Written by Steve Andrews
Job Growth and Unemployment Trends
The US economy added 254,000 net new jobs last month - nearly double the 143,000 expected. In addition, the increases in non-farm payrolls for July and August were revised higher by a combined 72,000. Meanwhile, the Household Survey of smaller businesses and startups, from which the unemployment rate is calculated, showed a gain of 430,000 jobs. Since the increase in the household survey was more than the increase in the US labor force, the Unemployment Rate slipped to 4.1% from 4.2% in August. The broader U-6 unemployment rate also improved, easing to 7.7% in September from 7.9% the month before.
Services Sector Performance
Growth in the US Services Sector, which makes up over 80% of GDP, rebounded last month as the ISM Non-Manufacturing Index rose to 54.9. Meanwhile, the struggles for the US manufacturing sector continue as the ISM manufacturing index held steady at 47.2 last month.
GDP and Corporate Profit Revisions
The revision to Q2 GDP kept overall growth at 3.0%, as it was in the previous reading. Corporate profits in Q2 were revised significantly higher, rising 3.6% in Q2 with the pretax profit margin rising once again above 13%. This is the longest such string of profit growth since 1950. In addition, the Bureau of Economic Analysis (BEA), which compiles the GDP data, released its annual update which revises data from the past five years. The revisions showed that average real GDP growth from the second quarter of 2020 through Q4 2023 was boosted to 5.5%, compared to 5.1%.
Consumer Sentiment and Spending
The US consumer remains in the driver's seat, and they should continue to do their part in growing the economy. Recent surveys on consumer sentiment show some concern over the November elections and their aftermath, and they also believe that inflation will continue to recede. Consumers have not been optimistic for some time but that has not slowed their spending which has been supported by rising wages, a healthy job market, and record household net worth. Personal Income, which measures disposable income (personal income less personal current taxes), increased 0.2% in August (the most recent data) and has grown 5.6% over the past year. Personal Spending also rose 0.2%, led by services which have increased 6.8% over the past year. Those Americans in the lower income bracket ($50,000 annual income or less) are starting to feel the pinch, as the bulk of the slowdown in job growth has come from workers with a high school education or less. Meanwhile, a record 20% of consumers reported travel plans to Europe in the next 12 months, and airports and restaurants are busy.
For all the focus on the Fed and its effect on economic growth, little has been said about rising US productivity. With recession fears rampant since the Fed began lifting rates 30 months ago, most US companies prepared for a downturn. However, as GDP has grown at a 2.8% clip over the past nine quarters, productivity has risen close to 2.7% - better than its long-term trend of 2.0%. If this productivity growth continues, as AI and other technological advances make companies more efficient, it projects that GDP growth will continue to flirt with 3.0%.
Fed Actions and Economic Outlook
It's now been three years since inflation started to rise, and two years since inflation peaked. Over these past two years, as the rate of inflation eased, the US economy has performed better than many expected despite the headwinds from interest rates rising to the highest levels we've seen in decades. We will not see the first report on Q3 GDP for weeks, but we expect that growth in the quarter that ended on September 30th once again flirted with 3.0%, which will have given us nine straight quarters of positive growth since mid-2022.
Following the September 18th Fed rate cut, the futures market quickly priced in an aggressive calendar for Fed rate cuts. While the latest projections show that the FOMC sees the Fed Funds rate declining to 3.00% by the end of 2026, the futures market priced in expectations for Fed Funds to hit that 3.00% target by mid-2025.
We were among those surprised by the Fed’s aggressive move on September 18th because, from where we sat, the economy was not in peril nor were there signs of a credit crunch in the US financial system. These are typically the main reasons that the Fed would embark on such an aggressive course. Now that the futures market is rethinking its aggressive path, 2-year yields are rising along with the rest of the yield curve. Also feeding the bounce in rates is the growing sense that the US will avoid a recession anytime soon and economic growth will demand more borrowing for investment.
To be fair, the Fed had shown some concern over the jobs market - especially in light of the softer-than-expected employment reports for July and August - to the point where they professed their belief that the time had come to pivot from their focus on driving inflation lower. They believed that the disinflation trend had enough inertia to cruise on to that 2.0% finish line and that they could now turn their focus to their other mandate - to promote full employment. However, the September employment report confirmed that the employment picture remains solid, as payroll employment reached a new record, and the unemployment rate fell for a second straight month.
In Conclusion
The slight increase in core CPI and the healthy employment backdrop in September suggests that the Fed may have gotten a bit ahead of themselves last month and can afford to sit tight at the November FOMC meeting. As we've discussed here in the past, relatively high Fed Funds rates have not seriously impeded economic progress over the past two years, and long-term rates, while rising over the past few weeks, sit close to their long-term historical averages. Meanwhile, the stock market, fed by economic growth and the prospects for continued earnings growth, pushes on unabashed. Historically, interest rates and the stock market rise (and fall) in tandem. In doing so once again, they offer another sign that things are getting back to normal.
