Health Check: How Is the U.S. Economy Holding Up?

Executive summary:

U.S. job openings fell to a three-year low in July
We think the Fed will probably cut rates by 25 bps later this month
The Bank of Canada cut rates for the third consecutive meeting

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin assessed the state of the U.S. economy, including the health of the services and manufacturing sectors, as well as the likelihood of a big rate cut at the upcoming U.S. Federal Reserve (Fed) meeting. He also provided an update on the latest rate decisions from key central banks around the globe.

What does the latest economic data suggest about the health of the U.S. economy?

Lin began by reviewing the latest batch of U.S. economic data, which he said suggests that the nation’s economy may be in a state of transition. For instance, July’s Job Openings and Labor Turnover Survey (JOLTS) report showed a further cooling in job availabilities, with 7.67 million vacancies, he said. “This was the lowest level of job openings in the U.S. since January 2021,” Lin stated, adding that June’s job vacancies were also revised downward. However, layoff rates still remain relatively low, he said.

In addition, economic activity still looks generally robust, Lin said, noting that the Institute for Supply Management’s (ISM) non-manufacturing purchasing managers’ index (PMI) came in slightly better than expected during August, with a reading of 51.5. A reading above 50 indicates expansionary conditions in the services sector, while a reading below 50 indicates contractionary conditions in the sector, he said. In addition, the new orders component of the survey rose in August from July, Lin noted.

By contrast, the U.S. manufacturing sector remains in contractionary territory, he said, explaining that the ISM’s PMI for manufacturing dipped to a level of 47.2 in August. Lin noted that this reading was a little softer than expected, but said that the services-dominated nature of the U.S. economy—the sector makes up approximately 75% of U.S. GDP (gross domestic product)—should be able to help limit some of the risks stemming from the manufacturing sector.

In addition, consumer spending still appears strong, he said. “Overall, U.S. consumers are in good shape today, with healthy real wage growth at both the lower and upper end of the income distribution,” Lin remarked.

Ultimately, he believes the U.S. economy is still likely headed for a soft landing, where economic growth slows but a recession is avoided. “At Russell Investments, a soft-landing scenario remains our base-case scenario, although the risks of a hard landing—or recession—can’t fully be ruled out,” Lin stated.

What are the odds of a 50-bps rate cut in September?

Focusing in on inflation, Lin said that the U.S. consumer price index (CPI) report for August will be released on Sept. 11. He said he expects inflation to continue to moderate over time toward the Fed’s 2% target, noting that headline inflation fell to its lowest level in three years during July, with consumer prices rising at a 2.9% clip on a year-over-year basis. “The cooldown in the labor market should translate to a continued softening of core services inflation pressures moving forward,” Lin remarked.

He added that the Fed doesn’t need to wait until inflation is fully at its 2% target before lowering interest rates, stressing that the central bank remains poised to cut rates for the first time this cycle at its Sept. 17-18 meeting. The bigger question is whether the Fed will cut rates by 25 or 50 basis points, Lin said. “The just-released Sept. 6 employment report showed that the U.S. added 142,000 jobs last month. While that’s slightly less than the consensus estimate for around 160,000 jobs, the report doesn’t change our view that a 25-bps rate cut in September would be the most likely outcome,” he remarked.

Rate-cutting cycle continues in Canada

Lin concluded with a look at disinflation trends outside of the U.S., noting that price pressures are continuing to ease in most developed market countries, although at somewhat different paces.

He said that in Canada, the Bank of Canada’s (BoC) considerable progress in bringing inflation down toward its 2% target played a pivotal role in the central bank’s Sept. 4 announcement of a third consecutive 25-bps rate cut. “Canada was the first G-7 (Group of Seven) country to cut rates this cycle, and I expect the BoC to deliver more rate cuts later this year and next, especially since Canada’s labor market is weaker than the U.S. labor market,” Lin remarked. He explained that in August, the unemployment rate rose once again in Canada, from 6.4% to 6.6%, while the unemployment rate in the U.S. fell from 4.3% to 4.2%.

He noted that other major central banks have also started cutting rates, including the Bank of England (BoE), which reduced its key lending rate by 25 bps on Aug. 1, and the European Central Bank (ECB), which lowered rates by a similar magnitude in June. Both the BoE and the ECB are likely to continue cutting rates over time, Lin said.

He finished by noting that Australia’s central bank has yet to begin lowering rates, with Reserve Bank of Australia (RBA) Governor Michele Bullock recently noting that a further rate hike can’t be ruled out. “Nevertheless, I expect that rate cuts in Australia will begin within the next 12 months,” Lin concluded.

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