August 12, 2022 | Economic Outlook

Economic Outlook - August 2022

  1. July nonfarm payrolls rose by 528,000, more than twice the number forecast. May and June employment numbers were also revised higher. In a separate survey, the unemployment rate fell by 0.1% to 3.5%, the pre-pandemic low achieved in early 2020. The U6 unemployment rate, which includes part-time workers looking for full-time employment, was unchanged at 6.7%, a record low. The strong jobs number will place increased importance on upcoming inflation data as it impacts the Fed’s future interest rate policy.

  2. The Consumer Price Index (CPI) was 8.5% in July from a year ago, down from 9.1% in June and flat month over month. The decrease was due to lower energy prices. Core CPI which excludes food and energy costs rose a smaller than expected 0.3% in July and 5.9% from a year ago. Food and rents continued to rise but transportation services fell. Inflation may not have peaked yet due to the statistical nature of dropping the prior – lower – 12-month ago data point.

  3. The Federal Reserve raised its federal funds target by an expected 0.75% at its July FOMC meeting. The European Central Bank raised interest rates 0.5% at its July meeting; this was the first increase in 11 years, ending a policy of negative interest rates. The higher-than-expected increase was the result of a compromise which will allow the ECB to implement its new anti-fragmentation tool to help stabilize weaker currencies. The Bank of Japan’s July meeting saw the Bank stand firm on Yield Curve Control which targets and places a ceiling of 0.25% on the 10-year yield; the policy is a partial anchor for yields globally.

  4. The Federal Reserve is expected to increase its federal funds target rate again at its September meeting. The market had expected a 50 basis points increase before the July jobs number but has since increased the odds of another 75 basis points hike. Quantitative Tightening and declining M2 money supply growth will have a slowing impact on economic activity.

  5. Real Gross Domestic Product (GDP) fell for the second consecutive quarter, marking what some call a technical recession. The final arbiter of an official recession is the National Bureau of Economic Research (NBER) which considers jobs, production, spending and income data, not likely supportive of recession.

  6. The ISM Manufacturing Index fell in July to 52.8 but beat consensus estimates. A number above 50 indicates expansion. The Empire Manufacturing Index in July rose more than expected to +11.1 from -1.2 in June. Strong manufacturing results suggests a recession is not imminent.

Sources: Bloomberg, FACTSET, U.S. BEA, U.S. BLS, Federal Reserve, Instit. For Supply Mgmt, ISI, IBD, Yardeni Research

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