Recent economic data suggest the Fed may be getting close to declaring victory in its war on inflation. Outside of the energy space, broad price declines are evident across industries, even while economic growth remains solid. Employment, long the key to the “no landing” thesis, remains robust, while the housing market has held up despite higher interest rates, and the reshoring movement has lifted the demand for manufacturing resources here in the U.S.
The jobs report for August was published today, September 1st, and showed a stronger than expected rise of 187k nonfarm payrolls. July’s increase of 187k was revised down to 157k, however. The Unemployment Rate edged up from 3.5% to 3.8%, while the Labor Force Participation Rate moved up from 62.6% to 62.8%. Average Hourly Earnings edged higher again, up +0.2% MoM in August (+4.3% YoY) while the average work week held steady at 34.4. JOLTS dropped below 9mm in July, coming in at 8.8mm, signaling perhaps a slowdown in hiring is under way, and Continuing Claims hover around the 1,725k mark.
The S&P Global US Manufacturing PMI reading for August came in at 47.6, following July’s 49.0 (readings below 50.0 suggest contraction in the sector). Factory Orders in June, however, edged up +2.3% and Industrial Production in July came in higher than expected at +1.0% MoM. Capacity Utilization registered 79.3%, slightly higher than estimates. Durable Goods for July, however, fell a greater than expected -5.2%.
Despite materially higher mortgage interest rates, the residential housing sector, (for many individuals home equity is their largest balance sheet item), remains resilient. The fundamental supply and demand imbalance remains a primary cause, but anecdotally many homeowners with low interest rate mortgages are reluctant to sell and take on today’s 6-7% mortgage rate. Commercially, the story is markedly different, with some building owners waking away from urban office buildings upside down financially.
Jackson Hole proved to be a non-event, with Chair Powell’s comments leaning a bit dovish. Markets appeared relieved that no bombshells were dropped and responded favorably. As mentioned earlier, recent economic data suggest inflationary pressures are waning, enough to give the Fed air cover for a longer term pause, or permanent cessation to rate hikes.
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