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Daniel Richards - MENA Economist
Published Date: 27 October 2022
Source: Bloomberg, Emirates NBD Research
Looking at our macro scorecard for the US just ahead of the release of Q3 GDP data, the table does not appear to show an economy that’s exhibiting signs of an excessive slowdown even as recession warnings from prominent actors escalate. This chimes with the consensus GDP forecast for Q3 which is expected to show an annualised q/q growth rate of 2.4% compared to Q2’s -0.6%. Most of the major data releases of the last month cover September, and while there was a slowdown in some indicators, it appears that growth was maintained over the final month of Q3, albeit at a slower rate than at the start of the quarter. However, conditions will likely worsen through the final months of 2022 and into 2023 as still-high inflation and much tighter monetary policy weighs on activity.
In this environment, the Fed is unlikely to stage any major reversal of its tightening policy over the next several meetings, even as there have been some comparatively more dovish comments from officials such as Lael Brainard in recent weeks that they are attentive to risks and that hikes will be data dependent. The minutes from the last FOMC meeting in September showed that the committee members were still in favour of restrictive rates and keeping them so in order to curb ‘broad-based and unacceptably high inflation’ and that members were more concerned about doing too little in this regard and allowing inflation to become more entrenched than they are by the risks that the tightening pose to the economy.
This view will have become further entrenched in the wake of the September CPI data which showed price growth still surprising to the upside at 8.2% y/y, down from 8.3% in August but still higher than the projected 8.1%. Core inflation accelerated for the second month in a row, rising to a 40-year high of 6.6%. Stickier components of the basket are starting to account for a bigger proportion of the price rises as while food and energy have come down to 1.4pp and 1.6pp of the total respectively, the contribution of services has steadily risen to 3.9pp in September. Shelter, which makes up around a third of the CPI basket, was up 6.6% y/y.
By contrast, the other side of the Fed’s dual mandate continues to show signs of resilience in the face of the tightening conditions, implying that the FOMC still has space to act decisively in tackling inflation without precipitating a major recession. While the NFP report for September did show that the net gain in jobs was lower compared to August, at 263,000 down from 315,000, it was nevertheless above expectations for a net gain of 255,000. Initial jobless claims have also remained fairly steady and came in below projections in the week to October 15. Indeed, the first real indication that the Fed’s actions is starting to have a meaningful impact on job creation came in the October S&P Global manufacturing PMI which saw the employment subcomponent fall below the neutral 50.0 level for the first time since June 2020.
On the production side, the data has been somewhat mixed, but output appears to have broadly held up to now. Industrial production in September exceeded expectations as it expanded by 0.4%, compared to a 0.1% prediction. The ISM manufacturing survey for September was down on the previous month, and missed projections, but at 50.9 it was still indicative of an ongoing expansion. However, the headline October S&P Global manufacturing PMI dipped below 50.0 to a (marginally) contractionary 49.9, perhaps heralding lower readings in these other measures over the next month as well.
US macro scorecard - October
US macro scorecard - August