Tho…

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For while durable goods prices have risen somewhat in recent months, the impact on consumer confidence and spending intentions has contributed to a major redu…

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In addition to the aggregate headline and core CPI forecasts, this latest update covers the implications of current growth rates in the M2 money supply on the inflation outlook, and provides an updated outlook for key CPI categories such as durables, foo…

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Headline CPI growth fell to 2.4% YoY in September, from 2.5% in August. While declining for a sixth consecutive month, growth came in above the Economics Uncovered and consensus forecasts of 2.3%.

Core CPI growth rose to 3.3% YoY (from 3.2%), which was also above both the Economics Uncovered and cons…

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The headline CPI is expected to record a second consecutive month of significant additional disinflation, falling to 2.3% (2.26%) YoY, from 2.5%. This is in-line with the consensus estimate.

Given that much of this anticipated moderation is expected to again be driven by the …

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A material jump in nonfarm payrolls, which rose by 254k MoM — the fastest pace of growth since March — headlined a much more positive employment report in September.

With upward revisions also made to nonfarm payroll growth in July (+55k) and August (+17k), 3-month moving average growth rose to 186k, its highest level since May.

Most of the stronger employment growth was driven by private employment, which rose by 223k MoM, also the fastest pace of growth since March.

Importantly, the breadth of private employment growth also turned materially higher, with the 1-month diffusion index rising to 57.6 points, its highest level since January.

Stronger employment growth saw the unemployment rate fall to 4.1%, its lowest level since June.

This saw the Sahm rule soften to 0.50 percentage points (from 0.57 percentage points).

But lots of concerning data points remain, with the broader outlook still negative

Though given the long-standing weakening of US employment data, it will take much more than one month of more positive numbers — particularly given the broader backdrop of negative revisions — to suggest that the US employment market is now back on stronger footing.

In terms of the headline numbers, this broader downtrend can be illustrated by the fact that both total nonfarm payrolls and private payrolls saw a reduction in 6-month moving average growth in September.

The 3-month moving average of the unemployment rate was also unchanged at 4.2%, while the 3-month moving average of the U-6 unemployment rate actually rose further, to 7.8% . At 0.50 percentage points, the Sahm rule also remains at a critical juncture (see charts above).

Looking at US employment data more broadly, lots of additional concerning data points remain — some of which worsened in September — which suggests that the outlook for the US employment market remains negative.

Some key points to be aware of, include:

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Produced in a presentation format, this comprehensive report contains 52 slides, over 75 charts and covers the following topics:

• M2 & liquidity;

• Inflation;

• Employment;

• Housing;

• GDP & associated items;

• Stage of the Economic Cycle & Outlook;

• Monetary Policy Outlook; and

• A note on China.

A free preview of the report i…

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The September FOMC meeting also brought a number of changes to the FOMC statement and material revisions to the Fed’s Summary of Economic Projections (SEP), with the Fed’s latest median federal funds rate projection now calling for 100bps of cumulative rate cuts in 2H24 (versus 25bps previously).

The Fed’s median projection is now in-line with the bottom end of the forecast that I had originally published on 5 August (see “Why the latest US jobs report points to a recession and what it means for the Fed and financial markets”), which was for 100-150bps of rate cuts in 2H24.

In my view, the key questions now are: 1) will the Fed deliver more than its current median projection of 50bps of additional rate cuts in the final two FOMC meetings of this year? and 2) will the Fed lower the federal funds rate below its current median year-end 2025 midpoint projection of 3.4%?

Before I provide an update to my current forecasts and attempt to answer these questions within the “Monetary policy implications and outlook” section below, let’s firstly unpack the key announcements that were made by the Fed and some key statements made by Fed Chair Powell at his latest FOMC press conference.

FOMC statement changes

SEP changes

Reviewing the Fed’s latest SEP, material changes have been made to the median projections for interest rate cuts in both 2024 and 2025.

Looking firstly at the estimates for 2024, the latest SEP incorporates a year end federal funds rate of 4.4% (5.1% previously), which implies an additional 50bps of rate cuts by year end. With two FOMC meetings remaining within the year, this implies two 25bp rate cuts and cumulative 2H24 rate cuts of 100bps. This would see 2H24 rate cuts meet the bottom end of my expected range of 100-150bps, which I first outlined on 5 August within the “Monetary policy implications” section of this report.

The Fed’s median projection for the average unemployment rate in 4Q24 has been revised higher to 4.4% (from 4.0%) versus its current level of 4.2% and 3-month moving average of 4.2%. Given the weakening trends that have been seen in the US employment market and ongoing relative constraints in the growth rate of the M2 money supply, I believe that a further increase in the unemployment rate is the most probable outcome in 4Q24.

The Fed has also revised down its estimate for core PCE inflation to 2.6% YoY in 4Q24 (from 2.8%). I will have more to say about the likelihood of this being achieved upon releasing a future update to my medium-term US inflation estimates.

