Soft economic data makes Fed's delay in rate-cutting look all the more foolish

Back after a few days up North to get away and see some scenery. But I've still been keeping up with the data and developments in the world, and I'm a bit perplexed as to why our experts at the Federal Reserve aren't picking up on what seems pretty obvious.

That includes this report from the Census Bureau from today.

US construction spending extends decline in June https://t.co/iUGMczsbg0 pic.twitter.com/M8xxKhG42k

— Reuters Politics (@ReutersPolitics) August 1, 2024

U.S. construction spending unexpectedly fell in June and the prior month's data was revised lower as higher mortgage rates weighed on single-family homebuilding.

The Commerce Department's Census Bureau said on Thursday that construction spending dropped 0.3% after a downwardly revised 0.4% decline in May...

Spending on private construction projects fell 0.3% in June after dropping 0.4% in the prior month. Investment in residential construction dropped 0.3% after falling 0.7% in May.

Outlays on new single-family construction projects decreased 1.2%. Spending on multi-family housing gained 0.1%. Mortgage rates surged in the spring, depressing homebuilding and sales.

It's not all bad, as April was revised significantly higher, indicating that the warm Winter and Spring got a jump on typical construction activity. But 2 straight months of cutbacks, and especially the decline in interest-rate-sensitive home building, are something that should cause us to at least be worried if the strength we've had in construction in the 2020s is coming to an end.

We also saw an increase in seasonally-adjusted new unemployment claims to their highest level in nearly a year. And this week's ADP payrolls report indicated that job growth slowed down at the start of the 3rd Quarter of 2024.

As a result and this and other recent soft data, Wall Street gave back a lot of its recent gains on Thursday.

Investors hoping for a quiet summer are being sorely disappointed as turbulence pummels the stock market, spurring outsized swings in US equity indexes with the dog days of August now upon us. https://t.co/S8vqAvt8ob

— Bloomberg (@business) August 1, 2024

The DOW Jones Industrial Average dropped by more than 700 points during Thursday's session, and ended up losing 494 points. Today’s selloff was a reflection of how the prospect of a slower economy is now viewed as a negative on Wall Street.

Piper Sandler's chief investment strategist Michael Kantrowitz reasoned Thursday's action showed markets digesting recent economic data as "bad news," despite potentially pointing to steeper Fed rate cuts in 2024.

"When yields go down it could still be a good thing going forward if it comes from lower inflation," Kantrowitz told Yahoo Finance. "But [not] if it comes from higher unemployment, bad [manufacturing data], bad earnings, and bad macro data."

Kantrowitz added that slower economic data may have been "good news a year ago when everyone was worried about inflation — that's not the case today."

And with a September rate cut from the Fed all but certain after Wednesday's policy announcement, investors on Thursday moved to price in even more aggressive moves from the central bank this year. Data from the CME Group showed traders pricing in a roughly 25% of a 50 basis point rate cut in September, up from just an 11% chance one day ago.

But would a September rate be too late to stop our apparent slowdown from becoming a standstill? 3 high-ranking Democratic senators (Elizabeth Warren (Mass.), John Hickenlooper (Col.) and Sheldon Whitehouse (R.I) sent a letter to Fed Chair Jerome Powell giving that concern as the Fed decided not to lower rates from their multi-decade highs earlier this week.

And the 3 Dems hinted that Powell is being scared off from doing the right thing to avoid the anger of Republicans, who don’t want a good economy ahead of the November elections.

In the letter, the senators said the data make clear there is ample evidence a rate cut is merited, as there have been consecutive decreases in the Personal Consumption Expenditures index, which is the Fed’s preferred inflation gauge.

Moreover, the letter adds, “The one-two punch of rising unemployment and slowing wage growth risks erasing the post-pandemic economic gains.”

The FOMC is not scheduled to meet again until [September], with some analysts expecting it will announce a reduction in rates following that meeting. Some Republicans, including Donald Trump, have suggested that doing so would be a political favor to Democrats.

In response, the three Democratic senators said in their letters that not cutting in response to the economic data would “indicate that the Fed is giving in to bullying, and is putting political considerations ahead of its dual mandate to ‘promote maximum employment and stable prices.”

Liz, Hick and Sheldon are right on the monetary policy here. The 12-month change in the core PCE index has been under 3% for all of 2024, and while wage growth is decent, it’s not anything that’ll cause costs to jump back up (in fact, the Employment Cost Index is growing by its lowest rate in 3 years).

And yet Powell and company are keeping the Fed Funds rate at double the rate of inflation in 2024. That’s a marked contrast to 5 years ago, when the Fed was caving to the complaints of Donald Trump and started cutting rates from a much lower level (2.5% vs 5.5% today), in a time when unemployment was lower then than it is today, with an Employment Cost Index and inflation number within 1% of the 12-month change that we are seeing today.

Maybe now that President Biden doesn’t have to worry about facing the voters, he might spend some of his remaining time in office to draw attention to the fact that the Fed was slow to react to higher prices in 2021 (they didn’t start raising rates until gas prices started spiking in March 2022), and had to drastically raise rates to their current, punitive levels to make up for it. Now the Fed is being far too slow in reacting to our post-COVID reality, and keep chasing the inflation that came from a one-time economic disruption (with a big side order of corporate greed) when that situation has long passed.

Tomorrow's July jobs report sure seems a lot more important than it did a week ago. If that comes in weak, watch for the talk of "RECESSION?" to pick up rapidly. Even if we aren't that close to it yet.