Economic Update August 2024

Overview

For once, the jobs report surprised to the downside with 114,000 added jobs vs the estimated 175,000. Furthermore, the prior two months were revised lower by 29,000. The unemployment rate increased further from 4.1% to now 4.3%. The most recent increase is putting the SAHM rule, a well-regarded economic rule named after Economist, Claudia Sahm, that says if the unemployment rate moves up 0.5% within 12 months the economy is in a recession, to the test. Either way, this is the highest unemployment percentage since Oct 2021 post-pandemic and last seen Sept 2017 pre-pandemic (that's seven years ago, time flies). The labor participation rate increased to 62.7% from 62.6%. Full-time employment saw a slight decrease m/o/m- this time even part-time employment only increased slightly.

Year-over-year annual inflation rate continued to trickle down to 3.0% vs 3.3% the previous month. Expectations are that we will still see a similar number, when the report comes out in the middle of next week.  The core inflation rate, which excludes volatile food and energy costs, also came in lower at 3.3% from 3.4%. Core inflation has steadily declined, and expectations are for another slight improvement in the next report. Further improvements or lowering of shelter and service costs increases remain the main driver for further reduction in inflation. With the latest jobs report, we might see some acceleration there.

The stock markets have been mixed over the past month and have recently declined. After reaching a record high of 41,200 in mid-July, the Dow Jones has nosedived the last couple of trading days but is only down about 600 points month-over-month, closing at around 38,700. The S&P 500 is down about 400 points to 5,186, after hitting another new record high in July. The Nasdaq is down about 2,200 points month-over-month to 16,2000. After hitting a new record high in July, the love affair with AI seems to have cooled a little bit. Also, further economic deterioration and an escalation in the Middle East could make it a bumpy ride for the markets in the next few months. The 10-year Treasury yield has tumbled down last week from 4.3% to 3.8% as chances for a rate cut in Sept have reached over 100%. This means, the question is between making a 0.25% or 0.50% cut and not whether we will have a rate cut in September.  The average rate for 30-year mortgages has moved below 7% and a further drop is highly anticipated. Oil has moved $10/ barrel down to $73/ barrel. After recent increases, global recession and anticipated lower demand have pulled oil prices lower again. Gold has increased m/m and is sitting close to the record high currently at $2,480/ ounce. The US dollar was relatively stable over the past month against the Euro, with the EUR/USD exchange rate at 1.09.

Jobs Report (July)

In July, the U.S. job market showed further signs of cooling. Non-farm employment increased by 114,000, significantly below the consensus forecast of 175,000. Additionally, job gains from the two preceding months were revised downward by a combined 29,000 jobs. This revised data indicates less hiring momentum in the second quarter than previously reported.

Private payrolls saw an increase of 97,000, with notable gains in health care and social assistance (+64,000), construction (+25,000), and leisure and hospitality (+23,000). Government hiring slowed but still added 17,000 jobs. Meanwhile, the household survey revealed a labor force surge of 420,000, while civilian employment rose modestly by 67,000. This increase pushed the unemployment rate up by 0.2 percentage points to 4.3%. The labor force participation rate also edged higher by 0.1 percentage points to 62.7%.

Wage growth also decelerated, with average hourly earnings (AHE) rising by just 0.2% month-on-month, compared to June's 0.3% gain. On a twelve-month basis, AHE decreased to 3.6% from 3.8% in June, marking the slowest pace of wage growth in over three years. This softening in labor market fundamentals is consistent with other labor metrics, including quit and hire rates and the ratio of job openings to unemployed individuals, all of which are at or below pre-pandemic levels.

The weakening labor market fundamentals have influenced various wage metrics, aligning them with an annualized growth pace more consistent with 2% inflation after adjusting for productivity. Given this trend, a rate cut by the Federal Reserve in September seems almost certain. The labor market no longer contributes to inflationary pressures, and delaying further could risk reversing recent normalization dynamics. Following the release of the employment report, the 2-Year Treasury yield dropped by over 20 basis points, and markets have priced in over 100 basis points of easing by year-end.

