Economic Update September 2024

Overview

In August, the U.S. job market showed some improvement over July, with 142,000 jobs added. However, this was still below the expected 165,000. In addition, the previous two months’ numbers were revised downward by 86,000 jobs, continuing the year-long trend of downward revisions. The latest benchmarking removed 818,000 jobs that had been reported from March 2023 to March 2024. Almost all the jobs added in August were part-time, rather than full-time. The unemployment rate saw a slight decrease, falling from 4.3% to 4.2%, as job growth marginally outpaced labor force expansion. The labor force participation rate remained unchanged at 62.7%.

On the inflation front, July 2024 saw the annual inflation rate slow to 2.9%, the lowest since March 2021 and down from 3% in June. This easing was primarily driven by decreases in inflation for shelter (down to 5.1%), transportation (down to 8.8%), and apparel (down to 0.2%). Prices for new and used vehicles continued to decline, with new vehicle prices falling by 1% and used cars and trucks dropping 10.9%. Food inflation remained steady at 2.2%. However, energy costs edged up slightly, rising by 1.1%, primarily due to a smaller decline in gasoline prices.

In the stock markets, performance has been mixed. After reaching a record high of 41,500 last week, the Dow Jones Industrial Average (DJIA) fell by about 1,200 points but is still up 1,500 points month over month. The S&P 500 hit a record high last week before dropping again but is still up about 200 points over last month at 5,400. The Nasdaq has been volatile, dropping to 16,700 after reaching 18,000 last week, though still about 500 points above last month. The 10-year Treasury yield has stabilized at 3.7%, slightly down from 3.8% last month.

Looking ahead, the Federal Reserve is anticipated to make a 0.25% or 0.50% rate cut next week. Mortgage rates for 30-year loans have dropped into the low 6% range and are expected to remain there for the rest of the year. Oil prices have fallen to $68 per barrel, down from $73 last month, while gold is now at $2,530 per ounce after peaking at $2,560 last week. The U.S. dollar has remained stable, with a slight weakening against the Euro, bringing the EUR/USD exchange rate to 1.11.

Jobs Report (August)

In August, non-farm employment increased by 142,000, falling short of the consensus forecast of 165,000. Revisions to the previous two months' data further reduced job growth by 86,000. Over the past three months, payroll gains have averaged 116,000, a notable decrease compared to the 202,000 average over the prior twelve months. Private payrolls saw an increase of 118,000 jobs, with the largest gains in leisure & hospitality (+46,000), health care & social assistance (+44,100), and construction (+34,000). Government hiring added 24,000 jobs. According to the household survey, civilian employment increased by 168,000, outpacing a 120,000 rise in the labor force, which contributed to a slight drop in the unemployment rate to 4.2%. The labor force participation rate remained steady at 62.7%.

Wage growth also picked up, with average hourly earnings (AHE) rising 0.4% month-on-month, accelerating from July's 0.2% increase. On a year-over-year basis, AHE ticked up to 3.8%, compared to 3.6% in July. Last week’s employment report provided more signs of a cooling labor market. Job growth fell below expectations, and revisions to prior months indicated a slower pace of job creation. However, the report wasn’t entirely negative. The unemployment rate reversed some of July's increase due to a sharp reduction in temporary layoffs, and aggregate weekly hours rose by 0.3%—the largest monthly increase since March.

Looking ahead, Fed officials have signaled that rate cuts are imminent. However, uncertainty remains as to whether the Federal Open Market Committee (FOMC) will reduce rates by 25 or 50 basis points at its upcoming meeting. While the labor market has cooled over the past year, there is currently no clear evidence of a more significant downturn in underlying fundamentals. Barring a shift in this outlook, it is expected that the Fed will implement three quarter-point rate cuts by year-end.

Existing Home Sales (July)

In July, U.S. existing home sales rose by 1.3% month-over-month (m/m), reaching an annualized rate of 3.94 million units. This increase met market expectations and marks a slight improvement in the housing market. Despite this, sales were still down 2.5% from a year ago, although this was an improvement from the 5.1% year-over-year decline seen the previous month. Single-family home sales rose by 1.4% to 3.57 million units, while condo and co-op sales held steady at 380,000 units. Sales activity improved across three of the four U.S. Census regions: the Northeast saw a 4.3% increase, the West rose by 1.4%, and the South by 1.1%. Sales in the Midwest remained flat.?

