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US Employment Indicators Raise Doubts About Sustaining High Interest Rates

Data: 10/04/2023

October 4 - Non-farm private employment figures from the ADP report fell short of market expectations, raising the possibility that interest rates may not rise significantly in the near future or could even be cut sooner than currently anticipated by the market.

In September, the U.S. services sector slowed down, with new orders hitting a nine-month low. However, the pace of this slowdown was in line with expectations for robust economic growth in the third quarter.

The Institute for Supply Management (ISM) also released a survey that revealed persistent inflation in the services sector last month and a gradual easing of employment growth. The economy's resilience, despite 18 months of Federal Reserve interest rate hikes to curb demand, suggests that monetary policy could remain restrictive for a considerable period.

Kurt Rankin, a senior economist at PNC Financial in Pittsburgh, commented, "A strong message from the Fed that rates will remain 'higher for longer' may, at this point, be enough to sustain the slowing momentum caused by actual interest rate increases over the past year."

ISM reported that its non-manufacturing PMI dropped to 53.6 last month from 54.5 in August. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The PMI was in line with economists' expectations and remained well above the 49.9 level that ISM considers indicative of overall economic expansion.

Retailers noted that "business is intensifying in preparation for the holiday season." However, service-providing businesses reported that "the volume of banks and leasing companies seems to be declining as credit tightens," and they added that "bankruptcy work is increasing."

The measure of new orders received by service businesses dropped to 51.8, the lowest level since December, from 57.5 in August. Nevertheless, order backlogs improved, and exports increased.

Stocks on Wall Street were trading higher, while the dollar fell against a basket of currencies. U.S. Treasury prices rose. Despite the slowdown in new orders, service businesses continued to face higher prices. Twelve service sectors reported an increase in prices paid, including utilities, retail, and wholesale trade. The four sectors reporting a decline were transportation and warehousing, mining, agriculture, forestry, fishing, and hunting, as well as finance and insurance.

A gauge of prices paid by service businesses for inputs remained unchanged at 58.9. Some economists view the ISM services prices paid measure as a good predictor of personal consumption expenditures (PCE) inflation. The Fed tracks the PCE price indexes for its 2% inflation target. The annual increase in the PCE price index, excluding food and energy, fell below 4% in August for the first time in more than two years.

Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range. Demand for labor remains strong despite higher borrowing costs. The ISM's gauge of service sector employment dipped to 53.4 from 54.7 in August, reflecting primarily supply issues.

According to ISM, comments from businesses included "fewer job vacancies due to filling vacant positions" and "the labor market remains highly competitive," as well as "we have lost employees due to normal attrition and are having trouble filling these positions."

This contrasts with the ADP National Employment Report, which showed private payrolls increasing by only 89,000 jobs in September, the lowest count since January 2021, after a gain of 180,000 jobs in August. September's shortfall, below economists' expectations of 153,000 jobs added, exaggerates the pace of deceleration in the labor market.

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