Economic indicators are exposing alarming developments just as the U.S. braces for what could be a damning Federal Reserve rate decision next week. According to the National Bureau of Statistics (NBS), China’s Purchasing Managers’ Index (PMI) for employment fell to 46.7. This sharp decline is an early indicator of a potential contraction in the labor market. This steady decline may have far-reaching impacts. The NBS PMI for employment index tends to lead consumer spending in China, which would be a big shift in global economic dynamics.
President Trump just made a fateful choice on who should lead the next Fed chair. This announcement has created tremendous excitement all over the United States. Current betting markets have a hefty favorite emerging for the nomination in the form of Kevin Hassett. Members of the state’s rate-setting committee are divided on the issues. All of this backdrop makes the rate cut decision this year more consequential than ever.
The market is still pricing in November for when the Federal Reserve will move to cut rates. On the agenda for their meeting next Wednesday is this announcement. Core inflation is still well above the target. For the moment, expectations have shifted in favor of a 25 basis point cut to the federal funds rate, taking it to a new range of 3.5% to 3.75%. Most analysts don’t think this cut goes far enough to significantly increase economic growth. Yet they think that it will nonetheless contribute to reducing inflationary pressures.
The macroeconomic picture is shifting and getting more complicated. A glance at recent wage data from the euro area reveals annual wage growth accelerating to 4.0% in the third quarter, according to the compensation per employee measure preferred by the ECB. This last figure is an important cautionary tale to the ongoing inflationary pressure that central banks around the world are still constrained by.
The latest Chinese PMI data—widely watched measures of manufacturing and service activity—has underwhelmed analysts. The new orders index for the private sector fell from 50.5 to 50.1. In the official NBS version, this index stayed lower than the key 50-threshold for the 12th month in a row, signaling continuous contraction of manufacturing activity. These changes create a daunting landscape for markets at home and abroad to navigate.
In Japan, a possible rate increase at the end of this month is all but fully priced in by financial markets. Such a move would be yet another signal of a deepening trend worldwide by central banks facing high inflation and stagnating economic growth.
As these separate but related economic signals continue to develop, they exhibit a nuanced story for policymakers and investors to follow. As we head into the Fed’s decision next week, we’ll keep a watchful eye on the ramifications of these trends. The new members of the rate-setting committee will need to balance inflationary pressures against prospects for continued growth.