The State of the US Economy
By Faisale Shefawe
Published on 07/05/24 5:30 PM
Last Friday, the Department of Labor reported 114,000 new hires in July. The department put the unemployment rate at 4.3% for the same month. The healthcare, construction, and hospitality sectors saw the most hiring, while the information sector lost more than 20,000 jobs. Investors didn’t like the news; the NASDAQ closed down 2.43%, the S&P 500 fell by 1.84%, and the Dow Jones ended the day down 1.51%. However, the reaction from investors seemed overblown as important economic indicators show the economy is in good shape.
A 4.3% unemployment rate is almost a natural or healthy rate that shouldn’t concern investors. Although unemployment has been rising for the past few months and is the highest since 2021, one reason the Federal Reserve had been raising interest rates was to ease pressure on the labor market, which had contributed to inflation reaching a 40-year high. Labor shortages and high inflation are closely linked as companies compete for workers by paying more, often passing these increased costs on to consumers.
The latest inflation rate for the US is 2.5%. The Personal Consumption Expenditure (PCE) is the Federal Reserve’s preferred inflation metric for making important interest rate decisions. The Fed has successfully brought inflation down from 7.1% in June 2022 to 2.5% in June 2024 without tipping the economy into recession. The Reserve expects inflation to hit its 2% target by 2026.
The Fed funds rate is at its highest in recent years, at 5.25%-5.50%, to cool down an overheated economy. With inflation now under control, the central bank is expected to start cutting interest rates in September by a quarter point. There is even a possibility the Reserve may cut rates by half a point to avoid a recession. The biggest concern when the Fed started raising interest rates was the potential for significant economic slowdown, but now it appears the Fed is on track to complete its mission successfully.
The US economy is expected to grow by 2.6% this year and by 1.8% next year, according to the World Bank. A large part of this growth is likely to come from increased productivity and outputs due to technological advancements and innovation. The highly anticipated rate cut in September is also expected to boost the economy, as consumers and businesses will have more access to cheaper loans for large purchases such as homes and cars.
The Labor Department's report sent a shock wave through the market. Investors are worried that the Federal Reserve has taken too long to start cutting rates. However, the economy seems safe from unforeseen threats, with every economic indicator showing that the economy is moving in the right direction.