Total housing inventory in July reached 1.33 million units, representing a 0.8% increase from June and a 19.8% rise from July 2023. However, the supply of unsold inventory, measured at the current sales rate, declined to 3.6 months from 3.8 months in June, though it remains higher than the 3.0 months recorded in July 2023. House prices increased by 4.2% year-over-year, a similar pace to June but slower than the 5.3% annual increase seen in April and May. On a seasonally adjusted basis, median home prices rose by 1% month-over-month, reversing a 0.2% decline from June. The improvement in home sales is a positive sign, but sales remain well below historical norms, signaling that the housing market is still sluggish.?

Inventory levels, while up nearly 20% year-over-year, are still low by historical standards, keeping the market in a seller's territory with 3.6 months' supply. Encouragingly, a notable improvement in pending home sales in June, along with some recent easing in mortgage rates, suggests the possibility of further improvement in sales in the coming months. However, recent changes to real estate commissions, which took effect last weekend, may introduce some uncertainty and bear-watching in the near term.

U.S. Personal Income & Spending (July)

In July, personal income grew by 0.3% month-on-month (m/m), an acceleration from June's 0.2% increase and slightly above market expectations of 0.2%. After accounting for inflation and taxes, real disposable personal income rose by 0.1% for the second consecutive month. Meanwhile, personal consumption expenditures (PCE) also picked up, increasing by 0.5% m/m in July, up from the 0.3% rise in June and matching market forecasts. Spending in real terms (adjusted for inflation) grew by 0.4% m/m, following a revised 0.3% gain in June, with notable increases in both goods (+0.7%) and services (+0.2%). On the inflation front, the Federal Reserve's preferred inflation metric, the core PCE price deflator, remained steady at 0.2% m/m and 2.6% annually.?

While the monthly reading met market expectations, the annual rate was marginally lower than anticipated (2.7%). Notably, on a three-month annualized basis, core PCE inflation decelerated to 1.7% in July from 2.1% in June, signaling a cooling trend. The personal savings rate fell to 2.9% in July, down from a revised 3.1% in June. This marks the first time in over two years that the savings rate has dipped below 3%, indicating that consumers may have been relying more on their savings to sustain spending levels. While consumer spending remains resilient, the decline in savings and a slowing job market may weigh on momentum as the year progresses.?

The core PCE price deflator, which the Fed closely monitors, continues to show a cooling trend, although it hasn't accelerated further. On a three-month annualized basis, core PCE has now fallen below the Fed's 2% target for the first time since December. Given the cooling inflation and stable spending figures, there is little in the July report to dissuade the Federal Reserve from considering a rate cut in September, especially as core inflation continues to decelerate from its Q1 flare-up.

Manufacturing Index (August)

In August, the ISM Manufacturing Index slightly improved to 47.2, just under market expectations of 47.5. While only five industries reported growth, the contraction in manufacturing GDP was less severe compared to July, with 65% of the sector shrinking, down from 86%. The demand outlook remains weak, as the new orders index dropped to 44.6, and both new export orders and backlogs stayed in contraction territory. Despite a minor uptick in employment, output conditions are still subdued, with both employment and production indexes remaining in contraction.

Price pressures rose again in August, with the index increasing to 54.0, surpassing the 52.8 level typically associated with an uptick in the Producer Price Index (PPI) for Intermediate Materials. This signals heightened cost pressures in the manufacturing sector. The manufacturing sector continues to face broad-based challenges, with demand contracting and output struggling. However, there are some reasons for optimism, especially with the Federal Reserve expected to begin cutting interest rates, which could provide a boost to growth prospects. Nevertheless, the recovery is expected to be gradual, as the pace of rate cuts may be slow, leading to a recovery that progresses unevenly.

Vehicle sales (August)

In August, U.S. vehicle sales fell by 4.5% month-on-month to an annualized 15.1 million units, falling short of the consensus forecast of 15.4 million units. Despite this monthly decline, unadjusted sales volumes were 1.42 million units, 7.6% higher than in August 2023. The average daily selling rate (DSR) reached 50,670 units over 28 days, a 3.8% improvement over the 48,837 units per day sold in August 2023. Passenger vehicle sales saw a modest 0.5% year-on-year growth, while sales of light trucks increased by a significant 9.4%. Light trucks accounted for 81% of sales in August, up slightly from 80% a year ago. However, the decline in total vehicle sales reflects the ongoing pressure from elevated financing costs, which continue to weigh on consumer purchases.

