A for hire sign is posted outside Urban Outfitters at the Tysons Corner Center mall on August 22, 2024 in Tysons, Virginia.
Anna Rose Layden | Getty Images
September’s outsized payrolls boost took the US economy out of the shadow of recession and gave the Federal Reserve a glide path closer to opening for a soft landing.
If it sounds like a Goldilocks scenario, it’s not far from it, despite persistent inflationary concerns weighing on consumers’ wallets.
The gravity-defying labor market, not least the slow price increases and falling interest rates put the macro picture in a good place right now – a critical time from a political and political point of view.
“We have expected a soft landing. This only gives us more confidence that seems to remain in place,” Beth Ann Bovino, chief economist at US Bank, said after the nonfarm payrolls report. “This also increases the probability of no bankruptcy as well, which means stronger economic data for 2025 than we currently expect.”
The jobs numbers were certainly better than anyone thought, with companies and the government combining to increase payrolls by 254,000, beating the Dow Jones consensus for 150,000. That’s a big step even from the upwardly revised numbers in August and a reversal of a trend that began in April to reduce the number of jobs and raise concerns for a further slowdown — or worse.
More than that, it virtually eliminates the possibility that the Federal Reserve will repeat its half-percent interest rate cut from September anytime soon.
In fact, the futures market reversed its position after the report, pricing in a near-certainty move of only a quarter point at the November Fed meeting, followed by another quarter point in December, according to CME Group’s FedWatch gauge. Previously, the market had been looking for a half-point cut in December followed by the equivalent of a quarter-point cut at each of the eight Federal Open Market Committee meetings through 2025.
Not picture perfect
However, no longer, because the Fed, barring further disappointment from the labor market, can adopt a moderate pace through the easing cycle.
“If we continue to see a stronger-than-expected economy that could give the Fed reason to slow the rate of rate cuts through 2025 with higher-than-expected exit rates today, the overall economy will still remain strong,” Bovino said. “That would be good news for the Fed and the economy.”
Of course, there are still some flaws in the project image.
More than 60% of growth for September came from the usual suspects – food and drink establishments, health care and government – all of which have been beneficiaries of the fiscal largesse that has pushed the 2024 budget deficit to the brink of $2 trillion.
There are also some technical factors with the report, such as a low response rate from survey participants, which could cloud Friday’s otherwise sunny report and lead to downward revisions the following month.
But broadly speaking, the news is good and raises questions about how aggressive the Fed should be.
Questions for the Fed
Bank of America economists, for example, ask “Is the Fed panicking?” in reference client notes half a percentage point, or 50 basis points, cut in September, while others wondered about the wild vacillations and miscalculations among Wall Street experts. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “I doubt” the Fed would cut much “if they knew this report was going to be very strong.”
“The question is, how does everyone keep getting it wrong?” said Kathy Jones, chief fixed income strategist at Charles Schwab. “How can we not get this number right with all the information we’ve got?”
Jones said the Fed will have a dilemma on its hands as it determines the appropriate policy response. The FOMC next meets November 6-7, after the US presidential election and follows a five-week stretch during which it will have more to digest.
Some comments after the meeting suggested the Fed may need to raise its forecast of a “neutral” interest rate that cannot increase or limit growth, an indication that the benchmark interest rate will settle somewhere higher than in the past.
“What is the Fed doing with this? Of course, 50 basis points is not on the table for the next meeting. I don’t think there’s a case to be made there,” Jones said. “Do they rest? Do they do another 25 (basic points) because it is still far from neutral? Do they only consider this against other data that may not be strong? I think they have a lot of figures out what.”
In the meantime, officials may be happy to know that the economy is stable, the labor market is not as troubled as they thought, and they have time to consider their next move.
“We’ve witnessed an incredible economy over the past few years, despite some naysayers and poor consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. “In the election year, the willingness to open is high and every economic report or event can garner a strong reaction. But the economic aggregates tell us the US economy has been and is strong.”
