Well, now it has happened. Powell’s Federal Reserve may have waited too long to begin the rate cuts. The financial markets think so, at least, as a stock selloff has begun and bonds are rallying in a flight to quality, as fears of a looming recession are now in the air.
It’s understandable, as the unemployment rate has been steadily rising from its low in January 2023 of 3.4 percent—a total of 19 months—to 4.3 percent in July 2024. Average hourly wage increases have declined to 3.6 percent, falling in line with the declining inflation figures that we reported last week.
It is the first time since July 2022 that retail inflation as measured by the U.S. Consumer Price Index (CPI) has turned negative.
The Consumer Price Index has now had two months of zero price increases. It could have been predicted because consumers have known for months that stores were discounting and shopped more at big box retailers like Target, Walmart and Costco.
Most alarming isn’t the lower job creation total, though, but that most new jobs were in the lower paying service sector that had 80,000 of the 114,000 jobs total, mostly in Leisure activities, Education & health care. That means job growth is still dependent on consumer spending, and consumers have had to borrow like crazy to keep spending, which can’t go on forever.
The manufacturing sector, which depends on capital expenditures (i.e., investments), added just 1,000 jobs. The Institute for Supply Management’s manufacturing index slid to 46.8% last month from 48.5% in June. Numbers below 50% signal the manufacturing sector is shrinking.
“U.S. manufacturing activity entered deeper into contraction,” said Timothy Fiore, chairman of the ISM survey. “Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and other conditions.”
Those remarks tell us exactly what is on the line. The Fed now must play catch up once again because of its fixation on theories that are not applicable to a post-pandemic economy which had a temporary inflation bulge due to COVID-19 caused supply shortages.
And U.S. factory orders fell 3.3% in June mostly because of weaker demand for passenger plans and military aircraft, but the ongoing slump in manufacturing showed no sign of ending.
The one bright spot in the report, according to MarketWatch’s Jeffry Bartash: So-called core orders, a measure of business investment, rose by a healthy 0.9%. Investment has barely risen in the past year, however.
The weak factory shipments in the past year reflect an ongoing slump among manufacturers due to high interest rates and lukewarm consumer demand for big-ticket items such as new cars.
But part of the car problem was a cyber-attack on car sales. Sales of new cars and trucks rebounded in July after auto dealers fixed their computer systems following a major cyberattack and were able to complete thousands of delayed purchases.
So auto sales increased at an annual rate of 15.8 million last month, up from 15.2 million in June, according to Ward’s Intelligence. An estimated 600,000 sales in June were affected by a criminal attack on dealers’ computer networks as part of an attempt at extortion, though sales of new cars and trucks in the U.S. are still being depressed by high interest rates.
The bottom line is that no country was exempted from the effects of the COVID-19 pandemic that killed 6-7 million people.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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