Despite the overall healthy economy, about 4.4 million Americans reported being unable to find a job as applications for federal benefits soared last week. Non-seasonally adjusted claims surged by over 30,000 to 258,000, but continued the negative trend. From the three most recent weeks of data (March 24, April 28, May 18) through yesterday, claims have been higher than average seven consecutive weeks.
Consumers React to Loss of Their Jobs
Until this point, we haven’t seen any effect on consumer spending from job losses, but this is consistent with a slowing U.S. economy, according to recent commentary from the Commerce Department. Retail sales growth has slowed, albeit at a slower pace than inflation, with inflation pushing businesses to raise prices and consumer spending to revert to higher levels.
This is consistent with recent comments from Mark Zandi, chief economist at Moody’s Analytics, who said that core retail sales should grow by 1.9% in 2019 and 1.7% in 2020, down from his expectation of 2.3% growth earlier this year. Zandi cites several contributing factors, including decreased consumer spending on electronics and appliances and a rebound in auto sales that had slowed in December and January. Housing permits also declined in March and April after rising to a multi-year high. In other words, consumers are paying down debt and saving more, a reaction from consumers and businesses that have clearly benefited from lower taxes this year.
The weakness in employment growth and weak growth of retail sales have each been related to the recent broadening out of the economic slowdown to include industries beyond manufacturing and business investment. Last week, the Institute for Supply Management (ISM) reported that its manufacturing sector index decreased from 55.8 in May to 53.3 in June. This was due to a slowdown in new orders, shipments, employment, and backlogs.
The tech sector has also seen strength fade. Last week, Yahoo reported that Yahoo Finance reached 697 million monthly users, an increase of 6% since the beginning of 2018. But the number of monthly users declined 8% in May, citing Instagram’s growth in the company’s dedicated apps.
Market Reacts to These Major Slows in Economic Growth
The weakening of retail sales has been an ongoing theme over the past few months. On May 31, the U.S. Commerce Department reported that retail sales had fallen 0.2% in April from the prior month and 1.4% from a year ago. Even with declines in purchases at restaurants and service stations, retail sales increased 0.4% for the month. Same-store sales for the month were also down, with the largest declines noted at supermarkets, department stores, and electronics and appliance stores. During the same three-month period, employment at restaurants and service providers fell by 131,000 jobs. These downward revisions to retail sales data point to the overall slowing of economic growth during the past few months, indicating that instead of being the result of a “temporary” slowdown, we are witnessing changes that are more permanent in nature.
The weakened economy and recent weakening of retail sales has spurred a drop in the U.S. dollar to a 16-month low, opening the door for U.S. goods and services to be more competitive abroad. The strength of the euro could push the 12-month high euro-dollar exchange rate as high as $1.16. The strength of the dollar in 2018 has been accompanied by a decrease in investment by U.S. multinationals in the U.S. This means that, in the absence of additional protectionist policies coming from the Trump administration, the dollar is likely to remain weak in the coming months, increasing exports and thus better able to compete with foreign goods.
In short, with the U.S. economy now slowing, the market is finding ways to translate this into a weakening of trade, taking a focus away from the domestic issues of the trade war to the slowing of the U.S. economy. Today, the Dow Jones Industrial Average was down over 349 points, or 1.5%, as investors reacted to a drop in consumer spending and slowdowns in the manufacturing and service sectors.