Only a couple more sleeps until the September meeting of the US Federal Reserve and its forecast three quarters of a per cent rate rise – the question now is, where to from here?
Coming on top of 315,000 new jobs created in August, the surprising strong inflation story from last month, a near five-month low for initial unemployment claims and now a solid set of retail figures, it is clear the Fed’s rate rises so far have failed to have anything bar a minor impact on the economy.
Wall Street still can’t wrap its head around the contradiction – all their models have been telling them the economy should have been slowing by now with job losses emerging.
Those big rate rises from the Fed should have started hitting activity and while there are signs that household spending has slowed a little (judging by the gradual dip in retail sales) the jury is still out on whether or not it’s significant.
July’s retail sales flat result was revised to a fall of 0.4% by the Commerce Department because of a weaker than first reported rise in so-called core sales for July. That sort of offset August’s 0.3% rise.
Until the data proves otherwise, economists reckon the retail performance is another sign that the economy could tolerate higher interest rates for longer as the Fed tightens monetary policy to fight the stubbornly high level of inflation.
The Fed started lifting its key federal funds rate in March with a 0.25% rate. It is now in the range 2.25% to 2.50% and will rise to a high of 3.25% this Thursday (Sydney time).
The one-day holiday to mark the funeral of the Queen will see the Australian sharemarket miss any immediate reaction – Friday will be the first chance – and who knows how things will go after Wall Street has a day and a bit to chew over the decision and the new interest rate, growth and inflation estimates for the next two years or more from Fed members.
Those new forecasts – especially for interest rates in the so-called dot plot – will probably end up having a bigger impact than the anticipated decision from the central bank to lift the federal funds rate.
Watch for economists to rebase their interest rate forecasts for the rest of this year, 2023 and 2024 off the back of this data.
Like here in Australia, US retail sales are being supported by the tight labour market, which is generating solid but not outrageous wage growth – the 5.2% annual growth rate for wages in August was unchanged for a fourth month and still lower than the 5.7% annual rate in January of this year. Australian wage growth is half that US rate.
US petrol prices – long a bugbear for consumers – continue to ease and averaged $US3.70 a gallon late last week compared with $US3.82a gallon in late August and the all-time high just above $US5.00 in mid-June.
A breakdown of the August retail sales data confirms the buoyancy of household spending.
Excluding cars, petrol, building materials and food services, retail sales were unchanged last month. Data for July was revised lower to show these so-called core retail sales increasing 0.4% instead of 0.8% as previously reported.
Core retail sales correspond most closely with the consumer spending component of gross domestic product.
The retail sales data and continuing absence of any sign of a wave of layoffs (US initial jobless claims were the lowest since May in the week for September 10) starting are two of the best signs (along with the overall strength of the jobs market) that the US economy is nowhere near a recession at the moment.
It is certainly not showing signs of exuberant growth (as a comparison, the Australian economy did better in the three months to June with growth of 0.9% and the June half year (1.7% growth or an annual rate of 3.5%).
US GDP contracted at a 0.6% annual rate last quarter after sliding at a 1.6% pace in the January-March quarter but the income side of the national accounts showed a 1.4% rate of expansion in the second quarter, thanks to labour market resilience (Australia saw a 2.7% rise quarter on quarter).
The US faces an even tighter jobs market than we do in Australia. There were 11.2 million job openings at the end of July, with two jobs for every unemployed person. In Australia its roughly one for one.
