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Chief Global Economist, Deloitte Touche Tohmatsu
United States
Dr. Kalish is the Chief Global Economist of Deloitte Touche Tohmatsu Ltd. He is a specialist in global economic issues as well as the effects of economic, demographic, and social trends on the global business environment. He advises Deloitte clients as well as Deloitte’s leadership on economic issues and their impact on business strategy. In addition, he has given numerous presentations to corporations and trade organizations on topics related to the global economy. He is widely traveled and has given presentations in 47 countries on six continents. He has been quoted by the Wall Street Journal, The Economist, and The Financial Times. Dr. Kalish holds a bachelor’s degree in economics from Vassar College and a PhD in international economics from Johns Hopkins University.
First, the US government releases two reports on the job market. One is based on a survey of establishments, and the other is based on a survey of households. The establishment survey found that, in September 2024, 254,000 new jobs were created. This was the greatest monthly number since March and far exceeded investor expectations. The increase included 25,000 new jobs in construction, 15,600 in retailing, 17,000 in professional services, 71,700 in health care and social assistance, 78,000 in leisure and hospitality, and 29,000 in state and local government. Other categories experienced only modest gains, or, as in the case of manufacturing, a decline in employment. Meanwhile, average hourly earnings were up 4% from a year earlier—the biggest increase since May. Evidently the tightness in the job market is causing a modest acceleration in wage gains, despite declining inflation. That, in turn, might be of concern to the Federal Reserve, unless productivity grows commensurately.
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The survey of households, which includes examination of self-employment, found that employment grew nearly three times faster than the size of the labor force. The result was that the unemployment rate fell from 4.2% in August to 4.1% in September. This was the second consecutive month in which the unemployment rate declined.
What does this mean for Fed policy? On the day before the jobs report was released, futures markets were pricing in a 68% probability that, at the Fed’s next policy meeting in November, there will be a 25-basis-point cut. On the day of the release, however, that probability rose to 94%. In other words, many investors interpreted the strong job growth as significantly reducing the likelihood of a 50-basis-point cut. Many investors now expect the Fed to act more cautiously, especially as the jobs report indicates some acceleration in wage growth. Moreover, this view is consistent with recent comments by Fed Chair Powell, in which he signaled a likely gradual approach to interest-rate reduction.
Meanwhile, the 10-year breakeven rate, which is an indicator of bond investor expectations for average inflation in the next 10 years, has increased modestly in the past several weeks. The breakeven rate was 2.02% on Sept. 10, 2024. As of Oct. 3, 2024, it was 2.21%. It is at the highest level since late July. Investors evidently have upwardly revised their expectations for inflation based on the strength of the US economy. Still, they continue to expect relatively low inflation.
The increase in spending was entirely due to a rise in purchases of services. There was no change in spending on either durable or nondurable goods.
Also, the government reported on the Fed’s favored measure of inflation—the personal consumption expenditure deflator, or PCE-deflator. This measure was up 2.2% in August versus a year earlier. This is well within the Fed’s target range. In addition, when volatile food and energy prices are excluded, core prices were up 2.7% from a year earlier—also within the Fed’s target range. Prices of durable goods were down 2.2%, nondurables were up 0.2%, and services were up 3.7%.
Fed Chair Powell recently said that, while interest rates are likely to come down, the committee does not feel “like it is in a hurry to cut rates quickly.” As such, he suggested that the committee will revert to 25-basis-point cuts in the months to come, rather than the sharp 50-point cut that took place in September. The latest report on both consumer spending and the PCE-deflator will likely confirm this point of view.
Finally, Chair Powell said that the September rate cut “reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective.”
Meanwhile, when volatile food and energy are excluded, core prices were up 2.7% in August 2024 versus a year earlier. This was the lowest since February 2022. In addition, energy prices were down 6%, food prices were up 2.7%, and non-energy industrial goods prices were up a mere 0.4%. On the other hand, services prices continued to rise significantly, up 4%. This hasn’t changed much for several months. Indeed, service inflation was 4% in November 2023. The price for services has been a factor in restraining the ECB from effecting rapid interest-rate cuts. Yet, the weakness of the eurozone economy is a good reason to continue cutting rates.
It is widely expected that the ECB will, again, cut its benchmark rates by 25 basis points, when it meets again later this month. Moreover, this expectation has increased. Following the inflation report, bond yields in major eurozone economies fell sharply, reflecting expectations of lower, short-term interest rates. Plus, the value of the euro fell sharply. However, equity prices fell, likely reflecting pessimism about the state of the eurozone economy.
Andrea Maechler pointed to geopolitical conflict, climate change, and trade disputes as boosting the frequency of sudden price movements. She said that such shocks are becoming “larger and more frequent.” She added that “this may require adjustments to the conduct of monetary policy. At times, forceful monetary tightening will be needed to ensure that inflation expectations remain anchored.”
