[Market Outlook] Has the Fed Slowed Down the Economy Enough?

What Might September Hold for the Markets? [Company Logo] Has the Fed Slowed Down the Economy Enough? What Might September Hold for the Markets? By Donn Goodman and Keith Schneider [image] Welcome Gaugers. We are glad to have you with us again. Hopefully, you closed out August in winning fashion (in the markets or your golf game) and you will be taking it easy this holiday weekend (remember it is LABOR related….which means NO LABOR). We also hope you are spending time with your families and loved ones soaking up the late summer warm weather. Our hearts go out to you if you, or someone you know, is still dealing with the aftermath of Hurricane Idalia or the aftereffects of the Maui fires (or any weather-related disruption anywhere). We will continue to keep you in our thoughts and prayers. Also, thank you to those of you who share your opinion (positive or negative) about any part of our weekly Market Outlook. We only get better at doing this with your critique, so please keep them coming. We appreciate the feedback. As is usual and customary, we have lots to cover so let’s jump right in. Inflation ticks up. This past week saw a couple of important economic statistics. July PCE (Personal Consumption Expenditure Price Index) Inflation was released. This is the Fed’s preferred inflation measure. It rose to 3.3%, in-line with expectations of 3.3%. Core PCE inflation rose to 4.2% in line with expectations of 4.2%. This is the second inflation metric that jumped in July. See chart below: [image] The inflation battle continues. Now we understand the “hawkish” rhetoric put out by Jerome Powell at the Fed’s conference two weeks ago. See chart below: [image] US Labor Statistics This is where we are beginning to see a real slowdown. The JOLTS number came out this past week (the job openings and labor turnover survey). The JOLTS survey showed continued considerable weakness. In that survey, the job openings rate for professional & business services sector fell from 8.4% in July 2022 to 5.5% in July 2023, which is the largest year/year decline since early 2002. This was a signal that the economy is beginning to see the slowdown the Fed was working towards. See chart below: [image] Jobs report. This past Friday the August jobs report was released. Hiring unexpectedly picked up in August as employers added 187,000 jobs despite the recent uptick in inflation and high interest rates. However, payroll gains over the summer were revised down sharply. Economists surveyed by Bloomberg had estimated 168,000 jobs would be added, missing the mark by quite a bit. The unemployment rate, which is calculated from a separate survey of households, rose from 3.5% to 3.8%, the highest since February 2022. That is because a surge of Americans went into the labor force, which included people working and looking for jobs. Why? We think this is partly due to COVID $ running out as well as people beginning to drive up credit to cover many items like food and gas, which are running quite a bit higher than in the past few years. The Job market is forecasting a slowdown. Several labor market metrics have been deteriorating for months. Yet most metrics also confirm that the labor market remains tight. It is a dynamic that has confused observers. Even Fed Chair Powell recently acknowledged these are not normal times. “For example, so far, job openings have declined substantially without increasing unemployment (until this past Friday). This is a highly welcome but historically unusual result that appears to reflect large excess demand for labor,” Powell said at the Jackson Hole Economic Policy Symposium last week. The key metric that seems to be driving the current labor market narrative is the ratio of job openings to the number of unemployed people. As of July, this sat high at 1.5 opens per unemployed person. While down from its record high of 2x in March 2022, it remains well above the pre-pandemic level of 1.2x. See chart below: [image] The participation rate jumped from 62.6% to 62.8%. [image] Employers cut 75k jobs in August - the most in 7 months. [image] [image] Non-farm payrolls are declining (a welcome sight for the Federal Reserve) [image] The temporary help services segment of non-farm payrolls has declined 7 straight months. (Another welcome sign for the Fed) [image] In month over month terms, average hourly earnings growth went from 0.2% vs. 0.4% prior, the slowest growth since February 2022. See charts below: [image] [image] Workers on strike. Besides the strike of a big portion of the entertainment industry (Writers and Actors), the UAW (United Auto Workers) look to be headed for a strike. Given the high inflation numbers and the tight labor markets, organized labor unions are opting to exercise their muscle right now and are willing and seem able to sit out for an extended period of time. See the chart below: [image] Bank of America analysts believe many of the above employment figures along with employers beginning to be hesitant about putting on new workers is pointing to the Fed being done raising rates (the market this past week thought so too) [image] Use the links below to read: - More bullish and bearish factors driving the economy and markets, - The probability of Fed rate moves, and - A historical performance fact that has correctly indicated the markets direction from Sept. to Dec. 100% of the last 13 times. - PLUS, Keith’s Big View analysis in bullets and video. [Click here to continue to the FREE analysis and video.]( [Click here to continue to the PREMIUM analysis and video](=). 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