Except maybe the Fed
By Joe Higgins, Quest 4 Quality
- The U.S. economy added 150,000 jobs in October, 21,000 fewer than forecast
- Mortgage rates fell more than half a point to 7.5% in early November
- A gallon of regular gasoline fell 40 cents over the past 30 days to a national average of $3.49
What can I say about an economy that seems to ignore the laws of gravity?
Reminiscent of the Matthew Wilder tune, our economy has withstood 20 months of interest rate hikes, inflation exceeding 9% and international chaos with wars in Eastern Europe and the Middle East. And despite it all, some key economic indicators remain positive.
The U.S. economy added 150,000 new jobs in October, 21,000 fewer than forecast and about 150,000 less than were added in September. The Federal Reserve could not have been happier, as this was the first time in 20 months that job growth had slowed, which will help bring inflation under control.
But the Fed needs to watch out, as the labor market may not be cooling as rapidly as these numbers would have you think. Wage earners nationwide, from writers and actors to auto and healthcare workers, were on strike while the jobs report was being prepared. Corporations like Ford and General Motors lost billions of dollars as workers marched on the picket lines. The UAW strike alone accounted for nearly 40,000 absences, mainly in manufacturing.
You cannot simply add these jobs back into the October figure, as the September and August reports were revised lower by about the same amount, thus canceling each other. Therefore, an economist might look at this report and see a trend toward an economic slowdown. But I see 150,000 new jobs that will add spending power to the U.S. economy.
In remarks earlier this month, Fed Chair Jerome Powell appeared to take a wait-and-see approach. “If it becomes appropriate to tighten policy further, we will not hesitate to do so,” he said. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening.”
Here are two factors Powell will likely consider:
September’s jobs report brought good news for the housing sector as well, as mortgage rates dropped below 7.5% for the first time in eight weeks. They exceeded 8% last month, which put a damper on sales of both existing and single-family homes. While the Fed’s nearly two-year run of raising interest rates has hurt housing, it did little to curb employment, consumer spending and retail sales. We even had a 4.9% increase in GDP, the best quarter of growth in two years.
I think it’s time for the Fed to reassess its current position and begin reducing interest rates before we do have a recession. It was late to the game in March 2022 and should not let that happen again.
For consumers, the most readily recognized inflation barometer is the price of a gallon of regular. On that front we have some more good news: Brent crude oil fell from $93 to $80 a barrel last month. I’m sure you have noticed a steep decline in prices at your local gas station. The national average was $3.49 a gallon; in early September it was $3.90.
The main driver of the decrease is concern over the health of the global economy, with the most significant drop in demand coming from Western Europe. But the elephant in the room is the war in Gaza, and fears that it could spread across the Middle East and disrupt the flow of oil. Indeed, if armed conflict led to the closing of the Strait of Hormuz, a barrel of oil could soar to $175 — and recessions have often followed a major oil shock.
We are already contending with the war in Ukraine, which has constrained Russian oil in the global market. For that reason and so many more, let’s hope both conflicts ends soon.
The Bottom Line
I don’t doubt that we’re entering an economic slowdown. Saving rates are the lowest in two years and consumers are using credit cards at the highest levels since the Great Recession. As forecast by the Atlanta Fed, GDP is only expected to increase by 1.2% this quarter, after last quarter’s 4.9% surge. Manufacturing has declined, and unemployment will likely increase as the Fed holds the federal funds rate at 5.25%.
That said, our economy is still in decent shape and strong enough to have what Fed Chair Powell calls a soft landing. Yes, times might get a little more challenging, but motivated consumers could very well keep spending and pull us up from a possible downturn in 2024.
Joe Higgins is a 46-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.