Existing Home Sales (June)

In June, existing home sales fell by 5.4% month-on-month to an annualized rate of 3.89 million units, underperforming the market consensus forecast of a 3.2% decline. Sales of single-family homes dropped by 5.1% to 3.52 million units, while the smaller condo/co-op segment saw a sharper decline of 7.5%, totaling 370,000 units. This downward trend was observed across all Census regions: sales decreased by 8% in the Midwest, 5.9% in the South, 2.6% in the West, and 2.1% in the Northeast.

Total housing inventory in June rose to 1.32 million units, a 3.1% increase from May and a significant 23.4% rise from the previous year. Adjusted for seasonal variations and measured at the current sales rate, the unsold inventory represented a 3.8 months' supply, up from 3.5 months in May and 2.9 months in June 2023. House prices increased by 4.1% year-over-year, showing a deceleration from the 5.2% annual gain recorded in the previous month. On a seasonally adjusted basis, median home prices saw a slight decline of 0.2% month-on-month, partially reversing the 0.6% gain observed in the prior month.

The U.S. housing market remains challenging, with existing home sales falling below historical norms and ending the second quarter on a negative note. This trend is largely driven by the higher interest rate environment, with 30-year mortgage rates hovering just below 7%. Despite sluggish demand, supply has improved somewhat over the past year. However, the market remains relatively tight, with the months' supply still below 4 months, allowing prices to continue trending moderately higher for now.

Assuming the trend of improving inventory continues, the increased choice among buyers could unlock more sales activity in the future. Interest rates, a crucial factor in the housing market, are expected to remain restrictive for the time being but may improve later this year. Recent signs of cooling in inflation and average hourly earnings suggest that the Federal Reserve might start cutting rates in the autumn, leading to an easing of long-term borrowing rates.

U.S. Personal Income & Spending (June)

In June 2024, personal income in the U.S. increased by $50.4 billion, representing a 0.2% rise from the previous month. Disposable personal income (DPI), which is personal income after taxes, also grew by 0.2%, amounting to an increase of $37.7 billion. This growth was primarily driven by increases in compensation and government social benefits, particularly in private wages and salaries as well as Medicare and social security benefits. Consumer spending saw a notable increase of $57.6 billion, or 0.3%, reflecting higher expenditures in both goods and services. Spending on services rose by $53.1 billion, with international travel, housing, and utilities being significant contributors. 

On the goods side, there was a $4.5 billion increase, led by pharmaceuticals, recreational goods, and information processing equipment. However, there were declines in spending on new motor vehicles and energy goods. The Personal Consumption Expenditures (PCE) price index, a measure of inflation, rose by 0.1% from the previous month and by 2.5% over the past year. When excluding food and energy, the PCE price index increased by 0.2% for the month and 2.6% year-over-year. This indicates a moderate inflationary environment. Real disposable personal income, adjusted for inflation, increased by 0.1%, and real consumer spending grew by 0.2% in June. The personal saving rate was 3.4%, with total personal savings amounting to $703.0 billion. 

Manufacturing Index (July)

The ISM Manufacturing Index declined further in July, falling to 46.8 and missing expectations of a slight improvement to 48.8. Only five industries reported growth for the month, resulting in 86% of manufacturing GDP shrinking, compared to 62% in June and 55% in May. Demand continued to slow, with the new orders index dropping to 47.4, new export orders remaining in contraction, and backlogs continuing to decrease. Output conditions also deteriorated, with both the employment and production indexes indicating accelerated contraction from June. Price pressures increased, with the index rising to 52.9, just above the 52.8 level typically associated with a rise in the Producer Price Index for Intermediate Materials.

The manufacturing sector remains under significant strain, displaying broad-based weakness and a bleak demand outlook. Tight financing conditions continue to impact credit-sensitive manufactured goods, reflecting the Federal Reserve's stringent policy stance. Following the recent FOMC meeting, it's clear that rate relief is on the horizon. The monetary tightening that began two years ago is expected to shift to easing, with the first rate cut likely in September if economic data align. While this will be welcome news for the struggling manufacturing sector, interest rates will still be in restrictive territory, so a rapid recovery should not be anticipated.