The problem, she said, is that onerous demographics have caused persistent labor shortages. This, combined with trade restrictions, implies that unexpected shocks could have a greater impact than otherwise. Maechler said that “all this means that inflation could become more volatile, raising the risk that economies transition more easily from self-stabilizing low-inflation regimes to self-reinforcing high-inflation regimes.” Thus, monetary tightening might have to take place more frequently than previously. The implication of this analysis is that, if central banks fail to respond to periodic shocks, we could face a new era of permanently higher inflation.
Into this environment comes BOJ Governor Asahi Noguchi. He said that, while a rise in interest rates is warranted, the movement ought to be slow to avoid hurting the economy. He said that “if economic and price developments move in line with our forecasts, we will adjust the degree of monetary support albeit at a slow pace.”
Meanwhile, Japan’s new Prime Minister, Shigeru Ishiba, said that the economy is not ready for further interest-rate increases. Specifically, he said that “I do not believe that we are in an environment that would require us to raise interest rates further.” He said this after meeting with the governor of the BOJ. His comments caused a drop in the value of the yen to a one-month low and an increase in Japanese equity prices. Moreover, his comments were somewhat surprising, given his reputation for being a monetary policy hawk. Still, given that he will soon face voters in a snap election, higher interest rates would hardly be helpful to election success.
The global PMI—a composite of the PMIs of the 32 countries analyzed—fell from 49.6 in August to 48.8 in September, indicating accelerated decline in activity. All subindices worsened from August to September, and most of them were below 50. Of the 32 countries analyzed, only 10 had PMIs above 50, with the remaining 22 standing below 50. The countries with the highest PMIs were India, Philippines, Brazil, and Spain. The countries with the lowest PMIs were Germany, Austria, Turkey, and France.
The major countries/regions with growing manufacturing activity were the United Kingdom, India, ASEAN (Southeast Asia), and Taiwan. The major countries/regions with declining activity were the United States, eurozone, Japan, China, and South Korea. Within the eurozone, only Spain and Greece had growing activity.
The US manufacturing PMI fell slightly to 47.3 in September, indicating moderate decline. Output fell at the fastest pace in 15 months. New orders fell further, leading to a decline in employment in the industry. S&P noted that “spending, investment, and inventory-building have been paused in many cases amid the uncertainty caused by the presidential election.” On the other hand, the prospect of lower interest rates has boosted confidence.
In Europe, the manufacturing PMI for the 20-member eurozone fell to 45.0—a nine-month low. This was led by Germany where the PMI fell to 40.6—a 12-month low. Although Spain’s manufacturing sector exhibited momentum, it was not nearly sufficient to offset the worsening state of German manufacturing. Meanwhile, S&P reported that new orders are “plummeting fast,” boding poorly for future output. Plus, employment is falling rapidly. Also, despite the decline in demand, S&P reports that companies are struggling with supply chain problems, leading to delays and shortages. The state of eurozone manufacturing might compel the ECB to accelerate monetary easing.
Meanwhile, British manufacturing is in much better shape. The PMI fell but remained at 51.5 in September, indicating modest growth of activity. This was driven by relatively healthy domestic demand. On the other hand, confidence is declining as companies worry that a restrictive fiscal policy will dampen demand.
Turning to Asia, the manufacturing PMI for China worsened, falling from 50.4 in August to 49.3 in September, indicating a modest decline in activity. Although output increased modestly, there was a downturn in new orders and export orders. Indeed, new orders fell at the fastest pace in two years. The result was a further problem of excess supply. Employment fell and confidence deteriorated. The issue of insufficient demand is what has driven calls for more fiscal stimulus.
The manufacturing PMI for Japan fell slightly to 49.7 in September, indicating modest decline in activity. Output and new orders both declined. Employment grew very slowly while confidence remained positive, although it fell to the lowest level in two years. In addition, neighboring South Korea also saw a decline in manufacturing activity after having grown in the previous month.
The best performing manufacturing industry in the world was in India, where the PMI declined slightly to 56.5, indicating rapid expansion. All subindices were strong but decelerated from the previous month. In addition, Taiwan’s manufacturing PMI declined to 50.8, indicating modest growth. Finally, the PMI for ASEAN fell to 50.5, with the strongest growth in Singapore and the sharpest decline in Myanmar.
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Chief Global Economist, Deloitte Touche Tohmatsu
United States
Dr. Kalish is the Chief Global Economist of Deloitte Touche Tohmatsu Ltd. He is a specialist in global economic issues as well as the effects of economic, demographic, and social trends on the global business environment. He advises Deloitte clients as well as Deloitte’s leadership on economic issues and their impact on business strategy. In addition, he has given numerous presentations to corporations and trade organizations on topics related to the global economy. He is widely traveled and has given presentations in 47 countries on six continents. He has been quoted by the Wall Street Journal, The Economist, and The Financial Times. Dr. Kalish holds a bachelor’s degree in economics from Vassar College and a PhD in international economics from Johns Hopkins University.
Cover image by: Sofia Sergi
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