Today’s report on August spending and incomes show advances slowing to a 4 percent to 5 percent annual rate. However, the August core inflation rate of 7 percent remains well above the Fed’s goal. That indicates that the Fed will continue to draw money out of the economy and force a deep recession because of the governors’ persistent inflation fight.
The Week That Was
The economic numbers remain mixed. Today’s report shows spending and incomes slowed to a 4 percent to 5 percent annual rate range in August. August inflation numbers show total rate for the month slowed to a 3.5 percent rate, but core inflation (ex-food and energy) ontinued to increase at a 7 percent annual rate.
Since this core measure is one of the Fed’s favorite indicators, this latest report will reinforce the governors’ desire to maintain a restrictive monetary policy, which wil further slow the economy.
Adding to the mixed news was the September S&P Global survey of U.S. business activity. It showed the economy declining less in September than in August. An alternative ISM business survey showed the economy expanding in August, with strong new orders. These surveys have different sources, providing different feedback.
August new orders for durable goods were down both for the total and for the more stable component excluding defense and transportation
orders.
In contrast to weakness in other areas, there are indications the labor market remains tight.
Weekly initial unemployment claims continue to decline. In the two weeks in mid-September claims averaged only 201,000, down from 238,000 in August and 247,000 in July.
Money, Money, Money
Without data showing a dramatic slowdown in inflation and sharp declines in economic activity, the Fed will continue to remove money from the economy and hike interest rates. That creates the potential for a sharp business downturn and is bad news for stocks and bonds alike.
Things to Come
On Monday, the September ISM manufacturing survey is likely to be in the low 50s, slightly below August. The greater strength shown in the August survey was probably an overstatement in an economy which, at best, appears to be treading water.
Wednesday’s September ISM survey for service companies will likely be down significantly from an exceptionally strong August report. It is difficult to imagine the service sector being very strong when other surveys show the economy flat to down.
An analysis of Treasury employee tax withholding data suggests the recent very strong jobs data in has been overstated. If so, there is a good chance we could see a significant slowing in employment gains in the closing months of this year.
Market Forces
Stocks moved sharply lower this week.
The S&P500 fell by 3 percent. Wednesday’s brief rally occurred when the Bank of England shifted from selling to buying securities. This led some to look for an end to monetary restraint.
After last week’s Fed meeting, it would take a sharp drop in both inflation and the economy for the Fed to reverse its current restraint. Until such signs appear, monetary policy will remain restrictive.
From a technical view, the market remains vulnerable. All key market indexes fell below their recent mid-June lows. When stocks fail to hold such support levels, they often continue to decline.
The economic news remains mixed. Quarterly real growth was essentially unchanged in the first half of 2022. The Atlanta Fed’s third quarter estimate also shows zero real growth. However, some jobs numbers and surveys are showing strong gains, which are inconsistent with zero growth.
We continue to believe the economy is in the early stages of what will become a serious downturn in the months ahead.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 14 percent
Monetary Policy: restrictive
For more from Robert Genetski.
More on recession.
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For more from The Heartland Institute.