Looking ahead to 2025, the Fed has revised down its median estimates for inflation (reflecting its increased confidence in the inflation outlook) and revised its median unemployment rate projection higher — but only to 4.4% (from 4.2%), which is the same level that it expects the unemployment rate to average in 4Q24.

The median federal funds rate projection for the end of CY25 has been lowered significantly to 3.4% (from 4.1%), implying 100bps of additional interest rate cuts in 2025. Given that the Fed does not expect any further uptick in the unemployment rate and that it is continuing to forecast real GDP growth of 2.0% YoY in 4Q25, this implies that the Fed firmly expects a soft-landing, which is reflected in the fact that its CY25 federal funds rate projection of 3.4% remains above the median long-run interest rate projection (i.e. its neutral rate projection) of 2.9% (central tendency: 2.5%-3.5%). I discuss the probability of such a scenario playing out and my own expectations, within the “Monetary policy implications and outlook” section below.

Key statements from Fed Chair Powell’s Press Conference

Opening statement

• “Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by 1/2 percentage point. This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent.”

• “In the labour market, conditions have continued to cool. Payroll job gains averaged 116 thousand per month over the past three months, a notable step down from the pace seen earlier in the year. The unemployment rate has moved up but remains low at 4.2 percent. Nominal wage growth has eased over the past year and the jobs-to-workers gap has narrowed. Overall, a broad set of indicators suggests that conditions in the labour market are now less tight than just before the pandemic in 2019. The labour market is not a source of elevated inflationary pressures.”

• “As inflation has declined and the labour market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate.”

• “In light of the progress on inflation and the balance of risks, at today’s meeting the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point, to 4-3/4 percent to 5 percent. This recalibration of our policy stance will help maintain the strength of the economy and the labour market and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance. We are not on any preset course. We will continue to make our decisions meeting by meeting.”

• “If the economy evolves as expected, the median participant projects that the appropriate level of the federal funds rate will be 4.4 percent at the end of this year and 3.4 percent at the end of 2025. These median projections are lower than in June, consistent with the projections for lower inflation and higher unemployment, as well as the changed balance of risks.”

• “If the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”

Q&A

• “Since the last meeting … we have had a lot of data come in, we’ve had the two employment reports … we’ve also had two inflation reports … we had the QCEW report which suggests that … the payroll report numbers that we’re getting may be artificially high and will be revised down … we’ve also seen anecdotal data like the beige book … we took all of those … and we concluded that this was the right thing for the economy, for the people that we serve and that’s how we made our decision.”

• “I think we had a good discussion [on the size of a rate cut] … if you go back to Jackson Hole … I didn’t address the question of the size of the cut … and I think we left it open going into blackout and so there was a lot of discussion back and forth … I think there was also broad support for the decision that the committee voted on.”

• “The labour market is actually in solid condition and our intention with our policy move today is to keep it there.”

• “I do not think that anyone should look at this and say “Oh this is the new pace” … you have to think about it in terms of the base case … in the base case … look at the SEP … we’re recalibrating policy down over time to a more neutral level and we’re moving at the pace that we think is appropriate given developments in the economy in the base case.”

• “Reserves have really been stable, they haven’t come down so reserves are still abundant and expected to remain so for some time. As you know, the shrinkage in our balance sheet has really come out of the overnight RRP, so I think what that tells you is we’re not thinking about stopping runoff because of this [rate cut] at all. We know that these two things can happen side by side, in a sense they’re both a form of normalisation and so for a time you can have the balance sheet shrinking but also be cutting rates.”

• “Labour market conditions have cooled off by any measure … but they’re still … actually pretty close to what I would call maximum employment … so you’re close to mandate, maybe at mandate … clearly payroll job creation has moved down over the last few months and this bears watching …. by many other measures the labour market has returned to, or below 2019 levels, which was a very good, strong labour market but this is more sort of 2018, 17 … so the labour market bears close watching and we’ll be giving it that, but ultimately we think … with an appropriate recalibration of our policy that we can continue to see the economy growing and that will support the labour market.”

• “Retail sales data that we just got, second quarter GDP, all of this indicates an economy that is still growing at a solid pace, so that should also support the labour market over time.”

• "We’re not seeing rising claims, we’re not seeing rising layoffs, we’re not seeing that and we’re not hearing that from companies that that’s something that’s getting ready to happen. So we’re not waiting for that because … there is thinking that the time to support the labour market is when it’s strong and not when you begin to see the layoffs”

• “We have a dual mandate … we’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment … and I think you can take today’s action as a sign of our strong commitment to achieve that goal.”

• “The downside risks to employment have increased and because we have been patient and held our fire on cutting while inflation has come down, I think we’re now in a very good position to manage the risks to both of our goals".

• “It’s always a question of look at the incoming data and ask, what are the implications of that data for the evolving outlook and the balance of risks, and then go through our process and think what’s the right thing to do? Is policy where we want it to be, to foster the achievement of our goals over time?”

• “On the job creation, it depends on the inflows … so if you’re having millions of people come into the labour force … and you’re creating 100,000 jobs, you’re going to see unemployment go up, so really it depends on what’s the trend …. of people coming into the country.”

