Economic Outlook - August 2022
- July nonfarm payrolls rose by 528,000, more than twice the number forecast. May and June employment numbers were also revised higher. In a separate survey, the unemployment rate fell by 0.1% to 3.5%, the pre-pandemic low achieved in early 2020. The U6 unemployment rate, which includes part-time workers looking for full-time employment, was unchanged at 6.7%, a record low. The strong jobs number will place increased importance on upcoming inflation data as it impacts the Fed’s future interest rate policy.
- The Consumer Price Index (CPI) was 8.5% in July from a year ago, down from 9.1% in June and flat month over month. The decrease was due to lower energy prices. Core CPI which excludes food and energy costs rose a smaller than expected 0.3% in July and 5.9% from a year ago. Food and rents continued to rise but transportation services fell. Inflation may not have peaked yet due to the statistical nature of dropping the prior – lower – 12-month ago data point.
- The Federal Reserve raised its federal funds target by an expected 0.75% at its July FOMC meeting. The European Central Bank raised interest rates 0.5% at its July meeting; this was the first increase in 11 years, ending a policy of negative interest rates. The higher-than-expected increase was the result of a compromise which will allow the ECB to implement its new anti-fragmentation tool to help stabilize weaker currencies. The Bank of Japan’s July meeting saw the Bank stand firm on Yield Curve Control which targets and places a ceiling of 0.25% on the 10-year yield; the policy is a partial anchor for yields globally.
- The Federal Reserve is expected to increase its federal funds target rate again at its September meeting. The market had expected a 50 basis points increase before the July jobs number but has since increased the odds of another 75 basis points hike. Quantitative Tightening and declining M2 money supply growth will have a slowing impact on economic activity.
- Real Gross Domestic Product (GDP) fell for the second consecutive quarter, marking what some call a technical recession. The final arbiter of an official recession is the National Bureau of Economic Research (NBER) which considers jobs, production, spending and income data, not likely supportive of recession.
- The ISM Manufacturing Index fell in July to 52.8 but beat consensus estimates. A number above 50 indicates expansion. The Empire Manufacturing Index in July rose more than expected to +11.1 from -1.2 in June. Strong manufacturing results suggests a recession is not imminent.
Sources: Bloomberg, FACTSET, U.S. BEA, U.S. BLS, Federal Reserve, Instit. For Supply Mgmt, ISI, IBD, Yardeni Research
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