Although market conditions remain generally healthy, with inventory levels close to pre-pandemic norms, many potential buyers may be delaying purchases in anticipation of expected interest rate cuts. The Federal Reserve is widely expected to lower interest rates in the near future, which could provide relief for consumers facing high financing costs. Despite growth in personal disposable income (PDI) outpacing the increase in vehicle transaction prices since 2019, the sharp rise in the cost of financing has been the primary barrier to higher sales volumes. Looking ahead, a projected 75 basis-point reduction in interest rates by year-end should alleviate financing burdens and potentially boost vehicle sales heading into 2025.???? ???

?What's Next

This month's job report came in once again lower than expected. Not necessarily a bad report but after July's low number perhaps disappointing enough to continue the talk of a current downturn taking place. The job's report numbers, as is, took a big hit last month. I have been questioning the numbers for the past few months and this is not an "I told you so" but a backup to my recent argument of the jobs number not translating to economic activity. A couple of weeks ago, the Bureau of Labor Statistics announced in a preliminary release that it had overstated the number of new jobs created in the 12 months to March by 818,000. That's about one-third of the 2.9 million jobs the government said it added in that stretch, or roughly 68,000 fewer jobs added each month than previously reported. Indeed, the revision is as big and unusual as it sounds. If we take this release at face value, it would lower the nonfarm payroll count by 0.5 percent in the year up to March -- the largest adjustment since 2009.

The job's report in itself is a difficult task. One is essentially trying to track what is happening to 160-170 million jobs. No easy task, so my comments on the revision should not come off as something that has been done deliberately, remember, I am not a conspiracy guy. I just look a data and sometimes that data does not make sense. This is simply to say that the monthly job report should be taken with a grain of salt. It can affect the stock markets, but then again, those markets are full of feelings, predictions, and speculations. This miss on the reporting looms larger and is more concerning probably for the Fed and its rate policy. The Fed thought that the economy and employment market were much stronger. As such, the Fed was pushing back rate cuts. With the latest job report, inflation numbers, and overall economic data, we have certainty for at least the 0.25% cut. There is still a 50/50 for a 0.50% cut. I am still holding on to my beginning-of-the-year prediction of a total of 0.75% cut by year-end, evened out over the next three meetings. I think a 0.50% cut may send the wrong message.

Speaking of inflation, we have seen a further drop in year-over-year inflation, but that does not mean products and services are getting cheaper. While the year-over-year inflation is dropping, the cumulative inflation over the past three years continues to take its toll on the US consumer. Narrowing cumulative inflation down by industry is somewhat complex, as inflation impacts sectors differently due to varying cost structures, supply chains, and price volatility in different commodities. However, the following is a summary of inflation impacts across key industries over the past three years, based on the Consumer Price Index (CPI) breakdown by sector. The Energy Sector experienced significant volatility due to factors such as the COVID-19 pandemic and geopolitical tensions. Energy prices rose dramatically in 2022 by over 25%, driven by gasoline and natural gas price increases. Over the past three years, cumulative inflation in this sector has been well above the overall rate, likely in the range of 30% or more, depending on the specific energy product. Food inflation has been driven by supply chain issues, labor shortages, increased transportation costs, and a more rapid population growth causing higher demand.?

Food at home has risen by approximately 9.4% year-over-year at certain points, and cumulative inflation in food over the past three years is estimated at 20-25% depending on the specific categories like meats, poultry, and cereals. Housing costs have steadily risen due to low inventory, high demand, especially for low-cost housing, and higher borrowing costs. Shelter inflation rates have hovered around 5-7% annually. Cumulative inflation in housing/shelter over the past three years is estimated at 15-20%. The auto industry has been impacted by supply chain disruptions, semiconductor shortages, and industry technology standards as well as emission standards. Prices for used cars, in particular, saw extreme inflation in 2021, with annual increases of over 25% in some periods. The cumulative inflation in this sector over the past three years can range between 25-40%, especially for used cars and trucks. Each sector is influenced by different factors, so the inflation impact can vary significantly within these industries. One thing is clear though, inflation has had a significantly larger impact on the middle-income and lower-income classes. Side note, the US Debt has surpassed $35 trillion.?

"We don't have inflation because the people are living too well, we have inflation because the government is living too well." - President Ronald Reagan

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.