Is the Fed delivering the crushing demand shock that will stabilize prices and allow them to pause on the rate increases? The answers are “things are easing” for goods, and “not yet” for services. Last week’s PCE release indicated “core” inflation rose 0.3% monthly and 4.9% annually. Last month was 0% monthly and 4.7% annually. Markets reacted with a bond selloff, sending the 10 Year Treasury up to 3.83%. Spending on goods dropped 0.5% but spending on services jumped 0.8%. This could be seen as a “demand rotation” that will eventually result in an overall economic slowdown. This week’s reports continued the narrative: weak ISM manufacturing index: 50.9% (near contraction territory), construction spending down 0.7% month to month, and today’s ISM services index up to 56.7%.
Today’s ADP report showed businesses added 208,000 jobs in September- surpassing the Dow’s estimation of 200,000 jobs. Note that goods producing industries (manufacturing, mining, natural resources) were down 29,000, but services (trade, transportation, utilities, business services) saw a gain of 147,000. The job increases aren’t necessarily inflationary, it’s the mismatch between open jobs and labor participation. That metric is easing – recent months saw a 2 to 1 ratio of open jobs for each unemployed American. That has dropped to 1.67 in September with increased labor participation and a drop in resignations. With the Fed having raised rates by 3.00% since March, it’s important to point out that the effects may be “lagging indicators.” There’s a case to be made for pausing rate increases to actually quantify the effects without going too far. From recent Fed speeches over the past few weeks, that isn’t happening. A 75 basis point increase in early November is basically a given, with speculation centering on the December and January meetings as slowing (25-50 basis points) or pausing. Stay tuned…
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
