‘It Is Time To Begin Rate Cuts’

The U.S. economy added just 114,000 jobs in July — far below forecasts — and the unemployment rate climbed to 4.3%. An economist who follows the marine industry told Soundings Trade Only that the jobs report, “adds much greater certainty to a September [interest] rate cut” by the Federal Reserve.

“Fed minutes and comments show the governors are sensitive to even a minor rise in the unemployment rate,” says Ian Wyatt, director of economics at recreational marine lender Huntington Commercial Bank. “At this point, it’s hard to ignore the signal the household/unemployment survey and other data are telling us: It is time to begin cuts.

“The statement from the July meeting said the Fed was still waiting on more data before making a move,” he adds. “The jobs report is data that is pointing in a very clear direction. I would be pleasantly surprised if the Fed cuts more than a quarter-point in September, because they have been cautious so far this year.”

Wyatt says it’s “good to keep in mind that equity portfolios are very healthy. The S&P 500 is up 13% this year. There are many retirees and other equity-rich buyers still flush with cash. As we see greater certainty that short-run rates are coming down, I would expect that fixed-rate boat loans will be following the path of the 10-year Treasury and should become more attractive even before the Fed’s September meeting.”

Wyatt says he believes the Fed was burned by lots of missed economic forecasts and inflation exceeding its expectations. “The Fed is always hesitant to avoid repeating its last mistake, and its most recent mistake was waiting too long to hike rates and respond to inflation,” he says. “At this point, the balance of risks has shifted. The inflation data are benign and trending downward. The balance of risks between too much inflation and too little job growth is clear: The labor market is the greater risk right now. It is time to begin rate cuts.”

Wyatt says the Fed’s July meeting statement and press conference and recent economic news have effectively cut one key rate, as the “10-year Treasury yield fell all the way from 4.18% to 3.85% in just five days. This is very important for the housing market because 30-year mortgage rates are closely tied to the 10-year Treasury. The hesitance to avoid cutting rates was a mistake, in my opinion. Rate cuts should have begun in July, if not earlier.”

Matt Gruhn, president of the Marine Retailers Association of the Americas, believes that Fed rate decreases “should spark retail interest for boats and provide a bit of relief on floorplan interest concerns at the dealer level. The overall impact of any potential decreases in those rates, though, will likely be influenced by everything else that is going on in the economy — business performance, jobless rates and so forth.”

When the jobs report was released Aug. 2, the stock market took a “bit of a hit on speculation that the Fed waited too long to adjust rates, but there’s also an argument that those same investors got a little overly optimistic, or at least ahead of themselves, on the speculation related to those rate decreases.”

The July jobs gain was the smallest since December 2020 during the Covid-19 pandemic. The jobless rate in July was the highest it has been since October 2021. But in an encouraging sign, the government said the labor force participation rate — the measure of the population that is in the workforce — rose slightly again in July, to 62.7%.

Wyatt says that “adding only 114,000 jobs — below what we need to match population growth — and the higher unemployment rate are concerning. Back in January, the unemployment rate was 3.7%. A rise of 0.6% over six months, even if partly driven by more people entering the labor force, is a cause for real concern.

“However, it is important to acknowledge that people joining the labor force is a signal of confidence they will find a job,” he continues. “The portion of prime-age workers — 25- to 54-year-olds — who are either working or looking for work rose to 84%, the highest level since 2000. Consumer spending is still solid but it is more
focused on experiential categories, like travel, dining and live entertainment, and less on durable goods, such as boats, electronics and home goods.

“There will be a lot of noise in the seasonal adjustments in August and September,” he says. “Kids returning to school. Summer jobs ending. We also have seasonal auto plant shutdowns in July-August. Given auto inventory levels, these shutdowns might be a little longer than over the past few years. Those seasonal adjustments should shake out by October, and we will have a clearer picture of the labor market. This jobs report is not a big departure from the trend over the past year, when we averaged 209,000 jobs gained per month. I expect that the current trends will continue, given spending data. It is just the current trend has not been enough to keep the unemployment rate from ticking up.”

