Student Debt Forgiveness Deemed an Overreach

According to the latest Supreme Court ruling, the Executive Branch overstepped its authority in its student-debt forgiveness plan. In a 6-3 vote, the Supreme Court struck down the Biden administration’s plan that would have extinguished $430 billion in loans.

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According to reports, however, the administration is already considering alternatives to circumvent the higher court’s decision. At least one plan proposed would reportedly allow low-income borrowers to pay smaller monthly amounts or temporarily halt penalties.

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Once the moratorium on student debt expires on September 1, the average student loan payment will resume at a monthly cost of roughly $200-300. In total, according to Federal Reserve data, student debt stands at roughly $1.6T with the average student loan debt around $38,000 per borrower.

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With the consumer already losing momentum under the weight of elevated costs, an added monthly burden will work to decelerate activity. That being said, the Fed is intentionally trying to slow growth and reduce spending in order to tame inflation. As Federal Reserve Chairman Jerome Powell has said time and time again,?“Without price stability, the economy doesn’t work for anybody.”

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On Friday, personal income rose 0.4% in May, a tenth of a percentage point more than the 0.3% gain expected according to?Bloomberg?and following a 0.3% increase in April. Consumer spending, meanwhile, increased 0.1% in May, a tenth of a percentage point less than expected and following a 0.6% gain in April. Year-over-year, consumer spending increased 6.0% and personal income rose 5.5%.

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Adjusting for inflation, real consumer spending was flat (0.0%), while real income rose 0.3% in May following a 0.1% decline in April. Over the past 12 months, real spending rose 2.1%, and real disposable personal income gained 1.6%, following a 1.1% annual gain in April.

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The PCE rose 0.1% in May, as expected and following from the 0.4% increase in April. Year-over-year, headline inflation increased 3.8%, also as expected and down from a 4.3% rise in April. Excluding food and energy, the core PCE rose 0.3% in May, as expected. Year-over-year, core inflation increased 4.6% following a 4.7% annual increase last month.

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Bottom Line:?Consumer spending cooled markedly in the latest May report, suggesting second-quarter GDP may be less robust than previously anticipated. The consumer, after all, was the primary catalyst to Q1 growth and was expected to provide – albeit to a lesser degree – ongoing support in Q2. Signs of emerging weakness, however, should not deter the Fed, as slower activity is the intended result of tighter monetary policy. In fact, against the backdrop of still elevated inflation, Friday’s report should do little, if anything, to change the Fed’s directive for further rate hikes in the near term.

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In addition, on Friday, the Chicago PMI rose from 40.4 to 41.5 in June, less than the expected gain to 43.9, albeit a two-month high.?In the details of the report, prices paid rose, while supplier deliveries, new orders, employment, inventories and production fell, signaling contraction.

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Finally, the University of Michigan Consumer Sentiment Index was unexpectedly revised higher from 63.9 to 64.4 in the final June print, a four-month high. In the details of the report, a gauge of current conditions was revised up one point to 69.0, and a gauge of future expectations was revised higher from a reading of 61.3 to a reading of 61.5 in the final June print, the highest reading since February.

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This morning, the ISM Manufacturing Index unexpectedly declined from 46.9 to 46.0 in June, the eighth consecutive month in contractionary territory (a reading below 50). According to the median forecast, the index was expected to rise to 47.1 in June.

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In the details of the report, production fell from 51.1 to 46.7, exports dropped 2.7 points to 47.3, and employment fell from 51.4 to 48.1, a three-month low. Additionally, prices paid declined from 44.2 to 41.8, the lowest reading since December. On the other hand, new orders increased three points to 45.6, imports ticked up two points to 49.3, and supplier deliveries rose from 43.5 to 45.7 in June.

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In addition, this morning, construction spending rose 0.9% in May, surpassing the 0.6% gain expected and following a 0.4% increase the month prior. Over the past 12 months, construction spending increased 2.4%, a two-month high.

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The New York Stock Exchange will close early today at 1:00 p.m. ET ahead of tomorrow’s holiday.

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Tomorrow, the market is closed and the economic calendar empty to celebrate Independence Day.

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Later in the week, on Wednesday, the June FOMC meeting minutes will be released along with the final read of durable goods.

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On Thursday, the ISM Services Index is expected to increase from 50.3 to 51.3 in June, and ADP is expected to report that private-sector employment rose by 240k in June. Also, the number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – is expected to decline from 10.10M to 9.97M in May.

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The key report, however, comes on Friday with the latest June employment report. Nonfarm payrolls are expected to rise 225k following a 339k rise in May. At 225k, this would mark the weakest pace of monthly job gains since March. The unemployment rate, meanwhile, is expected to remain steady at 3.7% for the second consecutive month, up, however, from a recent low of 3.4% in April. Additionally, average hourly earnings are expected to rise 0.3% in June and 4.2% over the past 12 months, down from the 4.3% annual increase in May. Since June 2021, wage growth has been relatively range bound between 4-6%, although since March, wage acceleration has hovered nearer the bottom bound of that range.?

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?-Lindsey Piegza, Ph.D., Chief Economist?