• “Certainly it appears that we’ve very close to that point, if not at it … [where] further declines in job openings will translate more directly into unemployment.”

• “Many people … would say we’re probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates … and it looked like the neutral rate might even be negative … my own sense is that we’re not going back to that, but you know, honestly we’re going to find out, but you know it feels to me that the neutral rate is probably significantly higher than it was back then. How high is it? I just don’t think we know. Again, we only know it by its works.”

• “The US economy is in a good place and our decision today is designed to keep it there. More specifically, the economy is growing at a solid pace, inflation is coming down closer to our 2% objective over time and the labour market is still in solid shape, so our intention is really to maintain the strength that we currently see … and we’ll do that by returning rates from their high level … to a more normal level over time.”

• “No we’re not [declaring a decisive victory over inflation] … the goal is to have inflation move down to 2% on a sustainable basis … we’re close but we’re not really at 2% and I think we’re going to want to see it be … around 2% and close to 2% for some time … we’re not saying mission accomplished or anything like that, but I have to say though, we’re encouraged by the progress that we have made.”

• “Housing inflation is the one piece that is kind of dragging a bit … we know that market rents are doing what we would want them to do, which is to be moving up at relatively low levels, but … the leases that are rolling over are not coming down as much and OER is coming in high … it’s been slower than we expected. I think we now understand that it’s going to take some time for those lower market rents to get into this, but you know the direction of travel is clear and as long as market rents remain … relatively low … over time that will show up … I don’t think the outcome is in doubt, again, as long as market rents remain under control … the rest of the elements that go into core PCE inflation have behaved pretty well … we will get down to 2% inflation, I believe, and I believe that ultimately we’ll get what we need to get out of the housing services piece too.”

• “The US economy is basically fine if you talk to … business people, who are actually out there doing business. So I think our move is timely. I do and as I said, you can see our 50bp move as a commitment to make sure that we don’t fall behind.”

• “If we had gotten the July [jobs] report before the [last] meeting would we have cut? We might well of.”

• “We can’t look a year ahead and know what the economy is going to be doing.”

• “We will continue to look at that broad array of labour market data, including the payroll numbers … but we will mentally tend to adjust them [downward] based on the QCEW adjustment.”

• “We’re recalibrating our policy over time to a stance that will be more neutral and today … I think we made a good strong start on that. I think it was the right decision and I think it should send a signal that we’re committed to coming up with a good outcome here.”

• “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated.”

Monetary policy implications and outlook

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In my view, the monetary policy backdrop and key economic data, support the case for a larger, 50bp reduction.

Here’s 3 key reasons why:

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Though for the first time since March, the core CPI saw an increase in YoY growth, rising slightly to 3.20%, from 3.17% in July (vs Economics Uncovered estimate: 3.08%, consensus: 3.2%).

Rather than being driven by concerning underlying shifts, the higher core CPI reading versus the Economics Uncovered forecast was instead largely driven by a blip higher in owners’ equivalent rent (OER). I refer to this as a blip, as the key leading indicator of rent of primary residence (RPR) and OER continues to point to a major deceleration in both measures over the quarters to come (see page 20 of my latest Medium-Term US Inflation Update for further detail). Indeed, as detailed below, both OER and RPR continue to trend lower in spite of August’s MoM uptick in OER.

The impact of OER can be seen in the much tighter spreads between the actual result and the Economics Uncovered estimate, for the core CPI ex-shelter — actual: 1.58% YoY, Economics Uncovered estimate: 1.54%.

The underlying detail of August’s CPI report thus reveals further positive signs, with adjusted core services price growth continuing to disinflate.

Let’s now dig into the monthly and short-term inflation trends, before breaking down the key details across the durables, nondurables and services categories (including an analysis of key and emerging shifts in vehicle, food, shelter and adjusted core services prices) and what it all may mean for the upcoming FOMC meeting.

Reminder: A premium subscription to Economics Uncovered (which grants full access to all reports) can now be purchased for just $10/month or $99/year (equivalent to just $8.25/month).

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In August, I expect the headline CPI to record YoY growth of 2.48% (2.5%), down significantly from 2.9% in July. This would represent the slowest pace of YoY growth since February 2021 and is below the consensus forecast of 2.6%.

I expect the core CPI to also see slower YoY growth, but to record a more modest reduction, falling to 3.08% (3.1%) from 3.17% in July. This compares to the consensus estimate of 3.2%.

The much larger estimated disinflation in the headline CPI is expected to be driven the CPI energy commodities index, which I forecast to fall from -2.0% YoY in July, to -10.1% in August.

On a seasonally adjusted basis, I expect headline CPI growth of 0.08% MoM, which would see 3-month annualised growth remain below 1% (0.72%) and 6-month annualised growth fall to 1.8% (from 2.5%) to its lowest level since September 2020.

