- Since the Federal Reserve’s July policy meeting, evidence suggests that the U.S. economy is cooling but not collapsing.
- Employment reports indicate a dip in job growth, transitioning from a rapid recovery phase to a more stable growth phase.
- In August, 187,000 jobs were added.
- Average employment gains over the past three months stood at 150,000, the lowest since late 2019.
- Several labor metrics, such as job openings per unemployed person, dropped in July, indicating a “clear cooling of the labor market,” as noted by former Boston Fed President Eric Rosengren.
- Despite these numbers, hiring still exceeds the rate needed to keep up with the working-age population growth.
Federal Reserve’s Response
The Federal Reserve, sweating bullets over inflation, has been cranking up its benchmark overnight interest rate at a brisk clip since March 2022. As we look forward to the powwow on Sept. 19-20, the word on the street is that the rate will likely stick in the neighborhood of 5.25%-5.50%. Reuters highlighted mixed opinions on the possibility of another rate hike this year, with shifting probabilities in futures markets.
The Inflation Puzzle
- Wage growth is showing signs of stabilization:
- The gain in average hourly earnings last month was the smallest since February 2022.
- This corresponds to an annualized pace of around 2.5%, aligning with the Fed’s 2% inflation target.
- Data post-July meeting indicates a slowing pace of price increases and a narrower inflation range.
- However, consumer spending patterns and PCE information suggest a different story. An increase in consumer sentiment could continue to put inflationary pressures on the economy.
- Despite this, the FX market remains divided on the possibility of another rate hike this year.
Payrolls vs. Inflation
- While payrolls are an important metric, they are not the definitive indicator of the health of the economy or its future trajectory.
- The Federal Reserve’s primary concern remains inflation. However, deducing inflation solely based on payrolls is deemed inconclusive.
- The current unemployment rate remains controversial. While reported at 3.8% in August, there are debates around its accuracy due to factors like the gray market and unreported gig economy jobs.
- Julie Su, who’s currently on duty as U.S. Labor Secretary, underlined the transition towards what she refers to as “ongoing steady progress.” A phrase that she’s using to hint at a “soft landing.”
- Ideally speaking, it would be a home run for the Federal Reserve if they could trim down the inflation rate to their target of 2%, without sending our economy crashing into a recession or spiking up unemployment rates.
- Generally speaking, say post-Second World War, U.S. unemployment generally hovers around 5%. Our current state is actually better than average despite a minor uptick in August.
- Taking a look at the bigger picture – other work-related stats like labor force participation – we’re seeing hopeful signs of long-term stability.
The Role of External Factors
Besides the metrics of payrolls and inflation, external factors like global economic health, trade dynamics, and geopolitical tensions could have a significant influence on the U.S. economy. The interplay of domestic and international scenarios can further complicate the task before the Federal Reserve. As global markets become more interconnected, a financial hiccup in one major economy could ripple across to others.
Consumer Behavior and Spending
One crucial aspect that cannot be overlooked is consumer behavior. With indications of wild consumer spending, as highlighted in the PCE data, any shifts in consumer confidence can heavily impact both retail and larger-scale economic activities. A sustained increase in consumer sentiment and spending could provide a buffer against potential downturns, but it can also raise concerns about unsustainable growth and potential economic bubbles.
Technology and Structural Changes
The evolving nature of the job market, driven by technological advancements and the rise of the digital economy, poses another layer of complexity. More tech-related jobs could mean a shift in the types of skills demanded by employers, requiring a pivot in educational and training frameworks. The structural changes in sectors like healthcare, education, and technology might also mean that traditional indicators of economic health need to be re-evaluated.
The U.S. economy is showing signs of slowing down, transitioning from a rapid pandemic-era recovery to more sustainable growth. However, the situation remains complex, with various metrics pointing in different directions. The Federal Reserve’s actions in the coming months, primarily concerning interest rates, will be pivotal in guiding the economy toward stability while managing inflation. As the landscape continues to evolve, policymakers, investors, and analysts alike will be watching closely., ensuring that decisions made align with the best interests of the nation’s economic health and future growth.