The Federal Reserve’s recent report, released on Wednesday, suggests the possibility of impending deceleration in both wage growth and inflation. In August, businesses in various regions encountered difficulties as the costs of manufacturing goods outpaced the rate at which they could raise consumer prices, as per the Beige Book report from the Fed.
Central bank officials will incorporate anecdotal information from the Beige Book, which collects evidence from all 12 bank districts, into their upcoming policy meeting scheduled for two weeks from now.
Continuous Interest rate hikes from 2022
In July, Federal Reserve officials increased interest rates, marking the 11th rate hike since March 2022, potentially the first of two hikes projected for the year’s remainder.
Officials are expected to pause and keep rates steady at the 5.25%-5.5% range during the Fed’s next policy meeting on September 19-20, monitoring ongoing signs of inflation moderation.
Since March 2022, the Federal Reserve has raised its policy rate by a significant 525 basis points, bringing it to the current range of 5.25% to 5.50%.
Remarkably, financial markets now indicate that the central bank may be finished with rate hikes and could even consider rate cuts in the coming year, as CME Group’s FedWatch Tool suggested. Futures tied to the Fed’s policy rate are showing only a slim likelihood of a rate increase at the upcoming September 19-20 meeting.
Moreover, there were no indications of employers reducing working hours last month, with the average workweek actually increasing from 34.3 to 34.4 hours in August. This contributed to a rise in total wage income, which is expected to bolster consumer spending and the overall economy.
Economic Outlook Received a Boost
Additionally, the economic outlook received a boost from other data released on Friday, which revealed a surge in construction spending in July and a slower pace of contraction in the manufacturing sector in August.
New York-based companies operating in the service and manufacturing sectors noted a recent uptick in expenses. Additionally, consumers increasingly prioritize price when making purchasing choices.
The majority of districts indicated a general slowdown in price increases, with a more pronounced deceleration observed, particularly within the manufacturing and consumer goods sectors.
Wage Growth
Nationwide, districts observed limited job expansion due to persistent skilled worker shortages and a constrained pool of applicants for available positions. Worker empowerment, driven by this trend, played a role in increasing wage growth.
Wage growth showed signs of moderation in the past month, with average hourly earnings increasing by 0.2%, marking the smallest gain since February 2022, following a 0.4% rise in July. Over the 12 months leading up to August, wages increased by 4.3%, slightly down from the 4.4% increase in July.
Notably, wages are rising faster than the 3.5% pace that economists believe aligns with the Federal Reserve’s 2% target. However, the trend could continue to ease as fewer people leave their jobs to pursue better opportunities.
On the flip side, some economists express concern that recent union contracts, including one at United Parcel Service, might exert upward pressure on wages.
Companies nationwide reiterate their expectations for a broad slowdown in wage growth in the immediate future.
Nonfarm Payrolls
In the past month, nonfarm payrolls expanded by 187,000 jobs, a slight improvement from the 157,000 jobs added in July. Over the last three months, the average job growth has been 150,000 per month, a notable decline from the 238,000 monthly average observed in the three months leading up to May.
Economists surveyed by Reuters had predicted a slightly lower increase of 170,000 jobs for the previous month. However, it’s important to note that employment gains still surpass the approximately 100,000 jobs per month needed to accommodate the growing working-age population.
Moreover, the share of industries adding jobs was the highest in seven months, signaling underlying strength in the labor market.
Stocks on Wall Street initially saw gains but mainly were trading lower later on. Simultaneously, the US dollar strengthened against a basket of currencies, and US Treasury yields experienced an increase.
Labor Market
The labor market is decelerating in response to the substantial interest rate increases implemented by the US central bank, aimed at tempering demand in the economy.
In August, employment expansion in the United States accelerated, although the unemployment rate experienced a notable increase concurrently, reaching 3.8%. Additionally, the wage growth exhibited a slowing trend.
These combined factors indicate a potential easing of labor market conditions and solidify the prevailing anticipation that the Federal Reserve will refrain from increasing interest rates during this month.