I expect the core CPI to record MoM growth of just 0.10%, which would mark the fourth consecutive month of annualised growth of 2.0% or less. This would see 3-month annualised growth fall to 1.3% (the lowest level since February 2021) and 6-month annualised growth fall to 2.3% (the lowest level since March 2021).

3 key areas to watch

Vehicle prices

After recording persistent declines since 2H22, the Manheim Used Vehicle Value Index has shown some signs of reversing this trend, with a second consecutive month of significantly above average MoM price growth recorded in August.

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In addition to a review of the key information from the latest jobs report — including the numerous recessionary indicators — this report contains an analysis of the related implications for monetary policy and financial markets.

The full report is available to premium subscribers. A premium subscription can be purchased for just $10/month or $99/year (equivalent to just $8.25/month) — all prices in USD.

Unemployment rate drops, but the underemployment rate hits a new cycle peak as job growth slows sharply

After jumping to 4.3% in July, the unemployment rate edged down slightly to 4.2% in August. Nevertheless, the 3-month moving average unemployment rate rose to 4.2%, its highest level since November 2021.

The U-6 unemployment rate, which is a broader measure that incorporates underemployment, rose to 7.9%. This is now 1.4 percentage points above its cycle trough and the highest level seen since October 2021. The 3-month moving average rate rose to 7.7%.

The additional increase in the underemployment rate comes after major downward revisions were made to nonfarm payroll growth in June (-61k) and July (-25k), with the 3-month moving average of nonfarm payroll growth falling to just 116k in August. Furthermore, these significant downward revisions do not incorporate the preliminary benchmark revision, which showed that job growth in the year to March 2024 was overestimated by an average of 68k per month.

The picture is even worse when the focus is kept on private payrolls, which saw 3-month moving average growth of just 96k — excluding the COVID recession, this is the lowest rate of growth since June 2012.

This saw 3-month annualised growth fall to just 0.86%, which excluding the COVID recession, is the lowest rate of growth seen since March 2010.

Recessionary indicators continue to mount

Given the ongoing weakening in nonfarm payroll growth — which the preliminary benchmark revision suggests is being overstated — and increases in the unemployment rate, the number of recessionary indicators stemming from US employment data are continuing to grow.

The latest key indicator to suggest that the US economy could already be in a recession, is the YoY change in household survey employment, which turned YoY negative in August.

A further six key recessionary indicators have now also been triggered, being:

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Significantly, all of the downward revision was within the private sector, with total private employment revised lower by a preliminary 819k.

In percentage terms, the preliminary estimate is for a -0.5% revision to total nonfarm payrolls and a -0.6% revision to total private payrolls. This is well above the 10-year average revision of +/-0.1% of total nonfarm payrolls.

With the benchmark revision covering the period from April 2023 to March 2024 (the benchmark revision is heavily lagged), this implies that monthly average growth across both total nonfarm payrolls and total private payrolls, was 68k lower than initially reported.

This would point to monthly average job growth across April 2023 to March 2024 of 174k (from 242k) and average private nonfarm payroll growth of 118k (from 186k). The downward revision to private payroll growth is particularly significant and suggests that actual private payroll growth could be well below its current 6-month moving average of 160k.

The weak private payroll revision corresponds to the latest Business Employment Dynamics (BED) data, which shows that the quarterly pace of private employment growth has weakened significantly since 2Q23.

As a result of this weakening, the 6-month rolling average of private sector net job growth has plunged since 3Q23.

The same data suggests that the BLS’ monthly CES survey of total private nonfarm payrolls has failed to pick up on the full extent of this slowdown, with the rolling 12-month average of quarterly private payroll growth drastically diverging from 2H23.

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Given the volatility of gasoline prices and that retail sales data is a nominal data series, to gain a better understanding of underlying growth, I prefer to look at retail sales on an ex-gasoline basis.

In July, retail sales ex-gasoline rose 1.0% MoM, the largest increase since January 2023.

After remaining range bound between ~$640bn-$650bn over much of the past year, July’s growth saw retail sales ex-gasoline break notably above $650bn.

While July’s MoM growth was strong, the longer-term trend remains one of deceleration, with the 3-month moving average of YoY growth 2.5% in July, down significantly from the year-ago level of 5.3% and well below the 2015-2019 average of 3.9% YoY.

US manufacturing production declines as light truck production tumbles

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Significant further disinflationary evidence was seen in July, with the latest CPI report highlighting a third consecutive month of major disinflation in adjusted core services prices. This additional disinflationary momentum is likely to clear the way for a 50bp rate cut to be delivered in September, in the event that upcoming employment data continues to a highlight a significant weakening in the US labour market.

While the ultimate outcome of the September FOMC meeting remains unclear — with lots of additional economic data still set to be delivered between now and 18 September — the latest inflation data and continued YoY declines in the real M2 money supply, suggest that the Fed should not be concerned about the potential for lower interest rates to lead to a near-term resurgence in inflation. Instead, the much greater risk is that a slow unwinding of the Fed’s significant interest rate hikes results in the US economy falling into a recession.

