The U.S. economic “soft-landing” is occurring, with employment stable, inflationary pressures at bay, and economic growth steady. Whether it can continue into year-end depends largely on an increasingly stretched consumer, grappling with higher borrowing costs and lower wage increases. Election-year noise aside, the U.S economy remains the envy of the world, with technological innovation and advances in artificial intelligence driving much of the growth.
The Federal Open Market Committee convened yesterday, July 31st, and while they held interest rates steady, Chair Powell did, in his own way, suggest that September’s meeting (there is no formal policy meeting in August), was perhaps live in terms of an interest rate cut. Despite appearances of political influence in terms of the timing, it’s important to remember that monetary policy acts with a lag, current rates are restrictive, and historically the Fed’s role has been to take away the punch bowl just as the party is getting started.
With June’s Unemployment Rate coming in at 4.1%, and with tomorrow’s reading for July expected to show no change according to Factset’s consensus forecast, the labor market has softened enough to give the Fed air cover to begin lowering rates. The Job Openings number for June has fallen to 8,184k, while Continuing Claims have ticked up to 1,877k. It’s important to remember that the Fed’s goal is not to increase unemployment, per se, but rather to reduce the demand for labor, thereby lowering wage inflation. So far, mission accomplished.
In regard to prices, the latest CPI report showed consumer prices fell -0.1% in June, while edging +3.0% higher YoY. Ex Food & Energy, prices ticked up +0.1% MoM, and are up +3.3% YoY. At the wholesale level, PPI rose +0.2% MoM and is up +2.6% YoY, while core PPI rose +0.4% in June and +3.0% YoY. Despite its stated goal of 2.0% inflation, our feeling is that the Fed may be comfortable with “2.something%” and call it a day.
Being mindful that roughly 2/3 of U.S. GDP depends on consumption, we remain wary of the increasing pressure on workers at the lower end of the wage spectrum. Inflationary pressures, along with higher borrowing costs are particularly punitive to this cohort, and cracks are forming, with a slowdown in spending, loan payments extensions and a higher default rate looming. Along with growing concern over the commercial real estate market, Chair Powell and the Fed would be wise to begin easing before too much more damage is done.
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