Farmers & Merchants Bank

Economic data was generally weaker this week with the ISM manufacturing data coming in at 47.0. Prices paid dropped
significantly and the all-important new orders was at a weak 42.6 and at the lowest level this cycle. ISM Services came in
way below expectations with a reading of 50.3 versus expectations of 52.4. Despite this, the only data point that seems to
matter now is the employment report, and really, only part of that report.

The Bureau of Labor Statistics reported that nonfarm payrolls increased by 339,000 in May, which blew away consensus
expectations. The streak is now 14 consecutive months with the actual number coming in better than expected. The other
half of the report, the Household Survey, showed a decline of 310,000 jobs.

As a result, the unemployment rate jumped from 3.4% to 3.7%. The market ignored the weak half of the report and ran
with the big headline number. Cyclical stocks had a fantastic week and bond yields moved higher.

The prospect of no recession is becoming consensus, but these are the factors that the National Bureau of Economic
Research uses in defining a recession. The bold items are where they have leaned more heavily in recent decades.

 Real personal income less transfers
 Nonfarm employment
 Household employment
 Real personal consumption expenditures
 Real Wholesale and Retail sales
 Industrial production

Industrial production is flat versus the prior year, which is associated with recession starts. Real retail sales are down
more than 5% over the past year while wholesale trade is off 10%. These numbers are at recession levels already.
Real personal consumption expenditures are around 2.5%, and while well off the highs, are holding above zero.
Employment remains strong, but real personal income less transfers is weak. This series is up just 1.2% from the
previous year and should be running between 2.5-5.0% during normal economic times.

With high inflation it is important to note that real data and real returns are what matter. The S&P 500 real earnings
are down 15% from a year ago. The S&P 500, despite being 19% off its lows, is still more than 16% below its inflation
adjusted monthly peak.