength. Consistent with recent trends, new unemployment claims remain low for the past few months. This suggests there haven't been widespread layoffs, a worrying sign for the job market. This week's claims data is relevant to the upcoming May jobs report (payrolls) expected in a couple of weeks. Low initial claims typically align with positive job growth, although the pace of hiring might slow down as businesses have been recruiting at a more moderate rate. While continuing claims have seen a slight uptick recently, they remain below levels observed earlier this year. It's important to remember that increases in continuing claims can reflect longer unemployment spells, but ultimately, their rise is limited by the influx of initial claims.

PMIs Rebound (Purchasing Managers' Index)
Beating expectations, US business activity showed surprising strength in May. The manufacturing sector grew slightly, with the composite PMI rising to 50.9 (up from 50). The services sector rebounded even more significantly, with the PMI climbing to 54.8 (up from 51.3). These positive results follow several months of decline and are considerably better than analysts' predictions for continued softening. Encouragingly, there were widespread improvements across almost all areas of the manufacturing and services surveys. As a result, S&P Global reports that the all-industry composite PMI reached a 25-month high. This positive momentum strengthens market confidence that US GDP growth will pick up and exceed its long-term trend in the current quarter, following a weaker performance in Q1.

Manufacturing activity picked up steam in May, with the output PMI rising to 52.4 (up from 51.1). Other key indicators within the report also showed improvement, such as a slight decrease in supplier delivery times, suggesting potential easing of supply chain disruptions. The tracking estimate for the ISM manufacturing index, which uses a different weighting methodology, also recovered to 50.7 (up from 49.7) for May, breaking back above the neutral level of 50.

Additionally, the May flash PMI indicated a modest improvement in future output expectations. However, a potential cautionary sign emerged. The ratio of new orders to inventories dipped slightly further below 1 in May. This suggests that production growth might not be as strong as other positive indicators within the report.

The May flash PMI also shed light on cost pressures. Manufacturing businesses are still facing rising input costs (the cost of raw materials), but these haven't significantly increased in recent months. In contrast, service sector businesses are experiencing a more stable situation, with input price trends mostly flat. When it comes to output prices (the prices businesses charge for their products or services), the picture is mixed across sectors, but overall haven't changed much over the past few months.

April New Home Sales Disappoint
 New home sales in April came in much weaker than anticipated. Sales figures reached 634k, falling short of the expected 678k. Additionally, March sales data was revised downwards from 693k to 665k. Geographically, sales declined in the Northeast, South, and West regions, with only the Midwest showing a slight increase.

There's also a slowdown in construction activity for new homes. The number of homes sold but not yet started on were 83k, decreased from 86k units in March. Similarly, homes under construction that have already been sold were 248k, which was a drop from previous levels. The number of new completed homes sold also saw a slight decline to 303k.

Both new and existing home sales data point to a cooling housing market.  April's weaker-than-expected new home sales follow a recent decline in existing home sales, suggesting rising mortgage rates are dampening buyer enthusiasm. New home sales data provides a timelier picture of housing demand, as these homes are recorded as sold at the start of the buying process.  While recent new home sales haven't shown a significant decline, staying around pre-pandemic levels, the surge in mortgage rates above 7% is likely to put a further squeeze on demand.

This translates to a potential drag on economic growth.  Residential investment, which reflects spending on new homes, is likely to make a smaller contribution to GDP growth in the second quarter compared to the first quarter. In the worst-case scenario, it could even become a negative factor.



Historically, rising interest rates tend to hit housing and construction industries first. A slowdown in these sectors can then trigger job losses, which can ripple through the broader economy. While housing activity did slowdown in 2022 as the Federal Reserve raised rates, it surprisingly avoided widespread job losses and a significant spillover effect on the rest of the economy. Similarly, even with lacklustre demand in 2023, the housing market showed surprising resilience despite high rates. However, with the renewed downturn in housing demand seen in 2024, there's a growing concern that this time, a weaker housing market could have a more tangible impact on the overall economy.

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