Economic Update October 2024

Overview

In September, the U.S. job market showed remarkable strength with 254,000 jobs added, far surpassing expectations of 140,000 to 150,000 jobs. Revisions to the previous two months' data further highlighted labor market resilience, with August’s numbers revised up by 17,000 and July seeing a much larger upward revision of 55,000. Notably, full-time employment increased significantly by 414,000, reversing previous trends, while part-time jobs fell by 95,000. The unemployment rate dropped slightly from 4.2% to 4.1%, as job growth outpaced the expansion of the labor force. The labor force participation rate held steady at 62.7%.

Inflation Update 

July 2024 brought positive news on the inflation front, as the annual inflation rate slowed to 2.5%, the lowest since February 2021, down from 2.9% in June. This easing was largely driven by reductions in energy costs (down 4% overall), including significant declines in gasoline (-10.3%), fuel oil (-12.1%), and natural gas (-0.1%). Inflation for food and transportation also moderated, while prices for new vehicles (-1.2%) and used cars (-10.4%) continued to drop. However, inflation slightly edged higher for shelter (5.2%) and apparel (0.3%).

Stock Market Performance

The stock market has been largely positive, with the Dow Jones Industrial Average (DJIA) hitting a record high of 42,352, up 800 points from the previous month. The S&P 500 also reached a new record high at 5,751, up 250 points. Meanwhile, the Nasdaq remained volatile but gained 1,300 points to reach 18,000. The strong job report has helped bolster market sentiment by alleviating concerns that the Federal Reserve would rush to cut interest rates.

Outlook for the Federal Reserve and Markets

Looking forward, the Federal Reserve is expected to make a 0.25% rate cut in November. Mortgage rates for 30-year loans have dipped into the low 6% range and are expected to stay at that level for the rest of the year. Oil prices have risen to $74 per barrel (up from $68 last month), and gold is nearing a record high at $2,673 per ounce, up from $2,540 in the previous month. The U.S. dollar has remained relatively stable but has weakened slightly against the Euro, with the EUR/USD exchange rate now at 1.10.

This positive economic data indicates that the U.S. economy remains resilient despite global uncertainty, and the Federal Reserve may feel less urgency to aggressively cut rates given the robust job market and moderating inflation.

Jobs Report (October report)

In September, non-farm employment surged by 254,000, well above the consensus forecast of 150,000. The previous two months’ figures were also revised upward by 72,000, highlighting stronger-than-expected hiring. Over the last three months, payroll gains averaged 186,000, slightly below the 12-month average of 203,000, but still robust. The bulk of the job additions came from the private sector, which added 223,000 jobs, with major contributions from leisure and hospitality (+78,000), health care and social assistance (+71,700), construction (+25,000), and professional and business services (+17,000). Government hiring also contributed 31,000 jobs. Notably, the breadth of hiring, a key indicator of employment growth across various industries, reached 57.6%, the highest in eight months, signaling broader job market recovery.

The unemployment rate edged down to 4.1% in September, as civilian employment rose by 430,000, outpacing the labor force increase of 150,000. This stronger-than-expected rise in employment pushed down the jobless rate by 0.1 percentage points. The labor force participation rate remained steady at 62.7% for the third consecutive month, reflecting stability in the workforce. Wage growth also continued, with average hourly earnings (AHE) rising 0.4% month-on-month (m/m), although this was a slight deceleration from the upwardly revised 0.5% m/m gain in August. Over the past 12 months, AHE increased by 4.0%, up from 3.8% in August, signaling persistent wage growth, which could sustain consumer spending.

Despite the positive labor market performance, Federal Reserve Chair Jerome Powell indicated that the Fed is in no rush to cut interest rates. Powell reaffirmed that the base case is for two more 25 basis point (bps) cuts by the end of the year. While the Fed had refrained from cutting rates by 50bps last month, Powell emphasized that interest rate recalibration is aligned with the current performance of an economy moving at a steady pace, rather than in response to recession risks. However, inflation remains a challenge, with rising commodity prices potentially hindering further progress. The strong job report may slow the Fed's timeline for future rate cuts, as it could imply more stability than expected. Following the release of the payroll data, futures markets adjusted expectations, now pricing in 57bps of easing by year-end, down from 69bps prior to the report.

