Rate Hike Likely Deferred to December
Only one month ago, the big story about the US economy was how strong it was. The August jobs report, released in early September, showed that payrolls rose 162,000 for the month. Meanwhile, at one point, the Atlanta Fed’s “GDP Now” model was estimating real GDP would grow more than 5% at an annual rate in the third quarter.
This impression of the economy shifted on Friday when the Labor Department reported that payrolls were up only 29,000 in September and that job creation was revised downward for prior months.
This swing is a good reminder that investors should not get too excited or too depressed about one month, or even multiple months, of economic data, whether good or bad. Data reports are just estimates and can be much more volatile from month to month than the actual economy. Instead, it’s more important to focus on economic fundamentals that drive the economy over the longer term, such as monetary policy, taxes, trade, regulation, and, of course, the unfolding process of technological innovation and entrepreneurship.
Notably, the jobs report on Friday was not nearly as soft as some analysts claimed. Civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 406,000 in September. And although the unemployment rate ticked up to 4.2% from 4.1% in August, the unrounded increase was from 4.141% to 4.175%, so relatively minor. Furthermore, the rise was due to more people participating in the labor market, either working or looking for work, which is not bad news.
Where does this leave us with the economy? Based on the latest economic reports, we still think real GDP grew at about a 3.0–3.5% annual rate in the third quarter (data coming on October 29). Not bad at all. By the way, the Atlanta Fed has come our way and now expects real GDP to grow at a 3.7% rate in Q3. As we said above, data can be volatile. This means the Fed can be more patient than many believe and will likely defer a rate hike until December.
A rate hike in late October would draw attention to the Fed the week before the mid-term election and make the move seem political, whether it was or not. Yes, it is possible for the Fed to raise rates at election time, but only if it’s extremely well-telegraphed, part of a pre-existing pattern of rate moves, or if the economy is desperately crying out for a change in rates, and this economy right now is not.
Average hourly earnings rose only 0.1% in September and are up a modest 3.0% from a year ago. This is well within the range you’d expect if the Fed were achieving it’s 2.0% inflation target, so the Keynesians at the Fed – and there are plenty of them! – don’t really have a strong justification for tightening monetary policy; there is no evidence of “cost push” inflation getting embedded in wages.
Moreover, CPI inflation excluding energy is 2.5%, the lowest it’s been since 2021, suggesting that in about six months, overall inflation, including energy, will be about 2.5% (versus 3.4% at present), even if energy prices stay where they are right now. Other measures of inflation, such as the Cleeland Fed’s trimmed-mean data, show a similar picture of contained inflation.
Combined, this gives the Fed some breathing room to wait until December.
However, inflation risk should not be dismissed out of hand. Yes, M2 money growth has been moderate. However, nominal GDP – real GDP plus inflation – is up 6.3% from a year ago and up at a 5.5% annual rate over the past two years. Normally, this would signal that a federal funds target at around 3.875% (the middle of the current policy range) is too low.
The problem is that rate hikes will hit rate-sensitive sectors like autos and housing, which are already soft, while doing little to slow investment in AI and data centers, the economy’s leading source of strength.
Source: Brian S. Wesbury, Chief Economist, Robert Stein, Deputy Chief Economist, First Trust
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
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Fortem Financial
(760) 206-8500
team@fortemfin.com
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