With the government shutdown over, reports on the economy are being released once again. The September employment report showed enough weakness that it is now likely that the Federal Open Market Committee (FOMC) will be easing monetary policy when it meets on December 10. Market expectations center around a 25 basis point cut in the fed funds rate. This would follow a similar move at the FOMC prior meeting in October. In the wake of the employment data, a number of FOMC members have gone on record as favoring such a move, helping to cement market expectations.
Non-farm payrolls rose 119,000 in September, but the unemployment rate edged up a tenth to 4.4%. Job growth in the prior two months was revised down a total of 33,000. The revised data now show a small decline in non-farm payrolls in August of 4,000. The unemployment rate is 0.3% above its year-ago level and at its highest rate since October 2021. It has risen for three consecutive months.
The ongoing rise in the unemployment rate is an important development but also somewhat at odds with other economic indicators and the ongoing gains in the equity markets. Consumer spending was relatively robust in the third quarter after weak growth in the first half.
The ability of consumers to keep spending in the face of decelerating job growth is mainly due to the wealth effects being generated by the equity market. Since the end of 2022, U.S. equity valuations have increased by over 60%. While this has primarily helped wealthier households, it has helped to offset the slowdown in consumption growth on the part of less wealthy households.
The Economy: Housing Prices and the COVID -19 Years
Generally, asset prices are at high levels relative to incomes. House prices appreciated very strongly in 2020 and 2021. While appreciation has been moderate since these, the outsized gains during the COVID years have never been reversed. This has created affordability issues but also generated significant increases in wealth (both in absolute terms and relative to income) for homeowners who bought a house prior to 2020.
The combined movements in equity and house prices since 2020 imply that consumer spending will likely hold up even as job and income growth slow. In making monetary policy, the members of the FOMC must weigh both of these considerations as well as the outlook for inflation. The divergence between asset prices and the labor market is driving a bigger wedge between middle and lower income households and those with larger portfolios of assets. The economy is always an average of both. But the FOMC is unlikely to be completely immune from a general perception that many Americans are struggling.
A number of FOMC members have spoken since the October employment data were released and they have generally indicated that conditions favor an additional easing of policy. Surveys of consumer sentiment have generally been gloomy in recent months. The University of Michigan’s Index of Consumer Sentiment stood at one of its lowest levels in recent years in October.
The FOMC has also been pressured by the White House to move more aggressively to stimulate the economy. With Jerome Powell’s term as chair expiring next year, it is possible that the president will be able to move monetary policymaking toward a more populist approach. The divergence between equity markets and labor markets and the discontent expressed by voters in various surveys of sentiments already appear to be having such an effect.
While a more populist Fed would not necessarily break sharply from traditional policymaking, over time it is likely to result in policy being easier than would otherwise be the case. One interesting period to consider is the second half of the 1960s and early 1970s when presidents Johnson and Nixon sought to pressure (to some extent successfully) the Fed to keep policy more easy than non-political considerations suggested it should be. Back then, measures of inflation expectations were not as readily available. Presumably, the availability of such inflation today (both from the inflation-linked bond market and from various surveys) will help the Fed from repeating those mistakes.