Existing Home Sales (September)

In August, existing home sales fell by 2.5% month-on-month (m/m), reaching an annualized rate of 3.86 million units, slightly below market expectations of 3.9 million. This figure represents a 4.2% year-over-year decline, marking a continuation of the housing market's slowdown. Single-family home sales dropped by 2.8% to 3.48 million units, while condo/co-op sales remained unchanged at 380,000 units for the third consecutive month. Regionally, sales activity deteriorated across most Census regions, with the South seeing a 3.9% decline, the West falling by 2.7%, and the Northeast dropping 2.0%. Sales in the Midwest remained flat for the third month in a row at 920,000 units. The total housing inventory rose to 1.35 million units, a 0.7% increase from July and up 22.7% year-over-year, reflecting a growing supply.

At the current sales pace, unsold inventory increased to 3.9 months' supply, up from 3.6 months in July and 3.0 months a year earlier, suggesting that the market is approaching more balanced conditions. House prices grew by 3.1% year-over-year, slowing from July’s 3.9% increase. On a month-to-month basis, median home prices rose 0.3%, a deceleration from the 0.9% increase in the previous month. The U.S. housing market remains sluggish, with sales falling to 3.86 million, the lowest level outside of October 2022 in the post-pandemic period. Low affordability due to high prices and relatively limited supply continue to constrain home sales.

However, some positive signs are emerging. Mortgage rates have dropped by 60 basis points since early August to just over 6%, their lowest point since spring 2023, which could encourage more buyers into the market. Additionally, the rise in inventory indicates improving buyer choice, with the supply nearing balanced levels typically seen between 4 and 6 months. Looking ahead, with the Federal Reserve now in a rate-cutting phase, lower borrowing costs combined with better inventory levels could help unlock more sales activity. 

U.S. Personal Income & Spending (September)

In August, personal income grew by 0.2% month-on-month (m/m), a slight slowdown from the 0.3% increase in July and below market expectations of 0.4%. After accounting for inflation and taxes, real personal disposable income rose modestly by 0.1% for the third consecutive month. On the spending front, personal consumption expenditures (PCE) also slowed, increasing by 0.2% m/m, compared to July's 0.5% rise and below the expected 0.3%. Adjusted for inflation, real spending rose by just 0.1%, down sharply from the 0.4% growth seen in July. This increase in spending was largely driven by services, which rose by 0.2%, while spending on goods remained flat.

In terms of inflation, the core PCE price deflator, which is the Fed's preferred inflation metric, rose by 0.1% m/m, slightly lower than the prior month's 0.2% increase. Due to base effects, the annual core PCE inflation rose from 2.6% to 2.7%, in line with market expectations. The personal savings rate declined marginally to 4.8% in August, down from 4.9% in July. However, the recent GDP update revealed that savings rates and income growth for the first half of the year were stronger than initially reported, suggesting that consumers had more capacity to sustain spending than previously thought.

Despite this, the data suggests that consumers might be slowing down their spending as the labor market cools. However, the higher-than-expected savings buffer could help soften the slowdown. On the inflation side, the Fed's core measure continues to trend in the right direction, though base effects are slightly boosting the annual pace. With inflation under control, the Federal Reserve is likely to focus more on labor market developments as it considers future policy adjustments, especially with the September payrolls report due soon.

Manufacturing Index (October)

In September, the ISM Manufacturing Index remained unchanged at 47.2, slightly below the expected reading of 47.5. This marks the third consecutive month where only five out of 18 industries reported growth, reflecting ongoing struggles in the manufacturing sector. Notably, the contraction worsened as only one of the six largest industries posted growth, causing 77% of manufacturing GDP to contract, up from 65% in August. Demand conditions remain weak, despite a slight improvement in the new orders index to 46.1 (up from 44.6), which still indicates contraction. New export orders and the Backlogs of Orders index also continue to signal weakness, with backlogs shrinking at nearly the same pace as in August.

