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Daniel Richards - MENA Economist
Published Date: 23 September 2022
Source: Bloomberg, Emirates NBD Research
Jerome Powell’s press conference in the wake of the FOMC meeting this week warned that there was significant pain to come for the US economy, and the accompanying revisions to the Fed’s economic projections told a similarly stark story – GDP growth is expected to slow to 0.2% this year and 1.2% in 2023, and he refused to rule out the chance of a recession, in contrast to earlier claims that a soft landing could be engineered even while hiking rates. For the time being, the key macroeconomic indicators we follow in the US continue to show signs of resilience, but there are signs that a slowdown is coming.
We had revised up our expectation for September’s FOMC meeting from a 50bps hike to a 75bps following the latest inflation print, and this was vindicated. CPI inflation came in at 8.3% y/y in August, and while this was a slowdown on the 8.5% seen the previous month, it was nevertheless higher than had been anticipated, and with meaningful inflation in components such as shelter, the Fed was committed to keeping up the pace of rate hikes.
On the other side of its mandate, the labour market remains robust and for now still exhibits few signs of the coming softness Powell warned of – the Fed now expects unemployment to rise from the current 3.7% to 3.8% next quarter and 4.4% by end of next year. The NFP print for August was a net gain of 315,000, which was down from the 526,000 seen the previous month but was nevertheless still a strong number and exceeded consensus projections of 298,000. Jobless claims stood at 213,000 in the week to September 17, up from the 208,000 recorded in the previous week but below the 217,000 consensus projection.
Despite the still high pace of price growth and tightening conditions, demand remains solid for now as US retail sales rose by 0.3% m/m in August, better than a -0.4% drop recorded for July. Stripping out petrol purchases, retail sales rose by 0.8%. However, the numbers are not adjusted for inflation so the higher overall spending was flattered by a near 3% nominal increase in car purchases, pushed upward by higher prices. Retail sales have slowed considerably since the start of the year when spending was closer to 2% in Q1 but even so they may not yet be slow enough to bring core inflation lower. In real terms we would expect a more marked slowdown over the coming months as the high inflation, tighter policy, and projected softening in the labour market starts to bite. Consumer confidence ticked up in September’s print but it remains very low by historical levels.
The housing market has been the key sector where the tightening policy has already manifested in recent months, but US housing starts actually picked up in August, rising to 1.58mn, from 1.40mn the previous month. The 12.2% rise confounded expectations of an ongoing decline, but the applications to build measure dropped to an over two-year low of 1.52mn, likely reflecting the rise in mortgage costs as the Federal Reserve hikes interest rates. Given the further tightening to come from here, we expect a more rapid slowdown is imminent.
On the production side, US total industrial production dropped by -0.2% in August, slightly worse than market expectation. Manufacturing was higher by 0.1% as a drag in vehicle production weighed on overall activity. The ISM manufacturing survey stayed flat on the previous month.
Monthly Insights - July 2022
US macro scorecard - May