October 31, 2024

     Economic growth remained resilient in the third quarter, posting a 2.8% annualized quarterly growth rate in GDP in the quarter. Consumer spending, the backbone of the economy, has been healthy. Recent upward data revisions lifted income more than spending suggesting households had not been spending at the expense of savings as much as previously thought, leaving to the door open for the potential of more spending. Regional and national surveys showed that the manufacturing sector remains in contraction, while the service sector has been edging upward, offsetting much of manufacturing’s weakness. September’s solid pace of payroll growth with upward revisions to the two prior months suggested that the labor market is on firmer footing, allaying concerns of deteriorating labor market conditions. However, those reports are backward looking and many challenges are ahead.

         Looking ahead, moderation appears to be in store for GDP as the lagged effects of tight monetary policy further feed through to households and businesses. Additionally, the impact of strikes, layoffs and the damage and disruptions of Hurricanes Helene and Milton are likely to muddy the outlook for the economy. There are also risks to various parts of the economic make-up. Even though there was an upward revision to aggregate savings, it is mostly concentrated among higher income households which are probably the main drivers of gains in overall consumer spending. The budgets of lower-income households are being squeezed by the high cost of essentials, including housing, reducing the amount for discretionary spending. These headwinds may be behind rising delinquency rates in auto loans and credit cards. The latest version of the Federal Reserve’s Beige Book called spending in the various Fed Districts as ‘mixed’ and noted that consumer were becoming cost conscience.

     The September employment report with an upsized surprise in the increase in non-farm payrolls, upward revision to the two prior months and the unemployment rate edging lower suggest a strong rebound in the labor market. That said, there remain broad signs that labor market conditions continue to cool. The Bureau of Labor Statistics preliminary benchmark estimates released in August showed a large potential downward revision could be revealed within the next six months. Hurricanes Helene and Milton, Boeing’s strike and automaker layoff will likely have negative residual employment effects. The rise in the number of people continuing to receive unemployment benefits indicate job finding has slowed. Job opportunities have dwindled as companies are taking a cautious approach to hiring. The latest Beige Book noted that demand for labor continued to ease with hiring aimed more at replacing workers rather than expanding headcount.

    The September Consumer Price Index was a disappointment in that it came in slightly higher than expected. The CPI report probably did not signal a reacceleration in inflation, but may signal that further progress may be slower-going or even stalling. The deflationary impulse to goods has waned with supply chain strains no longer receding and inventories largely replenished. In fact, there may be risks to goods’ prices if escalation of fighting in the Middle East pushes oil prices higher, or further complicates supply chains. Rebuilding in the Southeast U.S. also seems likely to put upward pressure on the price of lumber and other construction materials as they recover from two devastating hurricanes.