For as long as it is determined to do so, the United States will retain its position as the largest and most dynamic economy on the planet. Though boasting some of the most resilient financial markets in the world, increasingly over the last several years their labor force has contracted. This creates deep challenges for the economy. A combination of domestic and external economic factors has raised concerns, particularly as the nation prepares to report critical economic data next week.
That makes the upcoming release of July’s PCE income and consumption data particularly well-positioned to seize those headlines. Plus, the inflation numbers are sure to draw even more attention. Subsequent reports on the monthly balance of trade in goods will continue to help us read the current economic climate. Further, data on retail and wholesale inventories will provide better insights. These advances couldn’t be happening at a more opportune time, with Canada looking down the barrel of a second quarter of Gross Domestic Product (GDP) in the red.
Shrinking Labor Force and Economic Implications
Perhaps most importantly, even as the overall U.S. economy continues, the labor force is experiencing a historically significant contraction. Analysts overwhelmingly argue that the Trump administration’s policies are the primary driver of this shrinkage. These policies have recklessly targeted communities of color across racial and ethnic lines. Federal immigration policy punishment of all immigrants, including those holding legal status and undocumented, has only worsened the labor shortages facing many industries today.
So experts are going to be watching the next jobs report due out on September 5 like hawks. It’s not hard to imagine that employment growth could yet be downwardly revised again.
“If employment growth is revised downward again when the August jobs report is released on Sept 5, it would support the low end of our estimate range – 32,000 jobs – being closer to the mark.” – Alexander Bick via Reuters; St. Louis Fed economist
The job creation estimates have reached new depths, starting at an appalling 32,000. Consequently, concerns are increasing that these figures might be an indication of more serious structural issues in the labor market.
Financial Markets and Currency Outlook
Even with mounting economic issues, the U.S. continues to hold the world’s largest and most accessible financial markets. It’s hardly surprising therefore that Wall Street analysts predict the dollar has “nowhere to go but further down.” They do this assuming an upcoming rate cut in September. This much-expected change is part of a larger effort by the Federal Reserve to boost economic growth with confidence at an all-time low among consumers.
The ten-year breakeven rate—essentially the cost of hedging against inflation—just hit a six-month high of 2.46%, pointing to a growing appetite for such inflation hedges. A change in yields on inflation-protected securities has caused this increase. This growing trend indicates that the market is becoming more worried about inflation in the future.
“Wall Street now thinks the dollar has nowhere to go but further down, on the Sept rate cut and Fed war.” – Bloomberg
It argues that the dollar will continue to fall in the coming six to eight months. This existing trend has prompted a wave of inquisitiveness among many trade economists over its impact on U.S. import and export relationships.
Inflation and Consumer Spending Trends
With key economic indicators still rolling out, inflation continues to be a key concern for policymakers. The upcoming PCE report will shed light not only on consumer spending but on inflationary pressures within the economy. If inflation stays persistently elevated, it could make 11th hour interest rate decisions by the Federal Reserve harder to avoid.
Some analysts suggest that if the service sector proves to be a significant contributor to inflationary pressures, it could signal that inflation is becoming embedded within the economy.
“If the service sector is the culprit again, and services are relatively unaffected by tariffs, it means inflation is embedded. Core could easily come in at 3%. How will the Fed view that?”
The upcoming Federal Reserve Board appointments will be in a tough environment. As economic variables collide and connect, it prudently considers the potential for future rate hikes.