by Brian S. Wesbury â Chief Economist, Robert Stein, CFA â Deputy Chief Economist, First Trust Portfolios
Recent economic reports further undermine the politically-motivated argument from earlier this year that the US was already in a recession. Â They also undercut the Fedâs hopes that inflation will soon subside.
On the job front, nonfarm payrolls rose 263,000 in September while the unemployment rate fell back to 3.5%, tying the lowest level since 1969. Â Payrolls are up at an average monthly pace of 420,000 so far this year â that isnât a recession. Â And data show the share of voluntary job leavers (often called âquittersâ) among the unemployed reached 15.9%, the highest since 1990. Â People donât quit their jobs unless they have optimism about their job and earning prospects.
Meanwhile, the ISM Services index came in at a robust 56.7 for September. Â Yes, the ISM Manufacturing index declined to 50.9, but thatâs still in expansion territory (north of 50) and the services portion of the economy is much larger than manufacturing. Â Auto sales remained softer than normal in September, but, at a 13.5 million annual rate, were the fastest since April.
Put it all together, and we are tracking a 3.0% real GDP growth rate in the third quarter. Â The Atlanta Fedâs GDPNow model is tracking 2.9%, almost exactly the same. Â Net exports look very good in Q3 and should account for most of the growth. Â Again, no recession, yet.
At the same time, inflation remains stubbornly high. Â The consensus forecast for this Thursdayâs report on the Consumer Price Index (CPI) is that it grew by a relatively mild 0.2% in September. Â We would not be surprised by an increase of 0.2% but think the increase is more likely to be 0.3%.
But thatâs for September, when oil prices were weaker. Â For October, the Cleveland Fedâs âinflation nowcastâ is tracking an increase of 0.7% in the CPI. Â The Cleveland Fed also forecasts the âcoreâ CPI, which excludes food and energy, will rise 0.5% in both September and October. Â In addition, the nowcast suggests PCE inflation will run 6.1% for 2022 (Q4/Q4) compared to the 5.4% the Federal Reserve projected less than three weeks ago.
If the Fed can keep the M2 measure of the money supply growing at the 1.5% annual rate thatâs prevailed so far this year, we think inflation will eventually slow down. Â But that doesnât mean itâs going to slow down as fast as the Fed thinks. Â Less than three weeks ago the Fed projected 2.8% PCE inflation in 2023. Â That seems like a political forecast, not a forecast based on economic reality and models.
Rents make up a large part of consumer inflation measures and still have a very long way to go to catch up to home price appreciation during COVID. Â Theyâre an even larger part of âcoreâ inflation measures, which should outstrip broader inflation for the next year or so. Â Moreover, after falling below $80 a barrel a few weeks ago, West Texas Crude prices are now back above $90. Â Inflation data is not going to be pretty in the quarters ahead.
The bottom line is that the Fed isnât going to stop or even slow rate hikes very soon. Â Expect another hike by three-quarters of a percentage point (75 basis points) in early November, followed by another half percentage point (or more!) in mid-December. Â Then, in 2023, look for rougher economic waters by year end.
Brian S. Wesbury â Chief Economist
Robert Stein, CFA â Deputy Chief EconomistÂ
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