Viewpoint
November 01, 2024 | 15:08
November 1, 2024
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Downbeat Employment Report Not the Main Event for Markets |
| We knew it was going to be an ugly jobs report. That was unavoidable due to the confluence of weather and labor strike shocks that rocked the economy in October. Hurricanes Helene and Milton, along with the brief East Coast ports strike, and the more prolonged Boeing strike (still ongoing) left a trail of destruction in the employment report. Manufacturing employment sank by a net 46k and overall private payrolls dropped 28k (Chart 1). The Bureau of Labor Statistics, in a special note along with the release, indicated that it is likely that payroll employment estimates in some industries were affected by the hurricanes, but that it was not possible to quantify the net effect. The initial establishment survey collection rate was well below average, they noted. We take some solace in weekly initial jobless claims that dropped sharply over the last two weeks after a brief surge in the first half of October, suggesting that beyond the noise of the hurricanes and strikes, the labor market remains fundamentally sound as we move further into the fourth quarter (Chart 2). |
| Unfortunately, this is unlikely to be the end of the parade of downbeat economic indicators for October. We could easily see large impacts in the monthly industrial production and retail sales reports as well as building activity and home sales. Not calling these economic reports fake news, but they do overstate the weakness in underlying economic activity due to one-off factors that will ultimately prove to be a temporary stain on the U.S. economic expansion. Meantime, bond and equity market investors, and the Federal Reserve itself, will likely remain much more focused on the election outcome and the potential changes to longer-term fiscal policies around taxation and spending. These will have a much more lasting imprint on GDP growth, the budget deficit, inflation, and interest rates. Thankfully, these downbeat October economic reports are coming on the heels of a very solid third quarter growth backdrop that, along with another two quarter-point Fed rate cuts before year-end, should keep the expansion on a moderate trajectory. The advanced estimate of third quarter GDP showed an encouraging acceleration in both real consumer and government spending (Chart 3). These two sectors alone comprise around 85% of real economic activity, a strong foundation for continued economic growth. The September personal income and spending report confirmed the underlying strength in consumer spending just prior to the hurricanes as real outlays increased at a strong 4.3% annualized pace. Still, diminished real disposable income growth over the past four quarters and a continuing gradual decline in the personal savings rate, point to some slowing in real consumer spending growth in the fourth quarter and beyond. Putting all this week’s economic data together, we increased our Q4 real consumer spending forecast to 2.7% from 2.4% prior; and, we also modestly raised our Q4 real government spending forecast. At the same time, we lowered our forecast for real business equipment spending to reflect a more prolonged Boeing strike. Overall, we left Q4 GDP growth unchanged at 2.0%, down from 2.8% in the third quarter. Looking beyond the impact of the hurricanes, the U.S. labor market and economic outlook remains a relatively bright one. |
Fed’s Rate Cut Campaign Continues |
| We look for the FOMC to cut policy rates by 25 bps on November 7, with the target range for the fed funds rate falling to 4.50%-to-4.75%. The market is currently pricing almost full odds (92%) of a quarter-point move. Before, in the immediate wake of mid-September’s surprise 50 bp rate reduction, which kicked off the easing campaign, the market was betting better-than-even odds (56%) of a ‘follow-up-50’ for next meeting. Then, as the subsequent parade of economic indicators boasted some upbeat floats, the market pared its rate cut expectations. We figure the tone to the post-September 18 data has been more of a bother for the market than for the Fed. Recall it was back at Jackson Hole that Chair Powell first alerted that the Committee did “not seek or welcome further cooling in labor market conditions” and, by extension, in the broader economy. Although inflation’s last mile to the 2% goal was going to be a “bumpy ride”, further labor market and economic slackening and slowing was no longer required to arrive at the target. By design (i.e., August 2020’s alteration of the monetary framework), Fed policy has become more sensitive to unnecessary labor market weakening. How much more sensitive? After the Fed kept policy unchanged on July 31, the ‘weak’ employment report for July released two days later convinced policymakers that the risk of unnecessary deterioration in labor market conditions had become unacceptably high. Although August’s employment report fared better, this set the stage for the Fed’s inaugural 50 bp rate cut. This was a profound move. The last two times the Fed began an easing campaign with 50 bps, there was a financial crisis unfolding (the Global Financial Crisis in 2007 and the ‘tech wreck’ in 2001). Powell labelled the action a “recalibration”, which we took to mean a ‘catch up’ given the unexpected ratcheting up of the downside risks to the economic outlook between meetings. As for the tone of the data since the last policy confab, we suspect the FOMC is content to see the jobless rate back at 4.1% for September and October, just barely below its median projection of the longer-run level (4.2%). It was the spike to 4.3% for July that set off the alarm. October’s measly (12k) growth in payrolls will likely be dismissed owing to weather and labor disruptions, although the net 112k downgrade to August and September will register a bit. Real GDP growth running at an above-potential 2.8% annualized clip in Q3 is likely a little irking given the stubbornness of September’s core and supercore inflation readings (both 0.3% which lifted the three-month trends). Although, the latter will likely be interpreted (for now) as one of those proverbial ‘bumps’ on the road to price stability. On balance, there’s nothing here to dissuade the Fed from cutting another 25 bps or persuade that it should be a bigger move. These data and policy nuances will no doubt be covered in Chair Powell’s press conference. However, we suspect the media folks may be more interested in the Fed’s take on the election. On this front, we expect to see Powell’s deflecting and obfuscating skills in full display. |
Consumer in Full Flight |
| If Captain Powell doesn’t land this plane, blame the passengers. This week provided more evidence that the mighty American consumer is fuelling the economy’s engine. And next week might see even more fuel poured into the tank by way of rate cuts from the Fed and potential lighter taxes from the federal government. Lower interest rates will propel a revival in consumer goods spending—one that has already started it seems, led by home furnishings and recreational goods. Meantime, spending could get a lift from either increased income tax credits to families, should the Democrats prevail; or from the removal of the cap on state and local income tax (SALT) deductions, under a Republican sweep. The Penn Wharton Budget Model estimates that expanding the Child Tax Credit could cost the government more than $1.6 trillion in revenue over a decade, while the Committee for a Responsible Federal Budget estimates that removing the SALT cap would cost $1.2 trillion. This works out to more than one-half percent of annual personal spending. Not that the average consumer needs much help. Real spending ramped up 3.7% annualized in the third quarter. A strong finish to the quarter, along with a nice pop in confidence last month, flags plenty of steam heading into the final quarter of the year. Real spending rose 3.1% in September from a year ago, fully supported by the same rise in real disposable income. The latter reflects three sturdy pillars: low unemployment, solid (though moderating) wage gains, and easing inflation. What might cause some turbulence for consumers and an air pocket for the economy? Tariff increases could lead to a temporary rise in inflation, cutting into spending power. While there is bipartisan support to extend the 2017 individual tax cuts beyond 2025, failure to do so could clip the consumer’s wings. The Congressional Budget Office estimates that, absent an extension, the impact on after-tax personal incomes in 2026 would be $290 billion, or more than one percent of personal consumption. For now, though, put your seat back as it looks like clear skies ahead for the consumer and economy. |
