1.We continue to see the US economy on a narrow path to a soft landing. The 390kincrease in nonfarm payrolls in May beat expectations, but the unemployment rate has now been flat at 3.6% for three months, the underemployment rate U6 edged up again, and average hourly earnings registered another benign 0.3% gain. Moreover, job openings have started to decline. The official JOLTS series dropped sharply in April and timelier private-sector measures suggest that this drop continued in May. More anecdotally, many technology firms seem to be cutting back on new hiring and job openings, although we note that the job openings index in the NFIB small business survey showed a surprising rise in May.

2. The price news also looks more encouraging. Most notably, statistical measures of sequential PCE inflation—especially our trimmed core index—have eased over the past few months. Broad supply chain measures have improved, with the supplier delivery components of the monthly business surveys declining from high levels. However, one area where the news has been more mixed is the auto sector, as semiconductor supply is improving but shortages of auto parts from Ukraine and China are putting upward pressure on prices. This is one reason why we expect a 0.5% increase in the May core CPI.

3. We have not changed our estimated 35% risk that the US economy will enter a recession within the next two years. Although the deterioration in some growth indicators (most notably the 1.5% decline in Q1 GDP) suggests that near-term recession risk has increased in a mechanical sense, other broad activity measures (including the 2% increase in the income-side equivalent of Q1 GDP) imply that output is still expanding. Moreover, the net 200bp tightening of financial conditions since late 2021, increased signs of labor market adjustment, and better inflation numbers have reduced the risk that Fed officials will need to tighten monetary policy to a degree that will force a recession in 2023-24.

4.We fielded a number of questions about an imminent recession following the Q1earnings reports from Wal Mart and Target. But the macroeconomic significance of these disappointments is limited, in our view. Part of the problem was a large increase in shipping costs, consistent with what we see in the economic data but not really new information. Then there was the spending shift away from discretionary items in April noted in the Target earnings call. Since that call, however, we have learned that real personal consumption in April was actually quite solid; in any case, we should expect goods consumption to underperform service consumption as the economy emerges more fully from the pandemic.

5. We have also made no changes to our modal 3-3¼% forecast for the terminal funds rate. 50bp hikes at the next two FOMC meetings are almost certain, the September meeting is a close call between 25bp and 50bp (we are still at 25), and at least a few more 25bp hikes thereafter seem likely under our growth and inflation forecast. In terms of near-term communication, there is little incentive for Fed officials to deviate from their relatively hawkish framing of the last few months. After all, a significant further retracement of the earlier FCI tightening, on top of the 25bp easing seen in the past three weeks, would be counterproductive from the perspective of a central bank that is anxious to get inflation back down toward 2%. This could well mean signaling a fourth 50bp hike in September at the June 14-15 FOMC meeting. We will finalize our forecast for the dot plot in our FOMC preview next week.