This Week's State Of The Economy - What Is Ahead? - 06 December 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Dec 09, 2024

This Week's State Of The Economy - What Is Ahead? - 06 December 2024

Incoming economic data continue to illuminate pockets of stress in the U.S. economy. At first read, November’s employment report seems indicative of a solid labor market. The U.S. economy added 227K jobs on net. This acceleration was mostly driven by the unwinding of hurricane-induced job loss in the Southeast and the conclusion of Boeing strikes, each of which depressed job gains in October. October’s print was also revised higher, although only modestly, to 36K. That’s not to say there hasn’t been any improvement; job growth has averaged 173K over the past three months, better than the six-month average of 143K. Yet, ignoring red flags does not make them disappear. Monthly job gains remain highly concentrated in healthcare & social assistance, government and leisure & hospitality, which together are responsible for nearly three-quarters of overall payroll growth over the past year. Meanwhile, retail employment declined for the second straight month smack in the middle of the holiday season, casting some uncertainty over the outlook for consumers. The unemployment rate ticked up to 4.2%, accompanied by a decline in the labor force participation rate, meaning that the jobless rate rose for "bad reasons."

Data from the Job Openings and Labor Turnover Survey (JOLTS) also remain consistent with a gradual cooling in the labor market. Job openings in October rose both in level terms and as a percentage of existing and available employment, climbing to a 4.6% opening rate. This bump was likely more noise than signal. Job openings continue to trudge lower through the monthly noise, a clear trend echoed by Indeed job postings and the NFIB survey of small businesses. The quit rate made a somewhat unexpected jump to 2.1%, suggesting that workers may feel greater confidence switching jobs. Here, too, there is good reason for skepticism. Volatility in the quit rate is not historically uncommon, and consumer perceptions of labor availability remain near their lowest point since 2017 outside of the pandemic era. At 1.1 job openings per unemployed worker, the labor market today remains much softer than in recent years. All in all, while the jobs market continues to hold up, the wind is no longer at its back.

Although manufacturer sentiment remains fairly glum, conditions appeared to perk up in November. The headline ISM Manufacturing Index rose nearly two points to 48.4, still indicative of declining activity but the highest reading in five months. This improvement was mainly owed to a surge in new orders, which entered expansion for the first time since March. It is unclear what exactly drove this recovery. If demand is rising in response to lower financing costs, we might expect to see ongoing improvements in the manufacturing sector as the Fed continues to cut rates. If, however, firms are front-loading orders to get ahead of expected new tariffs from the Trump administration, this demand improvement will likely be short-lived. Anecdotal responses revealed some tariff-related stress forming. As customers expressed the desire to reshore manufacturing operations, manufacturers reported concern over the cost of U.S. production and lack of low-cost international alternatives to China. On the upside, only 12% of manufacturers reported paying higher input prices in November, the lowest share in over a year.

Prices remain much firmer in the services sector. The ISM Services Index fell to 52.1 in November, its second-largest monthly decline since 2022. Firms indicated a broad-based softening in business conditions combined with a small uptick in price pressures. It is worth noting that softening conditions do not mean that the service sector is contracting, but rather expanding a slower rate. This downshift is consistent with our forecast for holiday sales to rise 3.3% over 2023, which would mark the weakest annual gain of the past five years. As with manufacturers, concern over potential new tariffs was evident in survey responses, heightening caution in industries like construction and information that rely on imported inputs.

Meanwhile, higher interest rates and reduced credit access continue to weigh on select segments of construction. Nonresidential construction spending dipped 0.4% in October driven by pullbacks in both public and private sector outlays. Weakness was evident in commercial real estate projects, which have seen a sharp dropoff in new starts. Warehouse, hotel, traditional office and shopping mall construction all waned over the month. Public infrastructure spending also slipped, which may have been influenced by Hurricanes Helene and Milton making landfall in the Southeast. Elsewhere, a pickup in home improvement outlays lifted residential construction spending 1.5% over the month. Single-family and multifamily spending also improved. That said, plunging multifamily permits and the recent bounce back in mortgage rates seem apt to keep a lid on residential construction in the near term.




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