How Is The US Economy Really Doing?

When you listen to J Powell speak from the podium at the FOMC meeting he typically talks about managing the Fed’s dual mandate to maintain price stability and to maximize employment. The past several years have been focused on taming inflation. Core PCE inflation measured 0.3% for the past two months June and July. We will get the August report on Sept 26. On an annualized basis Core PCE inflation remains pretty sticky at 2.9%. This is higher than the Fed’s 2% target. It’s not zero, and it’s not runaway  inflation either. I don’t even get into the debate about whether the measurement is appropriate or not. We will take it for now that Core PCE is what the Fed needs to set interest rates. 

The other side of the coin is the labor market. If you’ve been listening to this show for a while, you will know that I’ve been flagging the inconsistencies between the two surveys that make up the employment report. There is the payroll survey and the household survey. The numbers reported in the two surveys are not consistent and have not been consistent for a long time. The employment report is the one that is most likely being overstated. 

Yesterday, The Bureau of Labor Statistics (BLS) has announced a significant downward revision to its employment data for the U.S. down 911,000 jobs compared with the previous estimate. That's a big deal.

So with this latest employment data, it’s almost a foregone conclusion that the Fed will cut their benchmark lending rate at next week’s meeting. The real question is how much, and whether this will affect the medium term bond yield and the 10 year bond yield in particular.

The bond yield is a reflection of risk for those bonds that have a risk premium attached to them. I don’t believe the US Treasury market is carrying a risk premium. So in the absence of a risk premium, the yield is a reflection of the economy. A weaker economic cycle will pull bond yields down as growth is going to take a hit. A stronger economy will bring inflationary pressure on prices which will tend to drive yields up. We have a 30 day t-bill trading at 4.17%, the 10 year treasury trading at 4.08%, and the 2 year trading at 3.55% and the 5 years trading at 3.61%. This is the market clearly signalling that over the medium term, interest rates are heading lower. 

That’s good news for real estate investors. 

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