Waller Says Fed Can “Proceed Carefully,” Further Weakness for China

According to Federal Reserve Governor Christopher Waller, policy makers can “proceed carefully” with interest-rate increases given recent data showing inflation continuing to ease.

Speaking on CNBC this morning, he said, “There is nothing that is saying we need to do anything imminent anytime soon,” suggesting policy makers could hold rates steady at the upcoming September meeting. “We can just sit there and wait for the data.

Recall on Friday, nonfarm payrolls rose by 187k in August, more than the 170k gain expected according to Bloomberg and the strongest pace of job creation since May.

July payrolls, however, were revised lower from a 187k gain to a 157k increase. With additional revisions to previous months, the overall change in nonfarm payrolls (August data + net revisions) was just 77k.

Private payrolls rose by 179k in August following a 155k gain in July. Goods-producing payrolls rose by 36k due to a 22k rise in construction payrolls and a 16k gain in manufacturing payrolls. Private service producing payrolls rose by 143k in August, up from a 141k gain in July. Education and health payrolls led the gain in service payrolls in August, rising 102k following a similar rise the month prior. Also, leisure and hospitality payrolls rose 40k, and financial payrolls gained 4k. Additionally, professional and business services payrolls rose 19k, despite a 19k drop in temporary help payrolls. On the other hand, trade and transport payrolls fell 20k, despite a 6k gain in retail trade payrolls, and information payrolls declined 15k in August. Finally, government payrolls rose by 8k in August following a 2k gain in July.

Household employment rose by 222k in August following a 268k increase the month prior. The labor force, meanwhile, rose by 736k following a 152k rise in July. Thus, the unemployment rate unexpectedly rose from 3.5% to 3.8% in August, the highest since February 2022. According to the median forecast, the unemployment rate was expected to remain at 3.5% for the second consecutive month.

The labor force participation rate, furthermore, ticked up from 62.6% to 62.8% in August, the highest since February 2020. At 62.8%, however, the participation rate is still below the pre-pandemic rate of 63.3%.

Also, average hourly earnings rose 0.2% in August, a tenth of a percentage point less than expected and following a 0.4% increase in July. Year-over-year, wages rose 4.3%, down from the 4.4% annual gain in July and the weakest gain in three months.

Finally, the average workweek ticked up from 34.3 to 34.4 hours in August, a two-month high.

The day prior, personal income rose 0.2% in July, less than the 0.3% gain expected according to Bloomberg and following a 0.3% increase in June. Consumer spending, meanwhile, increased 0.8% in July, a tenth of a percentage point more than the 0.7% gain expected and following a 0.6% rise in June. Year-over-year, consumer spending increased 6.4% and personal income rose 4.7%.

Adjusting for inflation, real consumer spending rose 0.6%, while real income fell 0.2% in July, the first monthly decline since June 2022. Over the past 12 months, real spending rose 3.0%, and real disposable personal income gained 1.3% following a 2.2% annual gain in June.

Furthermore, the Fed’s preferred inflation measure, the PCE, rose 0.2% in July, as expected and following a similar increase in June. Year-over-year, headline inflation increased 3.3%, also as expected and up from the 3.0% annual gain in June. Excluding food and energy, the core PCE rose 0.2% in July, as expected. Year-over-year, core inflation increased 4.2%, up from a 4.1% annual increase last month.

Bottom Line: The latest August employment report was relatively encouraging, suggesting the labor market is cooling somewhat without slowing sharply. The unexpected rise in the unemployment rate, in particular, reflecting a welcome surge of new participators in the market – if sustained – should help to alleviate wage pressures stubbornly above 4% since July 2021, the desired outcome from the Fed’s perspective. 

But what does this mean for policy? Against the backdrop of last week’s uptick in the PCE, Friday’s benign labor market report gives the Fed enough cover to pause later this month should it choose, as Waller suggests. However, with the pace of deflation slowing and price pressures still elevated nominally, given Fed Chairman Jerome Powell’s comments reiterating a need for additional policy action to tame inflation, the Committee would be well advised to move forward with another round hike sooner than later. Not only is an additional hike(s) likely necessary to reach a sufficiently restrictive level, but also to maintain credibility with investors that the Fed will continue to adjust policy until its job of reinstating stable prices has been completed. 

The market is currently pricing in a September rate hike at just 5%. Of course, investors have been wrong before, prematurely calling an end to Fed tightening throughout the year, instead betting on rate cuts, which have not materialized. 

Also on Friday, the ISM Manufacturing Index rose from 46.4 to 47.6 in August, surpassing the expected gain to 47.0 and a six- month high. However, at 47.6, this is still the tenth consecutive month in contractionary territory (a reading below 50).

In the details of the report, production rose from 48.3 to 50.0, exports rose from 46.2 to 46.5, and employment gained from 44.4 to 48.5, a three-month high. Additionally, prices paid jumped 5.8 points to 48.4, a four-month high, and supplier deliveries rose from 46.1 to 48.6 in August. On the other hand, new orders decreased 0.5 points to 46.8, and imports declined 1.6 points from 49.6 to 48.0 in August.

This morning, factory orders declined 2.1% in July, less than the 2.5% decline expected and following a 2.3% gain the month prior.

In international news, according to Bloomberg News, the Chinese economy faces further hardship amid a softer measure of new work. The latest Caixin services PMI fell to its lowest this year, falling from 54.1 to 51.8 in August.

Recently, the Chinese economy has faced other indications of weakness with Chinese exports dropping 14.5% over the past 12 months, the weakest pace since February 2020, and imports contracting 12.4%. Also, according to National Bureau of Statistics (NBS), industrial output grew 3.7% in July from the year prior, slowing from the 4.4% annual gain in June and below the median forecast of 4.4%. Also, retail sales rose 2.5% in July from a year ago, down from the 3.1% annual gain in June and the weakest pace since December 2022. Additionally, youth unemployment, which wasn’t reported in July, rose to 21.3% in the latest June report, a record high.

Tomorrow, the ISM Services Index is expected to decline slightly from 52.7 to 52.5 in August, and the trade deficit is expected to widen from $65.5b to $68.0b in July.

Later in the week, on Thursday, jobless claims are expected to rise from 228k to 233k in the week ending September 2, and nonfarm productivity is expected to be revised lower from 3.7% to 3.4% in the final Q2 report.

Finally, on Friday, consumer credit is expected to increase by $16.0b in July following a $17.8b gain the month prior, and wholesale inventories are expected to decline 0.1% in the final July report.

-Lindsey Piegza, Ph.D., Chief Economist