Key CPI aggregates highlight further disinflationary evidence

The headline CPI rose by 2.89% YoY in July, close to the Economics Uncovered estimate of 2.94% (consensus: 3.0%).

The core CPI rose 3.17% YoY in July, largely in-line with the Economics Uncovered estimate of 3.14% (consensus: 3.2%).

On an ex-shelter basis — which is important to analyse given the lagging nature of the CPI’s rent based measures — headline CPI growth fell to 1.7% YoY, from 1.8% (Economics Uncovered estimate: 1.8%).

Core CPI ex-shelter growth moderated for a fourth consecutive month, also falling to 1.7%, from 1.8% (Economics Uncovered estimate: 1.7%).

On a MoM basis, headline CPI growth rose by a seasonally adjusted 0.15% (Economics Uncovered estimate: 0.17%, consensus: 0.2%). This saw 3-month annualised growth fall to 0.42% (from 1.1%) to its lowest level since June 2020. 6-month annualised growth fell to 2.5% (from 2.8%), to its lowest level since September 2020.

Core CPI growth rose 0.17% (Economics Uncovered estimate: 0.09%, consensus 0.2%) MoM. This saw 3-month annualised growth fall to 1.6% (from 2.1%) to its lowest level since February 2021 and 6-month annualised growth fall to 2.8% (from 3.3%) to its lowest level since March 2021.

Headline CPI ex-shelter growth rose 0.03% MoM (Economics Uncovered estimate: 0.08%). This saw 3-month annualised growth fall to -1.5% (from -0.51%), which is the lowest level since June 2020. 6-month annualised growth fell to 1.4% (from 1.6%), to its lowest level since July 2023.

Core CPI ex-shelter growth rose -0.01% MoM (Economics Uncovered estimate: -0.09%), marking a third consecutive month of negative MoM growth. This saw 3-month annualised growth fall to -0.30% (from 0.64%), to its lowest level since June 2020. 6-month annualised growth fell to 1.5% (from 2.0%), to its lowest level since November.

Monetary policy implications

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YoY estimates & the disinflationary cycle

In July, I expect the headline CPI to record a fourth consecutive month of lower YoY growth, falling to 2.9% (2.94%) from 3.0% (2.97%). This compares to the consensus estimate of 2.9%.

I expect the core CPI to also record a fourth consecutive month of decelerating YoY growth, falling to 3.1% (3.14%) from 3.3% (3.27%). This compares to the consensus estimate of 3.2%. While my core CPI estimate is below the consensus estimate on a one-decimal place basis, it is not far away from rounding to 3.2%.

On an ex-shelter basis, I expect headline CPI growth of 1.8% YoY (from 1.8%). For the core CPI ex-shelter, I expect YoY growth to decelerate for a fourth consecutive month, falling to 1.7% (from 1.8%).

Disinflation continues to be supported by relatively modest growth in the M2 money supply, which on an inflation adjusted basis, recorded a 27th consecutive month of negative YoY growth.

With M2 growth having long ago decelerated, it’s no surprise to see that the disinflationary cycle has progressed significantly, with durables prices (the most responsive component to an increase in M2) deflating and nondurables prices disinflating significantly. Highlighting how the disinflationary cycle has strengthened and broadened, services prices — being the most lagging component of the price cycle — have recorded major MoM disinflation over the past two months (see the “Breaking down the details” section below for a breakdown of my services price forecasts for July).

This underlying understanding of the broader price cycle underpins my latest medium-term US CPI forecasts, where I expect further material disinflation to occur in 2H24 — my latest medium-term estimates and related analysis can be found, here.

MoM estimates

In terms of my monthly estimates — which better highlight the extent of the disinflation that has been seen over recent months — I forecast headline CPI growth of 0.17% versus the consensus estimate of 0.2%. This would result in 3-month annualised growth of just 0.48% (from 1.1%) and 6-month annualised growth of 2.5% (from 2.8%). This would represent the slowest pace of 3- and 6-month annualised growth since June 2020 and September 2020, respectively.

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This comprehensive 5,000+ word update covers the latest jobs report in extensive detail, including an analysis of potential weather related impacts, the Sahm Rule and an additional 15 key employment market indicators, many of which suggest that the US economy could already be in, or be nearing, a recession.

As a result of the latest jobs data, my expectations for interest rate cuts and the timing of a potential US recession have both shifted. Given these shifts, I have also provided updates on the potential outlook for financial markets.

This is one report that you won’t want to miss.

July employment summary

The unemployment rate jumped to 4.3% in July (from 4.1%), to its highest level since October 2021. This is 0.9 percentage points above the cycle trough recorded in April 2023. On a 3-month moving average basis, the unemployment rate rose to 4.1% (from 4.0%), which is also the highest level since October 2021. This is 0.6 percentage points above the April 2023 cycle trough.

The U-6 unemployment rate, which also measures underemployment, surged to 7.8% (from 7.4%), which is also the highest level since October 2021. The U-6 unemployment rate is now 1.3 percentage points above its December 2022 cycle trough. On a 3-month moving average basis, the U-6 unemployment rate rose to 7.5%, which is 0.9 percentage points above its cycle trough and the highest level seen since December 2021.

