The most recent U.S. jobs data suggests the employment sector may be showing signs of cooling. Rannella Billy-Ochieng’, Senior Economist at TD, speaks with Anthony Okolie about the implications for the U.S. economy.
Transcript
Anthony Okolie: The US economy is very much in focus right now as we await key jobs data out on Friday. Earlier this week, we had a report showing that job openings in the US unexpectedly rose in the previous month. And of course, this morning we got the US ADP Private Payrolls report, which came in weaker than expected.
Now, the results highlight just how difficult it is to try and predict when the economy may show signs of slowing. Here with some analysis is TD’s Senior Economist Rannella Billy-Ochieng. Rannella, welcome to the show. Thanks for joining us.
Rannella Billy-Ochieng: Thanks for having me.
Anthony Okolie: Okay, so let’s start with your overall outlook on the US economy. How’s the US doing right now?
Rannella Billy-Ochieng: So we see the US economy showing exceptional resilience, despite the fact that the Fed has been tightening rates for more than a year. The US economy is on track to grow by close to 4% for this quarter, and that’s a really large number.
Much of that strength is really coming from the consumers. They’re showing exceptional resilience. But looking beyond this quarter, we do expect to see the pace of growth slowing as the impact of monetary tightening makes its way into different sectors of the economy. And that’s our outlook for the year to come.
Anthony Okolie: Okay, let’s talk about jobs. Because, as you know, we got the August US Jobs Opening report, which seems to point to continued strength of the labor market. But then again this morning, we got the US ADP Private Payrolls report which points to some weakness. So what are the trends that you’re seeing right now?
Rannella Billy-Ochieng: So the monthly print in the Jobs Report can be a bit volatile. So it’s important for us to sometimes look beyond the monthly wiggles. If we look at the actual JOLTS report, for example, like looking at the three-month trend, we do see evidence of cooling showing up in that report.
Also, the Payrolls data, that has shown significant slowing since the beginning of the year. The three-month average was actually in the ballpark of roughly 300,000 gains in employment. Whereas in recent months, we’ve seen that number cut to something like half. That’s a material change. And that’s to be expected, given where we are in the economic cycle and given the changes that we’ve seen on the policy front with the Fed aggressively tightening rates.
Looking ahead, we do expect to see that this trend is actually going to continue. We do expect to see some job losses manifesting next year. Another metric that we also look at is the breadth of hiring. For example, we know that employers, they make decisions on hiring given the state of the economy.
So for example, if you look at the diffusion index which captures the breadth of hiring among firms, we actually see since the Fed started to hike rates last year. One of the things that we actually saw is that the breadth of hiring has slowed substantially. At its peak, it was something in the realm of about 85. The latest print is something closer to 60.
Anthony Okolie: Oh, I’ve seen that trend. That’s the trend.
Rannella Billy-Ochieng: So we are seeing a broad trend, some broad evidence of slowing. And it’s taking some time — that’s fully understood. But we are seeing evidence of slowing, and that’s something that’s going to keep the Fed on guard. Because at the end of the day, the Fed needs to see material slowing in the labor market. It needs to see wage growth slow considerably before we could declare victory on the inflation front.
Anthony Okolie: It seems to be a challenge. Let’s talk a little bit about inflation, talk about wage growth — inflation is also persistently sticky. Although we have seen that trend coming down, it’s still not where the Fed wants it to be. Where do you see inflation heading from here?
Rannella Billy-Ochieng: So the inflation print has been very sticky, and that’s something that’s making the Fed a bit uncomfortable. We’ve seen month-over-month reading inflation edge up a bit, and that’s something that we’re not necessarily taking lightly.
When you look under the hood, one of the things that we do see is that services inflation is actually helping to drive some of those price pressures. And more specifically, shelter inflation — that’s one of the key culprits. We’ve heard Fed officials talking about the stickiness of shelter inflation, and that’s something that has been on their radar for some time.
But there’s still cause for optimism. Because if we look at where we are at now relative to the beginning of the year, price pressures have cooled significantly. But we would think it’s premature to say that the job is far from done. And that’s what essentially the Fed has been reiterating in their narrative. They’ve been sending messages and hints that we’re not done.
We’re committed to cooling this inflation fire permanently, and they are going to keep their foot on the brakes for as long as possible. And markets are reacting to that. That’s why we saw bond yields jumping yesterday. Because they are repricing the notion that we’re going to see rates higher for longer, and some of that flowed over into equities.
Anthony Okolie: Now, another thing that people have been talking about is, will a recession happen? Will it happen? We kept hearing that it’s coming. We haven’t seen any evidence of that as of yet. Now, we are starting to see increasing worries of a recession in the market, particularly if the Fed keeps rates higher for longer. What are your thoughts? Do you think that we could see a recession next year, or is a soft landing still in the cards?
Rannella Billy-Ochieng: So that’s a difficult question to answer. And it’s something that, when we look at recession risk versus soft landing, I think it’s the way we characterize the depth and the duration of the slowdown.
Our forecast at TD Economics, we are anticipating that the US economy is actually going to slow. And that’s to be expected, given that we do see central banks tightening monetary policy. We’re not calling for a recession. Instead, we’re calling for a broad slowdown in growth. We’re calling for a slower pace of economic activity.
There are risks to our forecasts, and we are mindful of those risks. There are things that could alter the future state of the US economy. For one, if inflation presents itself to be even more persistent than the Fed or even us think it would be, then it would mean that the Fed would necessarily have to raise interest rates further. And that would actually raise the odds that the economy might lose its footing.
There are other factors to consider — late cycle factors, also issues with confidence. We’ve seen a lot of things happening in the US. We’ve seen strikes, we’ve seen political disruptions, US Congress averting a government shutdown. Those are things that they’re not game changers by themselves. But when they act together, they conspire to be very disruptive for economic growth.
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