In September, the U.S. economy surprised everyone. Recession fears from July and August gave way to concerns that strong growth could stall further disinflation. This shift is occurring at the start of a Federal Reserve rate-cutting cycle, raising questions about the timing of future rate cuts and whether Fed policy was restrictive enough to begin with.
In September, job growth rebounded strongly, and the unemployment rate fell. Average hourly earnings increased by 0.4% in September, only slightly lower than the 0.5% increase in August. Year-over-year, wages are nearly 4% higher – up from 3.9% in August. Falling energy prices, along with persistently strong wage growth, supported household spending and core inflation accelerated for the third consecutive month. Consumer sentiment improved, and both retail and home sales exceeded expectations. This economic strength helped push Treasury yields higher as traders – who initially priced in more rate cuts than the Fed’s dot plot suggested – adjusted expectations closer to FOMC projections.
However, while recession risks appear to have faded, one data point does not make a trend. Before the September report, the labor market had been cooling rapidly, with most new hiring concentrated in the government and health-care sectors. Hiring has been trending down, and when finding employment becomes more challenging, the quit rate falls and worker mobility slows.
This week, we’ll get a fresh look at the labor market with the Bureau of Labor Statistics’ October Employment Situation report. The challenge with this month’s report is that it may present a distorted view. The recent rise in initial claims, which has since partially reversed, suggests the report could be weaker than anticipated. Hurricanes and strikes may lead to some employed individuals – especially part-time workers – being counted as unemployed. Labor demand in affected areas would have declined, putting downward pressure on wages.
We’ll also see an inflation report this week. Although headline inflation, as measured by the Personal Consumption Expenditures (PCE) index, is moving in the right direction, core inflation remains stubbornly higher than desired. Core prices were still 2.7% higher than a year ago, up from 2.6% in July. While the three-month seasonally adjusted annual rate was just 1.6%, disinflation may already be stalling, as this rate is higher than the six-month pace of 1.4%.
Weaker-than-expected data this week could pull yields lower, while election-related drama could push yields higher. In either case, expect increased volatility and a possible dip in stocks. But a resilient economy may mean this week offers buying opportunities for long-term investors.
The Federal Reserve Bank of Atlanta’s GDPNow estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 rose to 3.3% last week, slightly down from 3.4% the previous week and 3.2% three weeks ago.