Nonfarm payrolls grew by 114k, the slowest pace of growth since April.

3-month moving average growth increased slightly, rising to 170k (from 168k), while 6-month moving average growth fell to 194k (from 218k), the lowest level since September 2020.

On a YoY basis, nonfarm payroll growth remained at 1.6%, which is only slightly below its 2015-19 average of 1.7%.

Focusing on the more cyclical private nonfarm payrolls, MoM growth of 97k was recorded, the slowest pace of growth that’s been seen since March 2023.

3-month annualised growth fell to 146k (from 150k), to its lowest level since January 2021. 6-month annualised growth fell to 160k (from 177k), to its lowest level since December.

On a YoY basis, private nonfarm payroll growth has fallen to 1.4%, well below the 2015-19 average of 1.9%.

Wage growth also continued to slow in July, providing a further sign of growing labour market slack.

MoM growth was 0.23%, the slowest pace of growth since April.

While 3-month annualised growth rose to 3.7% (from 3.5%), 6-month annualised growth fell to 3.3% (from 3.8%) which is now largely in-line with its 2018-19 average of 3.2%. YoY growth fell to 3.6% (from 3.8%).

Analysing the potential weather related impact on July’s national employment figures

While there has been a significant broader discussion about the extent to which weather related factors (with Hurricane Beryl making landfall on the central coast of Texas on 8 July) may have been behind the significant additional weakening in July’s employment figures, a deeper analysis suggests that it may not have been overly material, with the BLS noting that “Hurricane Beryl had no discernible effect on the national employment and unemployment data for July”.

The focus on weather related impacts comes after the BLS reported that 461k individuals with a job were not at work during the July reference week, versus the 2014-2023 July average of just 37k.

The first key point to note in regards to this data point, is that the household survey — from which the unemployment rate is generated — counts these 461,000 individuals as employed.

The potential upward impact on the unemployment rate from weather related impacts instead potentially stems from the increase in those that were temporarily laid off, which rose by 249,000 (393,000 non-seasonally adjusted) in July.

While this was a relatively large jump, indicating the potential for some weather related impacts, large MoM increases have been seen in July in prior years without large spikes in individuals not going to work for weather related reasons. In July 2017 and July 2019, temporary layoffs increased by 300k and 209k, respectively, without a significant increase in people not at work due to bad weather. While this doesn’t preclude bad weather driving the bulk of the increase in temporary layoffs in July 2024, it also serves to show that much of the increase in temporary layoffs may have also been caused by other factors.

Though the number of seasonally adjusted temporary layoffs does appear to have been unusually high in July, supporting arguments that it may have been driven by weather related impacts and that at least some of July’s increase may be unwound in August.

In regards to the impact on nonfarm payrolls, only 1 hour of pay needs to be received in the pay period that includes the 12th day of the month, for an individual to be counted as employed. Given that the BLS has previously reported that ~73% of employees (based on February 2023 data) are paid on a biweekly, semimonthly or monthly basis, it is the ~27% of employees that are paid weekly, that are the most likely subset to have potentially not been counted as employed in July.

Though given that many individuals may have received at least some of their usual weekly pay (perhaps either prior to the landfall of Hurricane Beryl or after it had dissipated), this may have acted to materially reduce the impact on national nonfarm payrolls.

As a result, while Hurricane Beryl may have had a material impact on employment data for Texas, it may not have been significant enough to have a material discernible impact on national nonfarm payroll data.

A key area in which Hurricane Beryl may have impacted the monthly employment data is instead in regards to average weekly hours, which fell to their lowest level since January. While not referring specifically to July’s employment data, the BLS notes that “the impact of severe weather on hours estimates typically, but not always, results in a reduction in average weekly hours”.

All-in-all, given the ultimate uncertainty of the extent to which weather events impacted the July employment data, it seems reasonable to take the BLS’ statement — that “Hurricane Beryl had no discernible effect on the national employment and unemployment data for July” — largely at face value, with the BLS having much more additional information at its disposable to make such a conclusion.

Recessionary indicators continue to pile up within the jobs data

While nonfarm payroll growth has clearly slowed and continues to trend lower, given that continued MoM growth is being recorded, at first glance, nonfarm payrolls are not sending a recessionary signal.

Though what must be critically noted, is that nonfarm payroll growth is being propped up by significantly above average population growth. As a result, instead of nonfarm payroll growth being relatively solid (which would have been the likely conclusion pre-COVID when the break-even nonfarm payroll growth rate was far lower), it is weak. This is clearly indicated by the major increases that have been recorded in the unemployment rate and the U-6 unemployment rate since 2H23, which shows that job growth is well below the level needed to account for population growth.

