The economy's not a dumpster fire

Between oil shocks and killer-AI jitters, the economy may look like it’s dressed to scare for Halloween. But beneath the frightening vibes, the numbers suggest we’re doing oddly okay.

Take inflation, which came in cooler than the doom and gloom would suggest. The Personal Consumption Expenditures price index rose 0.3% in August to a yearly gain of 3.4%, well below the expected 3.7%. The Fed’s favorite inflation gauge, core PCE (which excludes volatile food and energy costs), rose to 3% annually, also below forecasts of 3.3%.

The labor market isn’t a horror show, either. Private companies added 90,000 positions in September, per ADP—up from 36,000 the previous month and better than analysts’ consensus of 68,000. Overall, US job openings slid to 7.08 million in August from 7.34 million in July, according to JOLTS. That’s below forecasts of 7.2 million, but still surprisingly resilient for a market weathering historically high gas prices. Layoffs also fell, and the number of employees quitting their jobs held steady, suggesting that people who walk out aren’t all that worried about finding a new gig.

Meanwhile, GDP rose 2.2% annually in Q2—up sharply from the prior estimate of 1.5%—buoyed by higher spending by both consumers and the government, suggesting the economy has more cushion than the headlines let on.

But how does the Fed feel?

Markets cheered this news for good reason: Cooling inflation and a steady labor market lowers the odds that the Federal Reserve will hike rates at its next meeting beginning October 27. According to CME FedWatch, the chances that the Fed will leave rates alone now hover at 62.9%, compared to 49.1% yesterday and 29.1% a week ago.

But is this relief real, or just a head-fake before the next hike?

A lot hangs in the balance. High rates have wreaked havoc with bonds, pushing yields up to multi-year highs. Mortgage rates have also crossed the dreaded 7% threshold, pushing home loan demand to a two-year low. And Fed Chair Kevin Warsh seemed pretty intent on fighting inflation tooth and nail when he declared at the September FOMC press conference, “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

That’s Fed-speak for: More hikes are coming. But will the Fed do the deed in October, kick this can down the road to its next meeting in December…or punt even further than that?—JD