GDP, Jobs Hold Clues to Fed’s Next Phase After Likely Third Cut
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

GDP, Jobs Hold Clues to Fed’s Next Phase After Likely Third Cut

(Bloomberg) --

With the Federal Reserve projected to lower borrowing costs for a third straight meeting, a slew of economic reports this week will play a key role in whether the central bank needs to keep cutting or can take a breather.

Figures due Wednesday are projected to show gross domestic product in the July-September period expanded at 1.6% annualized pace -- the second-slowest quarter under President Donald Trump and about half the pace at the start of 2019 -- as consumer spending pulled back from gangbusters growth.

Two days later, the October jobs report may indicate that the largest strike in more than a decade pushed nonfarm payroll gains below 100,000, though even excluding the General Motors Co. walkout, employment gains likely remained tepid.

GDP, Jobs Hold Clues to Fed’s Next Phase After Likely Third Cut

The key question is whether the economy is stumbling toward a recession or merely cooling off. Stocks at a record high, along with a yield curve that’s turned positive again, have mitigated concern about a downturn.

But deteriorating global growth, Trump’s tariffs on Chinese goods and a weakened manufacturing sector have put the record-long expansion -- and possibly the president’s 2020 re-election prospects -- on the backs of consumers who are increasingly in a tougher position.

“It has the potential to be a pretty ugly week,” said Sarah House, senior economist at Wells Fargo & Co. “We are far from out of the woods in terms of this slowdown and some of the headwinds that the economy is facing.”

While GDP and payrolls will take much of the spotlight, the widely watched Institute for Supply Management manufacturing index due Friday is expected to contract for another month in October, deepening concerns about fragile factories. Meanwhile, the Conference Board is forecast to report Tuesday that its consumer sentiment gauge remained elevated in October. The employment cost index, a broad gauge monitored by the Fed, on Thursday could suggest companies remain hesitant to offer better wage gains and benefits.

Median Estimates for October Jobs Report:

  • Payrolls increase 85,000 from the prior month (80,000 for private payrolls)
  • Unemployment rate edged up from half-century low to 3.6%
  • Average hourly earnings accelerate with 0.3% monthly rise, 3% from year earlier

Consumers carried growth in the second quarter as businesses retrenched, and the picture will likely look remarkably similar in the GDP figures due hours before the Fed’s interest-rate decision. Nonresidential investment may have posted back-to-back declines for only the second time during the expansion; a third straight drop, in the fourth quarter, would mark the longest slump since 2009.

“Until there’s some clarity on trade then it’s hard to see any kind of a meaningful rebound in business investment,” said Richard Moody, chief economist at Regions Financial Corp. Business spending on equipment and structures may hit bottom this quarter or continue to decline “and the two have very different implications for the course of the economy,” he said.

What Bloomberg’s Economists Say

“Economic activity in the second half of the year is poised to decelerate markedly, as several drivers of growth fade and consumers are left dominating the outlook to an even greater degree than usual.”

-- Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger

Click here for the full week-ahead preview.

While there have been positive signs on trade, negotiations are far from over. Trump said Monday the U.S. is ahead of schedule with finalizing sections of the first phase of a trade deal with China that could be signed soon.

One bright spot: Residential investment, which has shrunk for six consecutive quarters, is poised to add to growth in the latest period as low mortgage rates helped boost sales. The problem is that the gain was likely too small to make a significant impact on GDP for the period, so the onus remains on Americans to keep buying goods and services.

Enter Friday’s employment report, the first on the state of the labor market in the fourth quarter. The overall trend in payroll gains has slowed this year down to 161,000 new jobs a month versus 223,000 in 2018. While that’s still more than enough to keep up with working-age population growth, a continued pullback could dent consumer spending.

GDP, Jobs Hold Clues to Fed’s Next Phase After Likely Third Cut

“If you see more slowing in the labor market than is already expected I think that is going to call into question whether the consumption story is going to hold up,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG. “And that’s the fear.”

The now-ended walkout of 46,000 General Motors Co. workers -- along with its knock-on effects -- could complicate the headline number. However, the strike will be concentrated in manufacturing payrolls, making it easy to separate from the overall trend. In past jobs reports, the Bureau of Labor Statistics has flagged when a strike causes large payroll declines in specific industries.

Another wrinkle could come from hiring for the 2020 census. Fewer than 30,000 of roughly 40,000 temporary hires were accounted for in official data for August and September.

Bank of America Corp. economists expect nonfarm payrolls to rise just 25,000 -- the low end of forecasts ranging as high as 140,000 -- with wages stalling and the Fed signaling it’s open to further interest-rate cuts.

If all goes as Bank of America expects, that indicates “the economy is shaky and the Fed still perceives there to be risks,” said Michelle Meyer, the firm’s head of U.S. economics.

©2019 Bloomberg L.P.

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