Given the major weakening that’s been seen in the US employment market — which I have been regularly calling out over the course of this year (see: “Signs of a significant weakening are now being seen in the US jobs market”, “A roaring economy and a recession, simultaneously: the latest US jobs data is all over the shop”, “The household survey is flashing a recession”, “Finely balanced”, “The latest US jobs report is not as strong as it may seem”, “US jobs report points to the growing risk of a recession”, “Key JOLTS indicators weaken further in June, raising recession concerns” and “Fed sets the stage for a September rate cut as more job market data shows growing weakness”) — the number of recessionary signals from the BLS’ employment market data are numerous and continue to grow.

The latest one is the so-called “Sahm Rule” which compares the current 3-month moving average change in the unemployment rate to its trough over the past 12-months. Since 1949, when the 3-month moving average rises by more than 0.50 percentage points, the US economy has almost always been in a recession. In July, the Sahm Rule rose to 0.53 percentage points.

I say almost always, as while many take the Sahm Rule as a concrete “rule” that means the US must be in a recession, this is not the case. While a recession did occur relatively soon thereafter, the Sahm rule hit 0.60 percentage points in November 1959 and fell back to 0.03 percentage points in February 1960, with a recession not beginning until May 1960. The Sahm rule also hit 0.50 percentage points in July and August 2003 without a recession occurring — this is why I said more than 0.50 percentage points versus the generally accepted “rule” of 0.50 percentage points.

As Fed Chair Powell stated in his FOMC press conference (emphasis added): “We’re aware of [the Sahm] rule, which is really, you know, a statistical thing that has happened through history, a statistical regularity is what I’d call it. It’s not like an economic rule where it’s telling you something must happen.”

Despite not being a concrete rule, the very strong statistical regularity of this indicator means that individuals have rightly taken notice of it breaching 0.50 percentage points.

Its breaching of this level is made all the more significant by the fact that a wide-array of other statistical regularities (many of which I have been pointing out for many months) also suggest that a recession is potentially already underway, or not far away.

Below, I provide a list of 15 key indicators that suggest that either 1) the US economy is already in a recession; 2) the US economy is nearing a recession or 3) the US economy/jobs market has weakened materially:

1) Unemployment rate, seasonally/non-seasonally adjusted, YoY change, 3-month moving average

An alternative to the Sahm rule, is to simply look at the YoY change in the unemployment rate on a 3-month moving average basis — since 1949, when this indicator has risen by 6.5% or more on a seasonally adjusted basis, a recession has always occurred.

In July, the 3-month moving average of the unemployment rate had risen by 15.0%.

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Fed paves the way for a September rate cut

As expected, the July FOMC statement and Fed Chair Powell’s press conference have set the stage for an initial rate cut to be delivered in September.

The Fed’s latest FOMC statement saw several revisions, which are shown in the table below with an accompanying comment. The biggest revision was in regards to the Fed indicating a shift towards a more even focus between both sides of its dual mandate (“the Committee is attentive to the risks to both sides of its dual mandate”), as opposed to a prevailing focus on the price stability side of its mandate (“the Committee remains highly attentive to inflation risks”).

Fed Chair Powell emphasised this shift towards a better balance of risks between its employment and inflation goals in his FOMC press conference and clearly articulated that there’s a significant chance of a September rate cut. The below list details some of the most important quotes from the press conference, with emphasis added to make the key points clear (see the Appendix for additional relevant quotes):

• “Overall, a broad set of indicators suggests that conditions in the labor market have returned to where they stood on the eve of the pandemic — strong but not overheated.”

• “As the labor market has cooled and inflation has declined, the risks to achieving our employment and inflation goals continue to move into better balance. Indeed, we are attentive to the risks to both sides of our dual mandate.”

• “We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. The second-quarter’s inflation readings have added to our confidence, and more good data would further strengthen that confidence.”

• “On September, let me say this, we have made no decisions about future meetings and that includes a September meeting. The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate…. We will be data dependent but not data point dependent.… The question will be whether the totality of the data … are consistent with rising confidence on inflation and maintaining a sold labour market. If that test is met a reduction in our policy rate could be on the table as soon as the next meeting in September.

• “If we were to see inflation moving down quickly or more or less in line with expectations [and] growth remains … reasonably strong and the labour market remains … consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting.”

• “I can imagine a scenario in which there could be everywhere from zero [2H24] [interest rate] cuts to several [2H24] cuts, depending on the way the economy evolves.”

• “I think you’re back to [labour market] conditions that are close to 2019 conditions and that was not an inflationary economy.”

• “I don’t now think of the labour market in its current state as a likely source of significant inflationary pressures, so I would not like to see material further cooling in the labour market”

• “We think we don’t need to be 100 percent focused on inflation because of the progress we’ve made. 12-month headline at 2 1/2 and core at 2.6 … it’s way down from where it was. The job is not done on inflation but nonetheless we can afford to begin to dial back the restriction in our policy rate”.

• “We’re also now seeing progress in the other two categories, non-housing services and housing services … I would say the quality of this [disinflation] is higher [than in 2H24] and it’s good, but so far it’s only a quarter.”

