The recent employment report from the Bureau of Labor Statistics is a clear indication that there is a stark divide between the perceptions of the market and regular folks. While the jobless rate fell to an impressive 3.5% in July, matching the levels last seen during the remarkable moon landing in 1969, a majority of respondents in a CNN poll still believe that the economy is in a downturn and getting worse. It’s a puzzling paradox.
In contrast to public sentiment, economists view the current labor market as a “Goldilocks” combination – not too hot, not too cold. Payrolls saw an expansion of 187,000, and hourly wages experienced a promising growth of 4.4%. Moreover, Bank of America and J.P. Morgan have forsaken their predictions of a forthcoming recession in 2023, joining the ever-increasing list of forecasters who have sung a different tune.
President Joe Biden is facing an uphill battle for re-election as his approval rating for handling the economy sits at a discouraging 37%, even lower than his overall approval rating of 41%. These numbers align with numerous other polls tracked by RealClearPolitics, further highlighting the president’s diminishing popularity on economic matters.
Although consumer sentiment, as tracked by the University of Michigan, has recently improved and reached a reading of 72.6, its highest since September 2021, it is still far from the scores that reflected optimism, nearing 100, seen before the Covid-19 pandemic struck in early 2020.
You would expect working Americans to be delighted that their wages are finally outpacing prices. Average hourly earnings have increased by an impressive 4.4% in the past year and risen at an annual rate of 4.9% over the last three months. In comparison, consumer prices have only risen by 3% in the most recent 12-month period ending in June, a significant decrease from the inflation peak witnessed in 2022.
It’s evident that there is a stark disparity between the perception of the economy among ordinary citizens and the market experts. While the statistics demonstrate a positive outlook, many people remain unconvinced and continue to view the economy through a pessimistic lens. The divide remains, and the question of how to bridge this gap becomes increasingly crucial for those in power.
Encouraging Economic Growth and the Possibility of Rate Cuts
What has economists and market watchers more encouraged is that the economy and employment continue to expand even after the Federal Reserve has raised interest rates by a huge 5.25 percentage points while also shrinking its balance sheet. All of which has futures markets betting that the Fed is done hiking and will leave its federal-funds target at 5.25%-5.50%—and possibly begin cutting rates as early as next spring, according to the CME FedWatch tool.
Data-Driven Decision Making
As Fed Chairman Jerome Powell indicated following the latest hike on July 26, what happens at the next policy meeting on Sept. 19-20 will depend on data released by then. After Friday’s solid job report, attention turns to July’s consumer price index, due this Thursday. Economists’ guesses center around a 0.2% increase for the month in both the headline and core (ex-food and energy) measures. But the improvement in the headline year-over-year change could reverse, to 3.3% from 3.0% in June, owing to the comparisons from 2022.
Those base effects suggest that the inflation picture in the June CPI is as good as it gets. Meanwhile, the economy continues to chug along. After gross domestic product expanded at a 2.4% annual rate in the second quarter, up from 2% in the prior quarter, the Atlanta Fed’s GDPNow tracker for the third quarter is running at a 3.9% pace.
Bond Market Respite and Monetary Policy
The just-right jobs report gave some respite to the bond market after its recent swoon, which lifted longer yields back to near 2022 highs. But the statistical reality of a solid economy and inflation stuck well above the Fed’s 2% target should keep monetary policy on hold longer than the futures market expects. That, in turn, could bring longer-term Treasury yields closer to the fed-funds rate. The resulting hit to stocks could then make Wall Street as blue as Main Street.