On the positive side, the production index rose by 5 percentage points to 49.8, approaching the neutral breakeven level. However, employment conditions deteriorated further, signaling a faster rate of contraction. Additionally, the uptick in prices seen in previous months faded, with the prices paid index dropping into contraction territory at 48.3, the first time this has happened since December 2023. While the report paints a difficult picture for the sector, there are some reasons for optimism. Falling raw material costs, as indicated by the prices paid index, suggest easing input costs for manufacturers. Moreover, with the Federal Reserve beginning its rate-cutting cycle, there is hope for some relief from the weight of higher interest rates, which have burdened the manufacturing sector in recent months. These developments provide a glimmer of hope for recovery in a sector that has faced persistent challenges.

Vehicle sales (October)

In September, the ISM Manufacturing Index remained unchanged at 47.2, slightly below the expected reading of 47.5. This marks the third consecutive month where only five out of 18 industries reported growth, reflecting ongoing struggles in the manufacturing sector. Notably, the contraction worsened as only one of the six largest industries posted growth, causing 77% of manufacturing GDP to contract, up from 65% in August. Demand conditions remain weak, despite a slight improvement in the new orders index to 46.1 (up from 44.6), which still indicates contraction. New export orders and the Backlogs of Orders index also continue to signal weakness, with backlogs shrinking at nearly the same pace as in August.

On the positive side, the production index rose by 5 percentage points to 49.8, approaching the neutral breakeven level. However, employment conditions deteriorated further, signaling a faster rate of contraction. Additionally, the uptick in prices seen in previous months faded, with the prices paid index dropping into contraction territory at 48.3, the first time this has happened since December 2023.

While the report paints a difficult picture for the sector, there are some reasons for optimism. Falling raw material costs, as indicated by the prices paid index, suggest easing input costs for manufacturers. Moreover, with the Federal Reserve beginning its rate-cutting cycle, there is hope for some relief from the weight of higher interest rates, which have burdened the manufacturing sector in recent months. These developments provide a glimmer of hope for recovery in a sector that has faced persistent challenges

What's Next

With September’s jobs report surprising to the upside, a 50 basis point (bps) rate cut for November now seems highly unlikely. Depending on the October jobs report and upcoming inflation readings, the Federal Reserve will most likely stick to 0.25% cuts in the next few meetings. Last week’s jobs report was a major surprise, and the 0.50% cut by the Fed last month was also more aggressive than expected (outside of Wall Street).

The Sahm Rule has now fallen back to 0.5 from 0.57. As a reminder, the Sahm Rule signals a recession when the three-month moving average of the unemployment rate rises half a point above the 12-month low. The rule was triggered in July, but with the indicator now at the 0.5 line, this cycle appears unique, as historically the indicator doesn’t fall back once this threshold is crossed.

In addition, the U.S. economy and markets are holding up surprisingly well despite significant global challenges, including the war in the Middle East, the conflict in Ukraine, China's weak economic performance, the ongoing labor unrest in the U.S., and the fact that it’s an election year. Yet, for the most part, U.S. consumers have been resilient. Consumer spending increased by 0.2% in August, following a 0.5% rise in July. The slowdown in August from July was expected as July included Prime Days and other back-to-school promotions that motivated consumers to spend. Households, however, are increasingly relying on borrowing as pandemic-era savings are nearly exhausted. The 0.50% rate cut may not have had an immediate effect on spending, but expectations of further cuts could boost consumer confidence.

While immigration can contribute to inflation by driving up shelter costs, it also supports demand for goods and services. Combined with a strong labor market, this helps keep the economy moving forward. However, a stronger economy poses challenges to inflation control. Housing and rental prices remain a significant driver of core inflation, as limited supply and high demand, along with rising construction costs, push prices up. Inflation in services, particularly in healthcare, education, and transportation, is also stickier due to higher labor costs, as wage increases are passed on to consumers. This makes services inflation slower to respond to economic changes compared to goods, keeping core inflation elevated.

Despite various challenges, the economy remains stable. The October jobs report, scheduled for release on November 1st, is crucial for the Fed ahead of its November 7th rate decision and will be the last jobs report before the presidential election. The impacts from Hurricane Helene and potential impacts from Hurricane Milton could also influence these numbers. Most importantly, if you were in the path of Hurricane Helene, I hope you made it through without major damage, and if you are in the path of Hurricane Milton, stay prepared and stay safe.

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.