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- In late September, I was concerned that the US economy could be about to hit an air pocket.
- In reality, there were limited headwinds to the US economy in October as a government shutdown did not happen, tax payments increased only moderately, and student debt service resumed but likely with limited compliance.
- High frequency indicators of consumption and the labour market suggest mediocre rather than contracting October economic activity.
- I still expect a December hike against the market pricing only 10% risk.
Limited Evidence of October Growth Headwinds
Has the US economy gone through the air pocket I was concerned about in late September?
The evidence suggests ‘No’, or at least not yet.
In late September, I listed four risk factors that could drag growth down. Besides a government shutdown, they were:
1. Student loans repayments
Student loan repayments have restarted but precise data on payments levels is limited. The Education Department (ED) does not publish real-time data on repayments. The ED deposit account at the Treasury does not provide a breakdown between student repayments and other inflows. This makes it difficult to interpret higher inflows in September than in October even though repayments started only in October! (Chart 1).
I expect a combination of relief through the administration’s new income driven payment and weak incentives to comply (e.g., the ED has instructed debt servicers not to report late payments to credit bureaus) have limited the financial impact for debtors.
2. Car strike
The strike is now over with no reports of car shortages or of car price hikes, which is consistent with retailers’ high inventories ahead of the strike.
Also, because of the United Auto Workers’ precision targeting of manufacturing facilities, the strike’s impact on overall employment and consumer income is likely to have been limited. For instance, the October household survey reported only 96,000 strikers out of a total employment of 161mn.
3. Tax payments
I was concerned that ending extreme weather-related tax relief could cause a bunching of tax payments in October. Indeed, the Treasury mentioned this factor as one of the drivers for lowering Q4 issuance projections by $76bn.
In September 2023, the last month of FY2023, cumulative non-withheld personal income tax deposits in the Treasury General Account were $283bn below September 2022. By contrast, in October 2023, the first month of FY2024, these deposits were $35bn higher than in October 2022. This increase (together with a $38bn increase in corporate income tax October deposits) was enough for the Treasury to lower its issuance forecast by $76bn. However, the October increase in personal income tax collections represented only about 2% of household income, probably not enough to impact consumption.
Overall headwinds to October growth seem to have been limited. This is also what high frequency indicators of economic activity suggest.
Limited Signs of October Dip in Economic Activity
High frequency indicators do not suggest a dip in economic activity, but rather a mediocre month. Consumption indicators show resiliency. Opportunity Insights’ consumption estimate, derived from credit and debit card data, shows an increase in October nominal spending of 0.2% MoM, not great but not a decline either (Chart 2).
Similarly, the Census Bureau Pulse Survey shows no marked change in October in the share of households having difficulties paying for usual expenses (Chart 3).
Additionally, air travel and restaurant reservations improved in October (Chart 4).
Similarly, high frequency data on the labour market conveys a lacklustre October rather than a marked contraction.
Indeed’s data on overall job openings, that tracks the Job Openings and Labor Turnover Survey (JOLTS) openings closely, shows a 0.3% MoM contraction (Chart 5). I am not a fan of overall job openings because they are such a large multiple of actual hires that I wonder if they actually represent genuine vacancies. But Indeed’s new postings data is not that different from overall postings and was up 0.3% MoM in October.
Finally, jobless claims also signal labour market resiliency in October. Both continuing and initial claims barely changed in October and relative to the workforce, they are in line with pre-pandemic trends (Chart 6).
The air pocket I was concerned about did not happen in October as there was no government shutdown, and student debt and tax payments do not seem to have hit household spending.
Going forward, the biggest risk to growth could be fiscal consolidation imposed through an extended government shutdown. This is not my base case scenario, as in the past government shutdowns have hurt Republican electoral prospects and Republicans and Democrats have found ways to compromise, at the last minute.
Overall, I still expect growth to remain above trend in Q4. In turn, this suggests unemployment below its long-term value of about 4% and therefore limited further slowdown, if at all, in wage growth.
Combined with inflation near the Federal Reserve’s Summary of Economic Projections forecast and with easier financing conditions, this suggests a hike at the December Federal Open Market Committee meeting, against the market pricing only a 10% risk.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.