Economic Resilience Amid Slowdown Concerns

Investing.com — Recent concerns about a potential economic slowdown have stirred considerable debate, but Yardeni Research offers a compelling counter-narrative.

According to the analysts, the U.S. economy exhibits resilience against prevailing concerns, implying that Federal Reserve intervention may not be necessary for sustained growth.

“The latest batch of labor market indicators has caused a temporary growth scare,” the analysts said.

This sentiment, driven by some weak labor market indicators, can be misleading. Overall economic conditions—particularly in the labor market—remain robust.

While recent payroll and household surveys reflect certain vulnerabilities, they also indicate strength in sectors like healthcare, leisure, and construction, which have shown solid employment gains.

A closer look at the labor market reveals resilience, even if headline numbers appear softer. For instance, average weekly hours worked increased by 0.3% in August, leading to a 0.4% rise in aggregate weekly hours. This uptick suggests real GDP growth could potentially exceed 3% annually, provided productivity continues to rise.

Yardeni Research anticipates that productivity growth, strong since Q3 2023, will be a key driver for economic expansion, reducing the need for significant Fed intervention.

Currently, the market expects multiple rate cuts by the Fed in the near future, with predictions of six to nine 25-basis-point cuts over the next year. This outlook reflects concerns about a potential recession and a conventional Fed response.

“Since the summer, we’ve been predicting one rate cut in September for the rest of this year, and maybe two to four cuts in 2025,” the analysts said.

Despite this, they contend that aggressive easing may not be crucial for maintaining economic momentum.

Yardeni’s skepticism about the necessity of monetary easing stems from the belief that the Fed has already met its inflation objectives. Recent comments by Federal Reserve Chairman Jerome Powell at Jackson Hole acknowledged that inflation is near the Fed’s 2% target, suggesting there’s room for policy easing.

However, Yardeni Research is unconvinced that further Fed support is essential for continued growth. In their perspective, easing monetary policy might inadvertently boost economic growth through enhanced productivity rather than employment gains.

The labor market data also reveals several positive trends countering the slowdown narrative. Industries like ambulatory healthcare, construction, and financial activities achieved record employment levels in August.

“Average hourly earnings rose 0.4% during August. Therefore, our Earned Income Proxy for private-industry wages and salaries in personal income rose 0.8% to a record high last month,” the analysts stated.

Addressing yield curve dynamics, Yardeni notes that while the curve has recently disinverted—historically linked to recessions—this does not necessarily imply an imminent downturn.

They argue that the U.S. economy is strong enough to withstand such trends, particularly with the Fed likely to lower rates as a precaution against potential downturns. The bond market’s reaction to softer employment data further supports Yardeni’s optimistic economic perspective.