On the eve of the election, the economy is hot On the eve of the election, the economy is hot http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\jobs-interview-businesspeople-small.jpg November 1 2024 November 1 2024

On the eve of the election, the economy is hot

Investors, voters and the Fed will likely look past the October jobs report distorted by hurricanes and strikes.

Published November 1 2024
My Content

Bottom line 

With the general election Tuesday and the Federal Reserve’s policy-setting meeting Thursday, this week’s data dump of third-quarter GDP growth, September’s inflation and October’s labor report may influence voters, investors and central bankers alike. Surveys and polls have indicated that economic growth is high in voters’ minds, along with the federal debt, inflation, immigration and abortion rights. But as we strip away the storm- and strike-related impact on employment, this week’s data collectively suggests that the economy is running hotter than expected, which should keep the Fed engaged with another quarter-point cut in November. This late in the game, however, the week’s data is neither likely to sway voters nor make a difference even in the extraordinarily tight presidential race. 

Labor market distortions With the October ADP private payroll survey running twice as strong as anticipated (gain of 233,000 jobs, consensus at 111,000), and with initial weekly jobless claims hitting a five-month low last week at 216,000, we were expecting a solid October jobs report today. But nonfarm payrolls rose by a much weaker-than-expected 12,000 jobs in October (consensus at 100,000, Federated Hermes at 122,000), with a combined downward revision of 112,000 jobs in August and September. This is the slowest pace of job growth since December 2020, and the adjusted October payroll represents a disastrous loss of 100,000 jobs. 

Impact from storms and strikes The labor market was severely distorted last month by Hurricanes Helene and Milton, as well as two significant strikes. About 45,000 dock workers affecting all east coast and gulf ports staged a short walk-out last month, and 33,000 Boeing machinists are currently on strike.

According to the Bureau of Labor Statistics (BLS), the response rate for their October survey of businesses last month was only 47.4%, the lowest level since 1991, due to the twin storms, compared with a normal 90%. Moreover, it reported that 512,000 people in nonagricultural jobs could not work last month due to the inclement weather, compared with the historical average for October of 56,000. So, the deadly storms prevented 456,000 more people than normal from working last month. In addition, another 1.4 million people normally employed full time could only find part-time work because of the weather, compared with the historical average for October of 264,000. Collectively, that suggests October’s dismal labor-market performance could be revised up sharply in coming months. At a minimum, we could see a sizable snap-back to trend. 

Getting into the weeds Private payrolls lost 28,000 jobs in October (consensus gain of 70,000), with a combined downward revision of 108,000 jobs in August and September. So, October’s adjusted private payrolls lost 136,000 jobs. In addition, the household survey shed 368,000 jobs last month, compared with a robust gain of 430,000 jobs in September. The participation rate ticked down to 62.6%, but the unemployment rate and the labor impairment rate were unchanged in October at 4.1% and 7.7%, respectively.

  • Temporary help (an important leading employment indicator) lost 49,000 jobs in October for the fifth consecutive month and for the 29th time out of the past 31 months. 
  • Manufacturing cratered in October, shedding a much worse-than-expected 46,000 jobs (consensus at a loss of 30,000), which was the worst since April 2020. This sector has lost jobs in six of the past nine months. 
  • Retail lost jobs for the fourth time in the past five months, losing 6,000 in October at the start of the important Christmas season. 
  • Leisure & hospitality lost 4,000 jobs in October for the first time in six months. 

Wage inflation remains a problem Wage growth has surprisingly re-accelerated, rising a hotter-than-anticipated 0.4% month-over-month (m/m) in October, which annualizes to 4.8%, and by 4.0% year-over-year (y/y). The Fed is targeting 3%. 

Inflation remains sticky Core PCE (the Federal Reserve’s preferred measure of inflation) rose by a firm 2.7% y/y in September (consensus at 2.6%). While this is lower than its February 2022 peak at 5.7% (a 39-year high), the improvement has stalled at 2.7% in four of the past five months. Core PCE rose by a five-month high of 0.25% m/m in September, which annualizes to 3.0%. In its latest Summary of Economic Projections in mid-September, the Fed expects that core PCE will decline to 2.6% by year-end 2024 and to its long-run target of 2.0% by the end of 2026. 

GDP solid Gross Domestic Product rose by a 2.8% annualized growth rate in the third quarter of 2024, compared with 3.0% and 1.4%, respectively, in the second and first quarters. The Atlanta Fed’s GDPNow estimate for the third quarter was at 3.4%, and the Bloomberg consensus estimate was at 2.9%. But the Blue-Chip consensus and Federated Hermes both forecast 2.3% growth.

What drove the quarter? Personal consumption posted its best quarter since the first quarter of 2023, rising 3.7% in the third quarter (consensus growth at 3.3%), which added 2.46 percentage points to the overall GDP print. Retail “control” sales for goods in September were more than double what was expected at a gain of 0.7% m/m, and the ISM services index has been consistently above the 50 contraction level. 

Nonresidential corporate spending also rose a solid 3.3%, due to an 11.1% quarter-over-quarter increase in spending on equipment, adding 0.46 percentage points to GDP. Government spending soared by 5.0%, its highest quarter in a year, due to a surge in national defense spending, adding 0.89 percentage points to GDP growth.

On the negative side of the ledger, housing declined for the second consecutive quarter, plunging by 5.1% (the most since the fourth quarter of 2022) and reducing GDP by 0.21 percentage points. Because of the relative strength of the dollar and the U.S. economy compared with our major trading partners, imports surged by 11.2% versus export growth of 8.9%, so net trade reduced GDP by 0.56 percentage points. Finally, inventory accumulation rose by $60.2 billion in the third quarter, compared with $71.7 billion in the second quarter, which subtracted 0.17 percentage points from overall GDP. We were expecting a smaller inventory build, but because of the port strike, companies grew inventories as a precaution. With the strike now settled, however, we expect that inventory growth which was pulled forward into the third quarter will likely recede in the fourth quarter.

Private domestic final sales solid This metric measures the economy’s underlying fundamental strength, as it excludes volatile inventory liquidation or restocking, net trade, and government spending. It rose by 3.2% in the third quarter, compared with 2.7% in the second quarter.

Data may not matter We are inclined to believe the election betting markets. They are favoring Trump, who many polls indicate has a modest lead within the margin of error in all seven of the key swing states. The down ballot impact is crucial. We think the Senate is likely to flip back to majority Republican regardless of the presidency. But control of the House of Representatives is likely to follow the race for the White House, as 80% of the electorate have voted straight ticket over the past 30 years. Consequently, the odds of a Republican sweep have increased to 46%, while the odds of a divided government (with Democratic control of the presidency and the House) at 20%, both of which are market-friendly outcomes. The odds of a Democratic sweep are now at 15%. This week’s economic data is eye-opening, but will likely impact the next administration more than the election.

Connect with Phil on LinkedIn

Tags Equity . Politics . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Issued and approved by Federated Advisory Services Company

3831464106