Economists, investors, and Federal Reserve members will be looking at Friday’s September jobs report for clues to the state of the economy. One figure is more important than others… and it’s not the unemployment rate or the number of new jobs. It is wage growth.
Inflation is more than just the result of rising oil prices and other commodities. It also includes production costs such as shipping and manufacturing. The inflation picture also includes how much money workers take home with their paychecks.
People tend to be more likely to spend money if they have more money in their pockets (virtual and good old-fashioned leather ones). This gives companies more flexibility to raise their prices.
According to the August jobs report, the average hourly wage rose by 5.2% in the past twelve months. This is a decrease from the 5.6% peak growth rate in March 2022.
How aggressively will the Fed raise rates in the future? Much will depend on whether wage growth continues its slowdown.
If workers are earning less, companies can’t increase prices as much or risk big destruction of demand.
Problem is, wage growth exceeding 5% is still very high. Wages rose by 3% annually before the pandemic. Covid-19 and the drop in workforce numbers caused labor shortages. Employers lost control over worker pay.
Another reason companies continue to increase prices is to offset rising costs.
Friday’s government report showed that personal consumption expenditures (PCE) rose 6.2% in August compared to August a year earlier. This was less than July’s reading.
However, the core PCE number, which excludes food or energy prices, increased 4.9% in August, compared to a 4.7% increase for July.
The Fed is more than happy to accept a headline PCE growth rate of 2% as a sign that there is price stability. This is unlikely to be the case anytime soon. According to the Fed’s most recent forecasts, PCE is expected to rise 5.4% in 2015, an increase of 5.2% from June’s projections.
David Petrosinelli (Senior trader at InspireX), stated that “I don’t see anything in near-term to give Fed tons of comfort because inflation is on a trajectory to 2%.” “Wages will stay high and that will keep Fed in a pickle.”
There’s another problem. While wages are still increasing, they are not keeping up with consumer price increases. You don’t have to be a math wizard to see that 5.2% is lower than 6.2%.
“Wages are a real pain. Marta Norton, chief investment officer for the Americas at Morningstar Investment Management said that people are spending more and not making more. Norton stated that there is a greater chance of stagflation.
Stagflation refers to the bad economic combination of persistent inflation and stagnant growth.
Although retail sales have performed well despite inflation pressures Norton warns that this won’t be the case forever. American shoppers will eventually reach their breaking point, and they will just buy the essentials. Slower economic growth will result in lower prices, but also lower consumption.
“Inflation is its treatment. She said that consumers can spend or not spend.
Market madness is over
The third quarter is over. Another bad quarter for the market. September was particularly dark. It was the Dow’s worst month since March 2020, when the pandemic began.
Even though everything seems to be in a bearish market, such as bitcoin, gold, and bonds, there are still some positive signs for the future.
Wall Street is usually festive during the fourth quarter. In anticipation of strong consumer spending during the holidays, investors tend to purchase stocks. Businesses tend to spend more to stretch their annual budgets. Major companies often provide optimistic guidance in October regarding earnings expectations for next year.
In a blog post, Jeff Hirsch, editor in chief of the Stock Trader’s Almanac said that October was a turning month. He called it a ‘bear killer’.
Hirsch said that there have been a dozen bear market endings since World War II, all of which ended in October. Seven of the twelve market bottoms occurred during midterm election years.
Traders will be closely monitoring Washington this fall to determine if Republicans win control of the House. Investors like more gridlock, so this could cause DC to become more chaotic.
It is unclear whether investors and Corporate America will be as bullish in October due to concerns about inflation, interest rate, and global economic conditions. Remember that October is also known for its huge crashes, including those in 2008, 1987, and 1929.
Stocks could be headed for a worse turn. Experts are optimistic that the bear market will end soon.
Christopher Wolfe, Chief Investment Officer at First Republic Private Wealth Management said that “we’re closer to a bottom”. “A lot of quality companies are up for sale. This is a time for patience and repositioning.