A still vital economy portends further rate hikes

By Joe Higgins, Quest 4 Quality

  • September’s unemployment rate fell to 3.5%, down from 3.7% in August
  • Job creation came in below estimates at 263,000 jobs
  • Wages rose 5% from last year
  • Consumers still planning furniture and appliance purchases

The September jobs report was released last week, and here is what it means for our economy.

Hiring is still robust but not as strong as it has been for most of this year. Interest rates will continue to rise as the Federal Reserve is committed to lowering inflation. With each report, the stock market will likely stay in retreat as the odds of a 2023 recession grow. And with higher wages, demand will not diminish, consumers will continue to shop and labor will be hard to find.

September’s unemployment rate fell to 3.5%, down from 3.7% in August. Job creation came in below estimates at 263,000 jobs, and wages were up 5% from last year. This represents a slowdown from the 315,000 jobs created in August and the smallest increase of new jobs since March 2021. Even though these numbers are well below the average for 2022, economists see this as solid growth.

The U.S. economy has had twelve strong months of rising employment. We have also had seven months of interest rate hikes that have not substantially impacted job growth. The Fed is trying to slow the economy by eliminating jobs, mainly to keep the inflationary cycle under control, and eventually this action will impact growth. But some of the 25,000 people laid off by state and local governments in September were seasonal hires, so this level of job loss still put the overall job numbers in line with expectations.

With all the efforts by the Fed to cool the economy, the effect on overall growth has been negligible. Americans are still out shopping, retail sales are robust and thus inflation is not going away. And when the final gross domestic product (GDP) figures for the third quarter are reported at the end of October, the Atlanta Fed is expecting it to show growth of 2.7%.

Not surprisingly, the stock market was less than pleased with the jobs report, with futures moving lower and government bond yields increasing after the Labor Department released the numbers. The consensus among economists is that the report will bring another 75-basis point increase in interest rates in November and a 50-basis point increase in December.

Consider this though: Our problem is not just with the Fed. While Jerome Powell has raised interest rates by 3% in seven months, there is also a war in Ukraine driving up prices for gas and food and home sales are falling. This is unwelcome news for economic growth, yet we continue to see strong demand. If the economy can sustain this kind of growth in the face of rising interest rates, it lowers the likelihood of the Fed engineering a so-called “soft landing” and avoiding a recession.

Consumer Confidence

The Conference Board’s September Consumer Confidence Index rose to 108, up from 103.6 in August and beating expectations. These numbers are hard to square when all we hear is how bad the economy is today, but with gas prices falling last month, consumers who were surveyed felt better about their future financial security. Rising confidence gives us hope that we can avoid the pain of a prolonged recession. As the Conference Board observed in its accompanying report, “Confidence improved two consecutive months due to the abundance of jobs, rising wages and lower gas prices.”

The good news for BrandSource dealers is the part of the report about purchase intentions. Queried consumers said they plan to buy furniture and major appliances in October, although respondents also indicated that they were less likely to purchase a home. No doubt the housing market is smarting from mortgage rates that are approaching 7%.

The Bottom Line

As of this writing America has a 3.5% unemployment rate, the lowest it’s been in 50 years. That’s something to celebrate, but it is also inflationary. The Federal Reserve needs to continue its interest rate hikes, even at the risk of pushing our economy into recession. The number one concern among economists is that if we don’t do enough to control prices, inflation could become entrenched, and that is a bigger problem than a future recession. Yes, the increasing strength of the U.S. dollar as a result of the Fed’s current policy could cause a global recession and severely impact corporate debt. But it is my opinion that if America allows inflation to become rooted in the minds of consumers and it sets off a cycle of spiraling prices, then we will spend years trying to recover.

Right now our economy has proven to be very resilient, and because of that inflation will continue to rise. The consensus among economists is that the Fed could raise rates as much as 150 basis points between now and year’s end. I believe these increases are necessary to bring this current cycle of rising prices to a close.

Joe Higgins is a 45-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.

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