The weekly note
December 12, 2024
This Week’s Developments in the US Economy
The Implications of a Potential Fed Pause and a Review of Key Indicators
During the most recent meeting of the Federal Open Market Committee (FOMC) on Tuesday, May 3, Federal Reserve Chair Powell signaled a potential pause in ongoing rate hikes. Mr. Powell acknowledged that the previous ten consecutive interest rate increases, combined with the impact of tightening credit conditions related to the collapse of regional banks in March and April, have brough policy to a sufficiently restrictive position needed to achieve a 2% target, albeit over some time. However, in acknowledging that it will take some time “for the full effects of monetary restraint to be realized, especially on inflation,” it seems clear that understanding whether policy is sufficiently restrictive—or perhaps overly restrictive—cannot be known until policy lags can be measured.
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In order to gain a deeper understanding of the changes and momentum of crucial economic indicators that the Fed is likely monitoring for policy effects, we categorized a variety of indicators based on their impact areas (i.e. price, sentiment, and economic momentum) and assessed their annualized pace of change over three-, six- and twelve-month periods. To align with the Fed’s policy targets, for example, we view rates of change below 2% as “positive”, between 2% and the Fed’s year-end projection of 3.5% as “neutral”, and anything above 3.5% as “negative”. The results are illustrative of the potential for a long road ahead given the Fed’s repeated commitments to achieving a 2% target over time.
This Week’s Developments in the US Economy
Coalescing Trends in the Economy and the Year Ahead
With the end of the year approaching, the outlook for the coming year comes into clearer focus—not just because 2024 is fading but also due to consistent trends emerging throughout the US economy. The US has experienced steady growth, inflation is lower but a little warmer than anticipated, and the labor market has cooled and stabilized. While the labor market continues to display stability, we see not only a firmer case for a December interest rate cut, but also a stronger case for additional cuts in 2025 as we assess labor market data that is often overlooked. We believe the Quarterly Census of Employment and Wages (“QCEW”) may give further support for additional interest rate cuts as the QCEW data suggest lower hiring levels than monthly Bureau of Labor Statistics (“BLS”) data. As the Fed balances its dual mandate of price stability and maximum employment, the QCEW offers important insights into actual employment conditions that might respond positively to lower rates in support of sustained economic growth.
Stability, but Potential Overstatement of Employment Levels
A positive trend has been the stability and breadth of monthly hiring across sectors. And while US employment levels have risen over the past several years, the BLS monthly data may be overstating the magnitude of the increase (see accompanying visual). Potentially signaling what is influencing the path forward, Fed Chair Powell has noted that while the labor market is near full employment, monthly employment figures could be inflated due to factors like the birth-death model, which estimates job creation from new businesses and losses from closures.
While monthly data offers timeliness, the quarterly QCEW, though lagged, provides a more accurate and comprehensive insight into hiring trends. Derived from quarterly reports of about 10 million US establishments under Unemployment Insurance (“UI”) laws, QCEW captures over 95% of jobs at detailed geographic and industry levels. In contrast, the monthly Current Employment Statistics (“CES”) survey, though largely derived from the same quarterly UI data, relies on a sample-based approach covering roughly 119,000 businesses and 629,000 worksites, which results in estimates rather than accurate counts. Additionally, due to the quarterly cadence of the UI data the CES sample alone cannot provide an accurate estimate of total monthly employment as it fails to capture new businesses. This is where the birth-death model comes into play, introducing another layer of estimation which could be contributing to the data discrepancy. In June, for example, private sector employment was reported at 135 million by CES but at 133 million by QCEW, indicating that quarterly employment data is showing softer hiring trends than monthly estimates.
Labor Market Stability
While hiring may not be as robust as monthly data suggests, the overall health and condition of the labor market remain favorable. The labor market continues to demonstrate structural stability and wage growth continues to be robust (see accompanying visual), providing a solid foundation for gradual economic growth as well as demographic- and consumer-driven segments of the economy. Historically low unemployment rates and balancing supply-demand dynamics are helping to contribute to a stable environment and an improving outlook for 2025.
Market Rates, Catalytic Indicators, and the Week Ahead
Disclosures
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