As expected, the Federal Reserve (Fed) held the benchmark rate steady at 5.25%–5.50% at its September Federal Open Market Committee (FOMC) meeting. The second “pause” in this 18-month long tightening cycle will allow the Fed time to further evaluate new inflationary data. Should Fed members feel the need to continue raising rates, they have two more meetings before this year concludes.

The Summary of Economic Projections (SEP) underwent its usual quarterly update. Of note was the rise in the projected federal funds rate from 4.6% to 5.1% for 2024 and from 3.4% to 3.9% for 2025, further backing the Fed’s unofficial motto of “higher for longer” rates. What was left unchanged may have also surprised some as the target rate for this year remained at 5.6% and all longer-run projections held steady. On the dot plot, 12 of the 19 policymakers expect one more rate hike this year, while the remaining seven members favor keeping rates steady. Thus, while the median expectation is for one more hike, it is far from unanimous. When questioned about the significant split in expectations by policymakers, Fed Chair Jerome Powell emphasized that these are simply projections, and they will “proceed carefully” and remain data dependent. Given the division in expectations, it was unsurprising to see central tendency ranges for each SEP measure widen from their prior June projections.

A few near-term concerns that Powell acknowledged included the United Auto Workers (UAW) strike, the recent oil price shock, student loan repayment resumption and a potential government shutdown later this year. Right now, the impact of the UAW strike is difficult to quantify. If sustained or expanded, the strike would have a clear impact on automobile prices (a major component of inflationary measures), automaker balance sheets and household balance sheets. As we saw last year, a sustained elevation in oil prices caused significant inflation. As for the remaining concerns, student loan payment resumptions will pinch the pocket of young consumers, while a government shutdown could impact the Fed’s ability to collect and parse through data right as it’s reaching the end of a historic tightening cycle.

Time for the usual checkup . . .


The economy continues to be best described as “resilient,” though shallow cracks are beginning to show. A loss in demand for big ticket items, trade downs and reduced discretionary spending were commonly used phrases in the most recent earnings season for the retail sector. “Shrinkage,” or theft, has also emerged as one of the retail sector’s most significant headwinds, which, while more subjective, could be a sign of a pinched consumer. Alas, discretionary goods spending hasn’t been the engine behind our economy year to date anyway.

The August ISM services report came in at 54.5, above both the 52.4 estimate and the 52.7 reported in July. It was the eighth straight month the index has been in expansion (above 50), as the services economy has been the primary driver of 2023 gross domestic product growth. New orders, employment and the business index all improved notably month over month. The prices subcomponent, which had been falling most of the year, rose for the second straight month.

With consumer spending on goods declining this year in favor of services, inventories are building in certain sectors. Manufacturing is likely in a recession, as reflected by the August ISM manufacturing survey that came in at 47.6, the ninth straight month below the key 50 level, which signals contraction. However, any recession that may be occurring in manufacturing may ultimately be rather shallow as inventories in the broader economy were not dramatically overbuilt. This is possibly being reflected in the August level of the survey being above the 46.8 estimate and the 46.4 reported in July.


The August headline Consumer Price Index (CPI) was up 0.6%, which was in line with expectations but higher than the +0.2% seen in July. The year-over-year inflation rate rose to 3.7% from 3.2%, as energy (+5.6%) was the primary contributor to the spike in headline inflation. Markets, however, paid more attention to the core CPI (excluding food and energy), which rose 0.3%, higher than the +0.2% estimate and the +0.2% reading in July. Year-over-year core prices rose 4.3%, notably better than the 4.7% in July but still a reasonable distance from the Fed’s 2% target. In assessing some of the subcomponents of the consumer inflation data, core services prices excluding housing were up 0.4%, as airfares spiked 4.9% after declining roughly 8% in each of the previous two months. Hotel prices were down 3.6% on the month as the post-COVID jump in travel demand appears to be leveling off. Another notable item in the report was the decline in used car prices, which were down 1.2% on the month and 6.6% year over year, and furniture prices, which were down 1.2%, providing further evidence that goods price inflation has seemingly normalized. Shelter price inflation dropped 0.1 point to +0.4% as housing inflation slowly declines to target levels.

August producer prices (PPI) rose 0.7% on the headline—well above the 0.4% expectation. Year-over-year producer prices were up only 1.6%, which was higher than the 1.2% at the end of July but well within the Fed’s target range. The miss of estimates was driven by a 10.5% increase in energy prices with core inflation at the producer level rising 0.2% month over month and 2.2% year over year, which was below the 2.4% registered in July. These hotter-than-expected CPI and headline PPI statistics were not expected to push the Fed to tighten at this week’s FOMC meeting, but it certainly has perpetuated the “higher for longer” stance among Fed watchers and the members themselves.

Another highly anticipated data point for an assessment of the health of the U.S. consumer was August retail sales. Sales rose 0.6%, well above the +0.1% estimate although higher gasoline prices were the primary driver of the beat. Looking at the control group, which takes out autos and gasoline, sales were up only 0.1%, below both the +0.2% estimate and the 0.7% increase in July. Accounting for inflation seen during the month, real retail sales declined in a sign of growing consumer reticence as we approach the end of summer.

Job Market

The July Job Openings and Labor Turnover Survey (JOLTS) saw a 7.4% decline in job openings from the originally reported June number, which was revised notably lower. The quits rate declined to 2.3% from 2.4% in June, which may be signaling reduced confidence among workers in their ability to find another job. The rate of job openings to unemployed workers fell to 1.51, the lowest level since September 2021.

August nonfarm payrolls slightly beat the estimate of +187,000, but the previous two months were revised down by 110,000. Notable factors restraining job growth during the month were a bankruptcy at the “less-than-truckload” carrier Yellow Corporation, which led to 37,000 job losses in the transportation industry. Ongoing strikes in Hollywood also resulted in 17,000 job losses. Consistent with what has been apparent in the overall economy this year, service-providing jobs are growing the fastest. The leisure and hospitality space, however, is beginning to slow, only adding +40,000 jobs in the month, below the 12-month average of +61,000 and still below the pre-pandemic February 2020 level by about 290,000. Manufacturing jobs saw a surprising increase of 16,000, both above the +4,000 August estimate and the -4,000 decline in July, confirming what may turn out to be a short and shallow recession in the sector.

Despite the reported increase in payrolls, the August unemployment rate increased to 3.8% from 3.5% in July, fueled by an increase in the labor force participation rate to 62.8% from 62.6%. Once again, concerns about an economic slowdown may play a part in what is luring people back into the labor market. The prime age labor force participation rate of 80.9% was unchanged from July and is back above pre-pandemic levels. The clear increased supply of labor may ultimately have been a driving factor in the decline in the growth rate of average hourly earnings to 4.3% from 4.4% in July.

While the job openings and payroll reports are beginning to show some signs of labor market cooling, weekly jobless claims remain low at 201,000, below the 225,000 estimate and the 220,000 reported the week prior. Ultimately, at this point in the economic cycle, we are seeing the beginnings of a slowdown in employment and wage growth, which should take some pressure off inflation. However, there has yet to be any collapse in the labor market that would lead to a recession. While these are surely signs of moderation in the labor market, a picture of an economy in danger, this does not paint. As we have noted in the past, large increases in unemployment without reason are what we would be frightened by. This was largely a supply-driven increase in a still historically low unemployment rate. The Fed will convene once again on November 1, 2023. Economic data to come includes the Personal Consumption Expenditures Price Index on September 29, and the JOLTS, ISM surveys, and payroll data in early October. As always, feel free to reach out to us with any questions,

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