Chief Economist Eugenio J. Alemán discusses current economic conditions.
The recent fears regarding the state of the U.S. employment sector seemed to have disappeared completely this morning as markets are ‘recalibrating’ their view on the U.S. economy going forward. Not only are markets now agreeing with the Federal Reserve (Fed) on the number of rate cuts expected before the end of this year but the yield on the 10-year Treasury increased once again, signaling markets are starting to believe that the economy is not weakening as they had thought.
However, we want to remind readers that markets typically overreact to new data and that there is the potential for this data to be revised in the future, so moderation seems to be in order when analyzing one data point. This is especially true today, considering that the Boeing strike would start to show up in the employment report for October, which is expected to be released on the first day of November.
The ISM Services PMI also showed some acceleration in the U.S. service economy, which is the largest sector of the economy, in September. However, that Index showed services sector employment contracting in September, which seems to be inconsistent with the nonfarm payrolls reported today. This should also be a sign that while today’s employment number was very strong, there is the potential for that number to be revised lower in the coming months and even later next year when the benchmark revisions are made. We need to remember that the benchmark revisions for the period April of 2023 to March of 2024 showed that employment growth was revised down by 68,000 per month, with markets also overreacting to that information several months ago.
Federal Reserve be aware: Risks are plentiful
The recent economic environment looks promising for the Fed with markets now repricing their outsized expectations for the path of the federal funds rate during the rest of this year. Although we understand why markets are expecting a more forceful move by the Fed, the central bank knows that it has to move with caution, especially if the economy continues to show no signs of slowing down.
Lower interest rates imply higher lending, especially in the home mortgage space and this could potentially create further inflationary pressures down the road due to the potential effects on home prices. At the same time, as we have said in the past, the Fed needs to be conscious of the still strong fiscal tailwinds produced by the three acts passed during the Biden administration, the CHIPS Act, the IRA, and the Infrastructure Act, which has kept nonresidential investment in expansion during this period of very high interest rates.
And if these concerns are not enough, inflation could also be impacted by the ongoing conflict in the Middle East, especially if the Israel/Iran conflict continues and starts to affect the price of petroleum. Thus, geopolitical risks are an important consideration for the Fed. Furthermore, domestically, we have the Boeing strike with more than 32,000 Boeing workers walking off the job, which is expected to have significant impacts on production, especially if the strikes persist.
Boeing shares are down over 40% this year and rating agencies have placed the company under review for a potential credit downgrade. Current negotiations are ongoing, but the workers’ union rejected the latest offer, and so far, it seems an agreement is unlikely to be reached soon enough to avoid a larger impact on economic activity. The last Boeing strike occurred in 2008 and lasted for nearly two months, ultimately impacting ~33,000 production workers’ income by $7,000 according to an article from the New York Times.
From an economic perspective, the strike may have already started to show in this week’s Durable Goods Orders preliminary release, and we will likely see new orders of transportation equipment as well as shipments of transportation equipment reflecting the strike until the strike is over. The impact could be felt in October’s employment report as machinists were still being counted on Boeing’s payrolls in September.
However, if Boeing’s strike persists for several weeks, it may have broader repercussions for local businesses as well as Boeing’s suppliers. For example, Spirit AeroSystems has announced that if the strike continues it may have to furlough workers as 70% of its revenues come from the production of Boeing’s 737 MAX’s fuselage, which will have to be paused.
A decline of ~30,000 Boeing workers, plus ~12,000 Spirit employees, would reduce the number of nonfarm payrolls, but the largest impact will most likely be reflected in an increase in the unemployment rate. This is because if ~42,000 individuals were suddenly counted as unemployed, the Household Survey, which is the survey which the rate of unemployment is calculated from, would need to add nearly 900,000 jobs during the same month to keep the rate of unemployment unchanged. Although this is not impossible, having that number of jobs added during a typical month in the Household Survey is highly unlikely.
While we wouldn’t consider an increase in the rate of unemployment due to the strike a sign of worsening economic conditions, markets might think otherwise and could potentially push for the Fed, once again, to lower rates more aggressively. We believe the issues at Boeing are temporary, and that the Fed is unlikely to change its mind over this matter and will stick with the SEP projections of 50bps of cuts between now and the end of the year.
This is the reason why Fed officials always argue that whatever they are going to do remains “data dependent.”
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. Current Situation Index (CSI) and Future Expectations Index (FEI) are the end-results of CCI, covering economic conditions, employment, price, income, and expense. The reading is 100 plus the average of said five factors
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
The Pending Home Sales Index (PHSI) tracks home sales in which a contract has been signed but the sale has not yet closed.
Supplier Deliveries Index: The suppliers' delivery times index from IHS Markit's PMI business surveys captures the extent of supply chain delays in an economy, which in turn acts as a useful barometer of capacity constraints.
Backlog of Orders Index: The Backlog of Orders Index represents the share of orders that businesses have received but have yet to start or finish. An increasing index value usually indicates growth in business but shows that output is below its maximum potential.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by
U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI new export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Durable Goods: Durable goods orders reflect new orders placed with domestic manufacturers for delivery of long- lasting manufactured goods (durable goods) in the near term or future.
Source: FactSet, data as of 9/20/2024
