According to the Cambridge English Dictionary, an inflection point is “a time of sudden, noticeable, or important change.” This summer has been marked by several inflection points on the political front. And now, the past couple of weeks have ushered in numerous economic data points that may also indicate an inflection point in the direction of the overall economy.
For much of the past 2 years, we have been on recession watch due to the inverted yield curve and contraction signals from the Leading Economic Indicators Index. However, resilient U.S. consumers have thus far proved these signals wrong as the economy has continued to expand. Second quarter Gross Domestic Product came in at a robust 2.8% annual pace according to the most recent estimate. Meanwhile inflation has trended down closer to the Federal Reserve’s (The Fed) target with the latest Personal Consumption Expenditures Index showing a reasonable 2.5% annual pace. This had market participants suggesting a soft economic landing as the most likely scenario.
A string of softer than expected economic reports in July and the first week of August suggest we may be at an inflection point. The Department of Labor reported just 114,000 new jobs for the month of July. This was about half of the monthly average year-to-date and comes on heels of a 12-month high in weekly jobless claims. In addition, the JOLTS index (chart below) which measures the number of job openings continues to contract. Openings peaked above 12.2 million and were down to just 8.2 million in June. This suggests 4 million jobs have already evaporated from the economy since 2022.
For much of the past 2 years, we have been on recession watch due to the inverted yield curve and contraction signals from the Leading Economic Indicators Index. However, resilient U.S. consumers have thus far proved these signals wrong as the economy has continued to expand. Second quarter Gross Domestic Product came in at a robust 2.8% annual pace according to the most recent estimate. Meanwhile inflation has trended down closer to the Federal Reserve’s (The Fed) target with the latest Personal Consumption Expenditures Index showing a reasonable 2.5% annual pace. This had market participants suggesting a soft economic landing as the most likely scenario.
A string of softer than expected economic reports in July and the first week of August suggest we may be at an inflection point. The Department of Labor reported just 114,000 new jobs for the month of July. This was about half of the monthly average year-to-date and comes on heels of a 12-month high in weekly jobless claims. In addition, the JOLTS index (chart below) which measures the number of job openings continues to contract. Openings peaked above 12.2 million and were down to just 8.2 million in June. This suggests 4 million jobs have already evaporated from the economy since 2022.
With the unemployment rate now up to 4.3% the Fed is turning their attention from fighting inflation to stabilizing the labor market. Jay Powell and the FOMC signaled a potential rate cut at the upcoming September meeting and the market is now pricing in up to 125 basis point reduction before the end of the year. It remains to be seen if this pivot will have been in time to stave off a recession.