• “12-month now is 2 1/2 percent headline and 2.6 percent core. This is so much better than where we were even a year ago…. the job is not done, I want to stress that and we’re committed to getting inflation sustainably to 2 percent, but we need to take note of that progress and we need to weigh the risks to the labour market and the risks to our inflation target now more equally than we did a year ago.”

• “I think the upside risks to inflation have decreased as the labour market has cooled off … inflation is probably a littler farther from its target than employment, but I think the downside risks to the employment mandate are real now. So we have to weigh all that … we have a restrictive policy rate, it’s clearly restrictive … and the time is coming as other central banks around the world are facing this same question, the time is coming at which it will begin to be appropriate to dial back that level of restrictions, so that we may address both mandates.”

• “There was a real discussion back and forth of what the case would be for moving at this meeting”

• “We’re aware of that [the Sahm] rule, which is really, you know, a statistical thing that has happened through history, a statistical regularity is what I’d call it. It’s not like an economic rule where it’s telling you something must happen. So again … we’re seeing … a normalising labour market”.

• “Let’s also remember that this pandemic era has been one in which so many, you know, apparent rules have been flouted, like the inverted yield curve … [which] just haven’t worked and it’s because this situation really is unusual or unique.”

• “Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks, and not on anything else.”

• “Overwhelmingly, the sense of the committee was [to not move interest rates at] this meeting, but as soon as the next meeting, depending on how the data come in … we think that the time is approaching and if we do get the data that we hope we get, then … a reduction in our policy rate could be on the table at the September meeting.”

• “The judgement of the committee is that … time is drawing near [to cut interest rates], that time could be in September if … the data support that.”

• “I think [the chances of a hard-landing] are low.”

All-in-all, I continue to expect the Fed to deliver an initial rate cut at the September meeting. I also continue to expect that a total of three 25bp interest rate cuts will be delivered in 2H24.

Given the ongoing weakening that’s been seen in employment market data (including the latest ADP data, which showed a further softening in July and is analysed below), I currently expect that risks are slightly slanted towards 100bps of rate cuts in 2H24, as opposed to rate cuts of 50bps or less — the upcoming monthly employment report will give us additional detail on which way risks are slanted.

ECI shows a continued gradual softening of wage growth

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Total nonfarm job openings fell to 8.18m in June, from 8.23m in May.

Given that the unemployment level has also been rising, the ratio of job vacancies to unemployed individuals fell to 1.20 in June, the lowest level since June 2021.

The private sector job openings rate, which is more impacted by cyclical shifts in the economy than overall nonfarm payrolls, fell to 5% in June. The fall has been softened by seasonal adjustments, with the non-seasonally adjusted private job openings rate falling to 4.7%, which is already in-line with pre-COVID levels and trending lower still.

The more timely Indeed survey of job openings, which had recorded 19 consecutive MoM declines to June, has shown signs of stabilising in July, with MoM growth up 0.67% to 26 July. Despite the MoM increase, Indeed’s job openings measure continues to point to further downside for the BLS’ measure of job openings in July.

Despite the uptick in overall job openings, Indeed’s measure of new job openings (i.e. those posted on Indeed within the last seven days) is on track for a fifth consecutive MoM decline in July, with MoM growth -1.0% to 26 July. This suggests that as opposed to a significant increase in employer demand, that the MoM increase in Indeed’s job openings index was driven by lower hiring rates, which as discussed below, is corroborated by the latest BLS data.

Quits decline further as the hiring rate tumbles

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Note that unless otherwise stated, the data points referenced in this report refer to seasonally adjusted data.

1) Economic growth remained solid in 2Q24, driven by fixed investment and government spending

In the advance estimate of US GDP data for 2Q24, GDP growth rebounded to an annualised rate of 2.8%, up from 1.4% in 1Q24.

This saw YoY growth rise to 3.0% (non-seasonally adjusted), the highest level seen since 1Q22 and notably above the 2015-19 average of 2.5% YoY.

Excluding the volatile private inventories and net exports components, real final sales to domestic purchasers growth was 2.7% annualised in 2Q24, up from 2.4% in 1Q24.

YoY growth rose to 3.0% (from 2.9%) which is above the 2015-19 average of 2.8% YoY.

Unpacking the underlying components of real final sales to domestic purchasers, real personal consumption expenditures (PCEs) rose at a 2.3% annualised pace. While not particularly weak, real PCE growth wasn’t strong either, coming in below the 2015-19 annualised quarterly average of 2.6% for a second consecutive quarter (real PCE growth was an even more modest 1.5% in 1Q24).

This saw YoY growth (non-seasonally adjusted) drop to 2.4%, from 2.7% in 1Q24.

As opposed to real PCE growth, 2Q24 real final sales to domestic purchasers growth was driven by nonresidential fixed investment, which rose by a quarterly annualised pace of 5.2% and government consumption expenditures and gross investment, which rose by a quarterly annualised pace of 3.1%.

2) Real disposable income growth trends continue to highlight the risk of a significant economic slowdown

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