Inflation, employment, manufacturing: What recent data tells us about the U.S. economy

When the Fed meets in June, it's going to have a slew of economic data to digest. Wells Fargo Senior Economist Sarah House joins Yahoo Finance Live to discuss what the data is telling us about the economy and what it means for the Fed.

Video Transcript

- So for more on what all this data means for the US economy, we are joined by Sarah House, Wells Fargo senior economist. So Sarah, let's get right into some of the data that we have out today. We have this ISM number out the latest print there showing another contraction. We also had the ADP numbers out showing strong job markets still. How do you read all of this?

SARAH HOUSE: So I think if you look at the details of the ISM, one thing that jumped out was that employment still remains positive. So I think that fits with the strength that we're seeing not only out of the ADP numbers this morning, but also out of the jobless claims numbers where we continue to see a pretty low level of layoffs and no clear uptrend in the past few months in terms of those layoff numbers.

But I think we continue to see a split between different segments of the economy. So manufacturing, I think, is clearly really more just given it's more interest rate sensitive and I think also given that-- just given the nature of the pandemic. That was an area that did very well. And so we're seeing some normalization there too in addition to those interest rates hurting CapEx plans.

BRAD SMITH: You mentioned manufacturing. One of the interesting nuggets within this manufacturing PMI report for the month of May is that even in the demand environment right now, the backlog of orders index there, that dropped to a level not seen since the Great Recession. What does that tell you right now about the broader near-term environment versus where the expectation is for demand to re-ensue, this report is calling out, "late summer, early fall period?"

SARAH HOUSE: I think what we're seeing is some of the froth and excesses worked off. So I think that's been one of the reasons why it's been difficult to pinpoint exactly when the Fed's tightening is going to take effect and really have a meaningful slowdown on the economy, is because not only did households have a lot of excess savings, but businesses had a lot of backlogs to work through.

But I think as we're seeing those decline, I think that does throw a cautionary note over what can happen to the jobs market ahead. So still very strong right now. But if businesses are working through those backlogs and we see broader demand continue to slow, then I think that spells trouble for the labor market actually as we move further into this year.

- And you mentioned the Fed's recent tightening plans. There have been more calls or more expectations now for a pause at the June meeting. What do you think this data signals to the Fed-- to a very data-dependent Fed?

SARAH HOUSE: Well, I think we've seen that the Fed believes-- or at least many members of the Fed believes that they can sit and wait a little bit, and see how this data shakes out. So again, we're still seeing a lot of strength in the most recent labor market data. But we're seeing other segments of the economy certainly beginning to feel the impact of that tighter policy.

And so I think this overall supports that the Fed could perhaps afford to wait here in June, see what happens. And I think they certainly teed up optionality to go again. So this doesn't necessarily mean if they don't move in June, that we've seen the conclusion of this rate hiking cycle. But I think the officials understand that they have done quite a bit in a very short time. And so they want to make sure that they don't overdo it. And they know that it's going to take time for the impact to be felt throughout the broader economy.

BRAD SMITH: Sarah, we've been continuing to do this Yahoo Finance economists guest survey, essentially asking, what is the number where the Fed could not afford to pause at this next meeting? And the ranges that we've heard right now-- Citi, I think, put out earlier this week, anything above 200k, which, I mean, that's already some of the expectation that's out there. But 250k as well is what we've heard. Is there a number that you would be watching for where the Fed could not afford to pause at this next meeting?

SARAH HOUSE: I don't think it's a single number. So I think it's going to depend not only on what payrolls do tomorrow, but what does the wage component do? So what do we see in average hourly earnings? What are we seeing on the supply front? So are we seeing more workers continue to funnel back into the labor force or are there signs of the pickup we've seen over the past six months or so beginning to slow down?

And of course, we also have an inflation print that we get before the Fed's decision as well. So it's coming on the morning that they kick off their meetings, so to be determined how much that really sways. But I think there's still a lot of different components. And so it's hard to boil down to any single number.

- Sarah, what are you expecting from the jobs report tomorrow? What are you looking for?

SARAH HOUSE: So we're looking for a continued moderation in the pace of job gains. But still overall, pretty robust hiring. So we're looking for an increase of 200,000. So still very strong when you put it in the context of population and labor supply growth. So it's estimated that we probably need less than 100,000 jobs per month just to keep the unemployment rate steady. So that would still keep the labor market very tight.

But I think it would signal that we are seeing the jobs market cool. So it's not collapsing by any means. But we are starting to see some softness creep back in. So not just in terms of the hiring numbers, but we've started to see, I think, some glimmers of that in the wage numbers. We saw that in terms of the JOLTS numbers earlier this week with the quits coming down. So I think if you look across a range of job market measures, we are seeing that the labor market begin to cool, but it's a pretty gradual rate still.

BRAD SMITH: We'll see if Fed Chair Jay Powell perhaps sees that inflation print the morning that the meeting starts and changes its tie as a signal of what could be his mood ring going into that meeting. Sarah House, Wells Fargo senior economist. Thanks so much for joining us here this morning, breaking down all things, economic data and what the Fed may or may not do. We appreciate it.