Economic data released on Tuesday suggested that the economy is continuing to slow as the labor market loosened, price gains eased and manufacturing contracted in June and July.
Indicators came in lower than expected, implying that while the economy has remained resilient, it has lost some momentum as the Federal Reserve continues to apply the brakes with more rate hikes.
For the labor market, job openings fell to 9.58 million in June, the lowest level since April 2021, while the vacancy-to-unemployed ratio rose slightly to 1.6.
Together with a sizable downward revision to May’s job openings data, the labor market has loosened noticeably in recent months.
Most of the vacancies came from small to midsize companies that have fewer than 250 employees. That means the entire impact of the Federal Reserve’s tightened monetary policy is still to be felt in that part of the economy.
The quit rate, a measure of people who voluntarily leave their jobs and a metric closely watched by the Fed, fell to 2.4% in June from 2.6% earlier. Job quits have been one of the most important factors that drive wage growth. With the quit rate continuing to stabilize, concerns over a wage-price spiral should soon fade.
A slight uptick in the Institute for Supply Management’s manufacturing index was not enough to keep the sector out of contraction territory in July. The overall index rose to 46.4 from 46 in the prior month, staying below the neutral threshold.
Read more of RSM’s perspectives on the manufacturing sector.
But the good news is that prices paid, the subindex for inflation, declined for the third straight month, pointing to further disinflation in the goods sector.
The employment subindex plunged to 44.4 from 48.1, the lowest since July 2020. The data suggested a smaller change in payroll data coming out this Friday. We forecast that the jobs report for July, which comes out Friday, will show that the economy added 190,000 net jobs, a step down from 209,000 in June.
Tuesday’s data supports our base case that July should be the last time the Federal Reserve raises interest rates in this cycle. We have reduced our recession probability to 60%, which means it will be a lot harder to predict which outcome it will be as the economic data provides mixed signals over the next couple of months.