Economic Outlook - August 2024
- The Federal Reserve Open Market Committee (FOMC) left interest rates unchanged at its July meeting, as expected, with the federal funds rate in the 5.25% – 5.50% target range. The vote was unanimous. In its written statement, the FOMC didn’t explicitly mention it was considering a September rate cut as some anticipated. The changes in the statement included “some” further progress toward the two percent inflation objective and the risks to achieving its employment and inflation goals “continue to move into” better balance. Taken at face value, the FOMC wants additional inflation and employment data to support a September rate cut. Interest rates fell on the announcement as the market is anticipating the Federal Reserve will have to act in September.
- Nonfarm payrolls rose just 114,000 in July, well below consensus estimates. May and June were revised down a combined 29,000. Jobs were added in construction (25,000), in health and education (57,000), in leisure and hospitality (23,000), in trade and transportation (22,000), and in state and local government (16,000). Average hourly earnings rose 0.2%, reducing the year-over-year rate of growth to 3.6% from 3.8%. The unemployment rate rose to 4.3% from 4.1%. The rise in the unemployment rate was likely due to an increase in the labor force by 420,000. The weak employment report solidified the likelihood of a September Fed rate cut. The markets are currently pricing in over 40 basis points of cuts at the September meeting as indicated by the federal funds futures.
- According to the US Department of Labor (DOL) the advance figure for seasonally adjusted initial jobless claims was 249,000 in the week ending July 27. This was an increase of 14,000 from the previous week’s unrevised level of 235,000. The 4-week moving average was 238,000, up 2,500 from the previous week. Although jobless claims spiked at the end of the month, the Bureau of Labor Statistics refuted the notion that Hurricane Beryl impacted the data. We think it did.
- The Institute for Supply Management (ISM) Manufacturing Index fell from 48.5 to 46.8 in July, below the consensus estimate of 48.8. A reading below 50 indicates contraction. Among the weaker components of the survey were Production, New Orders, and Employment, which all fell by several points. The Manufacturing Index has been weaker than the Services Index providing mixed signals about the US economy and a challenge for policy makers. We expect the Fed will remain data dependent into their September meeting and won’t initiate an inter meeting cut.
- The ISM Report On Business Services PMI for July was 54.4%, indicating expansion in the services sector of the economy. The July reading was 2.6 percentage points higher than June’s figure of 48.8% and the fifth time the composite index has been in expansion territory in 2024. Business Activity Index was 54.5%, New Orders Index was 52.4%, and Employment Index was 51.1%. The report provides some near term cover from critics who thought the Federal Reserve should have cut interest rates in July though likely is not sufficient to alter the expectation of a September interest rate cut.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Yardeni Research
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