Chad Lyon, managing director of global inventory finance at Wells Fargo, says the July jobs number “will draw some conclusions that the Fed may have waited too long to lower rates. However, the Fed needs to be cautious as inflation threats remain, given the relatively low unemployment, healthy wage growth and ongoing fiscal deficits.”

Lyon says it appears that after Fed chairman Jerome Powell’s remarks in late July and with the weaker jobs number that the stock market is “anticipating a rate cut and for the first time seeing forecasts for potentially more than 25 basis points.

“A rate cut by the Fed will lower short-term borrowing rates, which all dealers’ floorplan rates are indexed to,” he says. “Meaning, heading into the offseason, dealers will have lower carrying costs on their inventory. Also, retail rates for consumers should be trending lower, as the jobs number has signaled slower growth in the bond market, which are indexes used to price retail loans.”

Lyon says that a trend toward lower job totals and a higher unemployment rate can be seen during the past 12 months. “So the lower trend existed prior to July’s job numbers,” he says. “However, month-to-month job reports can be volatile, so it’s hard to call if the size of the drop in [July] is starting a further trend lower.”

The jobs report did not shake Lyon’s confidence in the economy. “The report showed job and wage growth, though slowing, still signs that the economy is doing fine,” he says. “The impact of lower rates, both short- and long-term, should help support growth.”

In prior months, the small increases in the jobless rate had been attributed to more people entering an economy with jobs to offer. This time it appeared that the increase was driven by people being laid off from or otherwise losing their jobs.

Analysts had estimated the economy would add 175,000 to 185,000 jobs, and that the jobless rate would hold steady at 4.1%. However, not only did the July figure disappoint economy-watchers, but the June total was revised downward by 27,000, to 179,000, and the May figure was cut by 2,000, to 216,000. That month’s total had previously been revised downward from an originally reported 272,000.

In a sign that pay increases are continuing to trend downward, the government said average hourly earnings rose by just eight cents, or 0.2%, to $35.07, down from a 0.3% gain the previous month. During the past 12 months, earnings have increased 3.6%, down from 3.9% the previous month but still above the rate of inflation.

The health-care sector, which has been a jobs leader for more than a year, was the category leader for July, adding 55,000 jobs. Construction employment was up by 25,000, government added 17,000 jobs, and transportation and warehousing added 14,000.

Wyatt believes the economy remains strong enough that a soft landing — defined as successfully cooling inflation without setting off a recession — “is still achievable and is my base case, meaning we start to cut rates, see the labor market stabilize while inflation remains around the Fed’s target.

“There are still plenty of positive signs in the economy,” he adds. “Yes, GDP growth was solid in 2Q, and 3Q is tracking at plus 2.5%, according to the Atlanta Fed’s GDPNow estimate. Consumers are still spending. Job growth remains positive. But interest-rate-sensitive industries, such as marine, are feeling the impact of Fed rate hikes as Chair Powell acknowledged at the July press conference. Hopefully, the recent move in the 10-year Treasury and expected Fed cuts will boost those interest-rate-sensitive industries in the second half of the year.”

Ahead of the jobs report, the Labor Department said job openings nationally declined slightly in June, although the total was higher than economists had predicted. The department’s Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey that the number of openings fell to 8.18 million from an upwardly revised 8.23 million the previous month. The solid showing denoted a job market that remains healthy but has begun to soften.

The ratio of job vacancies per unemployed worker remained at 1.2, where it has now sat for three months. That is consistent with a well-balanced job market.

The ADP Research Institute said in its National Employment Report for July that private-sector employment rose by 122,000, which was down from an upwardly revised 155,000 in June, and annual pay was up 4.8% year-over-year, down slightly from 4.9% the previous month.

“With wage growth abating, the labor market is playing along with the Federal Reserve’s effort to slow inflation,” Nela Richardson, chief economist at ADP, stated in a press release. “If inflation goes back up, it won’t be because of labor.”

This article was originally published in the September 2024 issue.