US macro scorecard - July 2024

US macro scorecard

Source: Bloomberg, Emirates NBD Research

Our macroeconomic scorecard for the US was quite mixed over the past month, but the key takeaway is that the line for the NFP report turned red (indicating it was both weaker than the previous month and lower than consensus estimates had predicted) for the first time since our April scorecard, while the CPI inflation line was green for the third month in a row as the slowdown in price growth exceeded expectations. This dynamic was acknowledged by Fed officials over the past month, in particular during Jerome Powell’s address at the annual Jackson Hole conference last Friday.

The net gain in jobs in July was just 114,000, far lower than the predicted 175,000, and down from a downwardly revised 179,000 gain the previous month. At the same time, the unemployment rate ticked up to 4.3%, from 4.1% previously, far ahead of the Fed’s prediction that it would be at 4.0% in Q4. The surprisingly swift deterioration in the labour market data contributed (along with the unwinding of the Japan carry trade as the Bank of Japan has hiked rates) to severe market volatility at the start of the month, and even for calls from some quarters for emergency rate cuts from the Fed.

While we were always of the view that this response was somewhat overblown – a slowing jobs market is after all a desired effect of the Fed’s policy actions to date and the net gain in jobs is still positive – it does seem appropriate that the focus is starting to shift more resolutely to the labour market, especially as figures through to Q1 2024 were revised last week. The number of workers on payrolls was downgraded by 818,000 for the 12 months through to March, in the largest revision since 2009. While this was somewhat lower than the 1mn revision which some had predicted, it still means that the US jobs market has been weaker earlier than previously thought.

And on the other side of the dual mandate, price growth continues to come in lower than predicted. Annual CPI inflation was 2.9% in July, down from 3.0% the previous month and beating expectations that it would remain at that level. This was the lowest level since 2021. On a monthly basis the headline index rose by 0.2%, up from a drop of 0.1% a month earlier. Core inflation also ticked lower to 3.2% but was largely in line with market expectations. Speaking at Jackson Hole, Jerome Powell said that he had greater confidence that price growth was now on a sustainable path downwards towards the Fed’s 2.0% target, while on the other hand, downside risks to employment had increased. This means, he said, that ‘the time has come for policy to adjust’, making a rate cut at the upcoming September meeting all but certain.

There are some other indicators that bolster the case for easing policy. Durable goods orders were positive on the face of it in July, expanding 9.9% m/m following a 6.7% decline in June. However, stripping out the volatile transport component orders declined 0.2%, suggesting that businesses are pushing back their investment, potentially awaiting lower borrowing rates, or perhaps deterred by uncertainty around the upcoming presidential election. There was a deterioration in both the ISM and the S&P Global manufacturing PMI surveys, while industrial production contracted more rapidly than predicted in July.

Nevertheless, the outlook for US growth is still relatively buoyant, following the upside surprise in Q2 GDP growth released last month (2.8% q/q annualised compared with the predicted 2.0%). While we will be watching for the August NFP report due on September 6, for the time being we are holding to our view that the Fed’s first move will be a 25bps cut rather than 50bps. The consumer remains the key driver of the US economy, and retail sales surprised to the upside in July, expanding 1.0% m/m, compared with a 0.2% contraction in June and higher than the predicted 0.4%. Core sales were up 0.3% m/m, beating the predicted 0.1%. In housing market data, new homes sales rose sharply in July, gaining 10.6% m/m, to reach their highest level since May 2023, bolstered in part by lower mortgage rates.

Meanwhile, the University of Michigan consumer sentiment index rose for the first time in five months to 67.8, up from 66.4 in July and beating the predicted 66.9. While sentiment towards current conditions deteriorated to 60.9, from 62.7 previously, the expectations index rose from 68.8 to 72.1, with the decision by President Joe Biden not to seek reelection seemingly boosting confidence amongst Democrats. Politics-related volatility in US data is likely to accelerate over the next several months ahead of the November vote.