The Economy
Questions Around Where We Are, And Where We’re Going
November 2024
One of the hard lessons we’ve learned from a lifetime of being somewhat, let’s say, navigationally challenged, is that it’s hard to know where you’re going when you’re not sure where you are. There’s a certain uneasy feeling, with which we’re far too familiar, that comes with not being able to navigate a set course to a fixed destination. Lately, however, we’ve experienced that same feeling when trying to plot the course of the U.S. economy. Granted, the economy seldom, if ever, follows a set course and its destination is never fixed, but there are times when one can at least be reasonably confident in their assessment of where the economy is and where it’s going. Now is not, at least for us, one of those times.
The final days of October and opening days of November brought a flurry of economic data releases which, if nothing else, reinforced the point that quantity does not necessarily bring clarity. Beyond what for some time has been a high degree of noise across much of the economic data, the signals being sent by the recent economic data have been further muddled by three factors: the effects of the Boeing strike, the effects of Hurricanes Helene and Milton, and questionable seasonal adjustment. We could easily add a fourth factor – uncertainty over the outcome of the elections – to that mix, as this had for some time been somewhat of a catch-all explanation for movements in the economic data and the financial markets. While any such uncertainty will begin to fade in the weeks and months ahead as the contours of fiscal, trade, and regulatory policy changes become more clear, that doesn’t necessarily help us answer the question of where we are today.
At first glance, much of the recent economic data suggest the U.S. economy is in a good place. For instance, the initial estimate from the Bureau of Economic Analysis (BEA) shows real GDP grew at an annual rate of 2.8 percent in Q3, not far off the 3.0 percent pace of growth seen in this year’s second quarter despite a wider trade deficit knocking six-tenths of a percentage point off top-line real GDP growth. To that point, real private domestic demand – combined business and household spending – grew at an annual rate of 3.2 percent in Q3, better than either of the first two quarters of 2024. We do, however, have grounds to question whether the initial Q3 growth print overstates the case. For instance, real consumer spending is reported to have grown at a 3.7 percent pace in Q3, but the September data on consumer spending were significantly bolstered by favorable seasonal adjustment. We do not think underling growth in consumer spending to be as robust as implied by the Q3 GDP data and expect the Q4 data to show a meaningfully slower pace of growth.
The effects of the Boeing strike and Hurricanes Helene and Milton factored into the October employment report, to the point that the report says little, if anything about underlying labor market conditions. In addition to the 33,000 Boeing workers on strike and, as such, not counted as employed in the establishment survey, significant numbers of those working for Boeing suppliers were sidelined in October. By our estimate, the strike deducted roughly 41,000 jobs from the October count of nonfarm payrolls. Moreover, the household survey data show that 512,000 people did not work during the October survey period due to adverse weather and that an additional 1.409 million people worked part-time hours rather than full-time hours due to adverse weather, each easily the highest counts on record for the month of October.
We’ll further note that the initial collection rate for the October establishment survey was only 47.4 percent, the lowest in any month since January 1991. Though October’s rate was clearly distorted by the hurricanes, persistently low survey collection rates go to the heart of our concerns over the reliability of estimates of nonfarm employment, hours, and earnings in any given month. The high degree of noise in the October data largely accounts for the notably muted reaction to the initial estimate showing nonfarm payrolls rose by only 12,000 jobs with private sector payrolls declining by 28,000 jobs. The low survey collection rate all but guarantees the November employment report will incorporate sizable revisions to these initial estimates.
The Federal Reserve estimates the Boeing strike knocked three-tenths of a percentage point off the monthly change in industrial production in September, and the strike will act as a drag on the October industrial production data as well. To be sure, with the Boeing strike having ended in early-November, industrial production will bounce back. These strike-related swings, however, should not deflect attention from what has been notable weakness in manufacturing output for the better part of the past two years. This is also seen in the data on orders for core capital goods, which have been strikingly rangebound since early-2023, and the ISM Manufacturing Index, which has shown the manufacturing sector in contraction in twenty-three of the past twenty-four months.
Amid that streak, however, prices for non-labor inputs to production in the manufacturing sector have continued to push higher. Less surprising is that the same is true in the services sector which, according to the ISM Non-Manufacturing Index, continues to expand at a steady pace. Continued increases in prices for non-labor inputs in the industrial and services sectors are a reminder that inflation, though having slowed significantly, is not going away quietly. Another, more visible, reminder is that core inflation as measured by the PCE Deflator, the FOMC’s preferred gauge of inflation, has been stuck at 2.7 percent in each of the past three months. Moreover, with base effects becoming more challenging, core PCE inflation will likely accelerate over the next few months.
It should be noted that, despite clearly cooling labor market conditions, several FOMC members have argued it would be premature to assume inflation is firmly on a path to the 2.0 percent rate targeted by the FOMC. Such concerns will likely be reinforced when accounting for potential policy implications of the November elections. With a starting point of the $1.8 trillion federal government budget deficit in fiscal year 2024, there are concerns that an even more expansionary fiscal policy mix could add to the deficit while buttressing inflation pressures. Moreover, the potential expansion of tariffs poses the threat of a “stagflationary” shock (i.e., lower growth, higher inflation). To be sure, it is too soon to know the specific paths to be set for fiscal, trade, and regulatory policy over coming months, but the broad contours have been fairly clearly telegraphed in advance.
Though the FOMC cut the Fed funds rate by twenty-five basis points at their early-November meeting, they offered little in the way of forward guidance, with Chair Powell sending no clear signals in his post-meeting press conference. Such vagueness, however, will not be an option at the December FOMC meeting, with the Committee set to issue an updated set of economic and financial projections. The prospects of a more expansionary fiscal policy, expanded tariffs, and renewed wage pressures stemming from immigration reform could sustain inflation pressures and, in turn, limit the scope for further Fed funds rate cuts. To that point, we and many other analysts have dialed back our expectations for the number of funds rate cuts to be delivered through 2025. Market interest rates are likely to remain notably volatile as the policy landscape takes shape over coming months.
Through all of the noise in the data, our assessment of where the economy is has remained largely unchanged. We continue to see the pace of economic activity as settling back toward the pre-pandemic trend rate, with the labor market continuing to cool but not collapsing, and core inflation as being more persistent than many had anticipated. Making these determinations is, at least in a relative sense, the easy part. What will be more difficult, even for those less navigationally challenged, in the weeks ahead will be processing how potentially significant changes in fiscal, trade, and regulatory policy, consumer and business confidence, and overall financial conditions will alter the path forward for the U.S. economy.
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve Board; Institute for Supply Management
As of November 13, 2024