Vehicle sales (July)

U.S. vehicle sales rose by 4.2% month-on-month to an annualized rate of 15.8 million units in July, aligning with the consensus forecast. Unadjusted sales volumes were 1.273 million units, which is 2.0% below the levels from a year ago. The average daily selling rate (DSR) was 50,925, slightly down from July 2023's rate of 51,971, both calculated over 25 days. Passenger vehicle sales saw a significant increase of 9.1% month-on-month, while sales of light trucks rose by 3.1% month-on-month. Light trucks accounted for 81% of last month's sales, roughly a percentage point higher than their share a year ago. This rebound was anticipated and largely reversed last month's decline, which had been impacted by a cyberattack at CDK Global, a software company providing dealer management services to over 15,000 auto dealers.

Year-to-date (YTD) sales have reached 9.08 million units, marking a 1.4% increase from 2023's YTD total of 8.95 million. Auto production has largely recovered from the pandemic, leading to a gradual increase in inventories, though they remain significantly below 2019 levels, especially for base trim models. The shortage of affordable vehicles has been a factor preventing sales from returning to their pre-pandemic range of 16.5 million to 17.0 million units. However, continued gains in inventory levels are expected to stabilize the market. Additionally, some relief in interest rates is likely to attract more buyers, potentially allowing sales to return to a pre-pandemic pace by the first half of 2025.

What's Next

Say it ain't so, Joe! Is the party over? How about some good news first? Rates are dropping and so is oil. Before the jobs report numbers came out, I would have told you that oil prices tell me we are heading towards a downturn. July and August are the height of world travel and vacation. Given that oil, over the past month, has trended down $10 / barrel even before the jobs numbers came out, it was clear that we are staring at lower demand (worldwide). Overall, future demand looks weak. The data shows declining manufacturing activity in China. That adds to concerns about demand growth after earlier data showed imports and refinery activity lower than a year ago, while Asia's crude imports in July fell to the lowest in two years due to the weak demand in China and India. This is offsetting for now the tensions in the Middle East. Lower Oil prices, and in turn, gas prices at the pump will help with lower inflation. It does look that, at this point, the labor market has moved to the forefront and is of bigger importance than inflation. With the recent jobs data, projections for rate cuts have changed. We currently have a 100% chance for a 0.25% rate cut in September and discussions are now if it will be even a 0.50% rate cut. That's a pretty rapid turn, considering less than two months ago, we were not sure if there would be a rate cut this year or at maximum we would see a 50 bps reduction.

Most economic indicators have pointed toward a downturn for a while. The jobs numbers last Friday may have been what most economists have been waiting for as the final nail in the coffin. At the same time, I do believe that we will have to analyze next month's jobs report numbers to determine if we are looking at a trend or an outlier. There was Hurricane Beryl in Texas, which might have distorted the jobs report numbers slightly. Another month will certainly help the Fed decide what the appropriate rate cut will be. Either way, we have started our way to lower rates, and for now, we are projected to see 0.75% to 1%. The jobs report numbers aren't necessarily a surprise, and further economic deterioration is likely. Inflation has outpaced wages and the continued delta has reduced the consumer's purchase power. Furthermore, most people have used up their savings and we continue to see rapid growth in credit card debt. I mentioned in the past that most of the discretionary spending this year was attributed to the wealthiest 20% of Americans. If the stock markets decline further and deposit rates fall, then even the wealthiest of Americans will start pulling back their spending, which will certainly hurt demand, causing, in turn, further layoffs.

While the labor market data was disappointing, it was not the only area of concern. The weak manufacturing report last week showed the manufacturing PMI slump to 46.8 in July, which is the lowest reading since November and down from June when it was 48.5 (anything below 50 is in contraction territory).  This further shows that Companies are going to be reluctant to hire, and if demand is not improving, are more likely to reduce headcount. As mentioned, the SAHM rule will be one to watch.  If true, then we are now in a recession. Are the next three months going to be bumpy? Most likely so. I would even proclaim that the next 5-6 months, and beyond that, could be challenging. The majority of consumers are tapped out, and while the cost-of-living delta is not getting worse, it is also not improving. In addition, we still have lots of cities with empty office buildings. While repurposing those buildings seems to be the best option, the cost of doing so would have to come down. That might happen sooner than later with rates falling and a downturn possible. 

Even though we keep hearing the word recession, there is no real need to talk too much about it. Depending on your economic situation, there will be a different answer. We won't know until next year (officially) if that is the case. By then, the world will have changed once more. We will face different challenges, and have new opportunities presented to us.

The Fed is always late. Late to raise and late to cut.

Disclaimer

This report is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the author is a not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.