A Soft Landing ‘Remains Likely’

The U.S. economy added fewer jobs in August than economists had predicted, adding further momentum to expectations for a Federal Reserve rate cut this month. The Labor Department said in its Sept. 6 report that job growth in August totaled 142,000 and that the unemployment rate eased from 4.3% in July to 4.2%.

Economists had estimated that the economy would add about 160,000 jobs in August and had anticipated a slight dip in the jobless rate. However, the Labor Department again revised downward its job growth numbers for previous months. The June figure was corrected by 61,000, from 179,000 to 118,000, and the July total became 89,000, down from an initially reported 114,000 — already a low figure that raised concerns about the health of the economy.

“My base case remains, the Fed starts cutting rates, and we see a little better job growth over the next few months,” Ian Wyatt, director of economics at recreational marine lender Huntington Commercial Bank, told Soundings Trade Only. “I am still nervous about downside risks to the outlook. The unemployment rate holding steady (move was not statistically significant) is a good sign but somewhat expected as we recover from temporary job losses caused by Hurricane Beryl. We have averaged a fairly modest, positive pace of 164,000 jobs per month over the past six months. This is a solid enough report — with not great but not bad job growth — that the ‘soft landing’ scenario remains the most likely outcome.”

The Fed’s policy-making Federal Open Market Committee meets Sept. 17-18, and Wyatt said he expects the central bank to begin cutting rates with a reduction of 0.25%. “If this jobs report were more negative, such as if there had been an increase in the unemployment rate or falling payrolls, I would have revised my outlook to a [0.5%] cut,” he says. “Chair [Jerome] Powell’s Jackson Hole speech was very dovish and suggests he’d support more aggressive rate cuts, but recent comments by other Fed governors were not as dovish and support a slow and steady cutting cycle.”

Wyatt says there was nothing dramatic enough in the August jobs report “to really alter current rates” on boat loans. The Newport International Boat Show opens Sept. 12, five days before the Fed meeting. “The market is already pricing in several cuts to the short-term fed funds rate, and that has shown up in longer-term, fixed-rate debt, such as boat loans,” he says. “For example, the average 30-year mortgage rate has fallen almost a full percentage point from 7.22% back in May to 6.35% (Freddie Mac).

“Both consumer confidence surveys and real-time spending data in August were a little stronger than July,” Wyatt adds. “While consumers remain cautious, I’m hopeful that we will see a little better fall season for autos, boats and RVs, with stocks still near all-time highs and lower borrowing costs. Well-off consumers could be out there looking for deals on aging inventory.”

Chad Lyon, managing director, global inventory finance, at Wells Fargo, told Soundings Trade Only that the “job market still seems healthy, as the August [jobs] report showed both job and wage growth while the unemployment rate fell, though this appears to be related to temporary layoffs reported late in the month.

“Despite improvement in August, both the June and July job numbers were revised lower, and the job openings (JOLTS) report [in early September] showed a continuing decline,” he says. “There is a lot to interpret to have a clear view on the economy’s direction. However, the relatively low unemployment rate, along with low weekly jobless claims, should give comfort that the economy is doing reasonably well.”

Lyon agrees with Wyatt on the size of the Fed’s likely move on rates later this month. “[The August] report does not appear to show further weakening in the jobs market, so I would expect the direction of the Fed to be unchanged,” he says. “Many felt a 25-basis-point cut was the most likely scenario before the report, so I would think that would remain unchanged, and there is limited additional economic data being released before Sept. 17-18 that would change that course.”

Lyon also reflected on the interest-rate environment for boat loans at the Newport show. “It will be interesting how exhibitors will think about rates during the Newport show,” he says. “Long-term rates, which heavily influence retail rates, started declining in early summer and were leveling off just after the July jobs report, so the market is seeing improving retail rates already. Most assume the forward look for rates would be lower. However, with underlying strength seen in the jobs numbers, there may be a delay to assess more data before the Fed meeting.”

The latest jobs report reflected good news for workers, as average hourly earnings climbed 14 cents, or 0.4%, to $35.21. Wages had lately been on a downward trend and in July rose just 0.2%. During the past 12 months, worker earnings have risen 3.8%, remaining above the current rate of inflation. That level of pay increases continues to support solid growth in consumer spending.

The job category leader in August was construction, which added 34,000 in an above-average monthly performance. Health care added 31,000 jobs, although the government said that figure was only about half the average monthly gain of 60,000 during the previous 12 months for the bellwether sector. The overall job gain was limited because the manufacturing sector shed 25,000 jobs in August. The government said there was little change in employment during the month in other major industries.

The government said the labor force participation rate — the measure of the population that is in the workforce — remained steady at 62.7%. Two days ahead of the August jobs report, the Labor Department said job openings nationally declined in July to their lowest level in 3½ years, a figure well below economist expectations. The department’s Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey that the number of openings fell to 7.67 million, down 237,000 from a downwardly revised 7.91 million in June.

The government said layoffs climbed to 1.76 million during the month, the highest figure since March 2023. Hiring rose by 273,000. The ratio of job vacancies per unemployed worker declined to less than 1.1, which is about half of its top ratio of more than 2.1 in the early months of 2022.

The ADP Research Institute said in its National Employment Report for August that private-sector employment rose by 99,000 jobs, down from a downwardly revised 111,000 in July, and annual pay was up 4.8% year-over-year. “The job market’s downward drift brought us to slower-than-normal hiring after two years of outsized growth,” ADP chief economist Nela Richardson stated in a press release. “The next indicator to watch is wage growth, which is stabilizing after a dramatic post-pandemic slowdown.”

This article was originally published in the October 2024 issue.