How Important Are Upcoming Key US Economic Data?

The stock market should have no problem with this week's key US economic data -- if the data print close to the consensus estimates.  They would show a moderately growing economy, without putting undue stress on the labor market or lifting inflation.  Stronger-than-consensus data could lower market expectations of the size of the next Fed rate cut, and vice versa.  However,  the Fed will see another month's data before it meets again.  So, this week's releases lose some significance.  Away from the data, the stock market has major support behind it by the fact that central banks around the world are shifting to pro-growth policies.   China joined the Fed last week in monetary policy easing, and the ECB should soon do so, as well (meeting on October 17).   Market pullbacks on disappointing data (particularly in this seasonally weak period) could be buying opportunities.

Although US economic data may influence the Fed's decision on the speed of policy re-calibration, it will probably not stop the process.  The Fed's focus is on future economic activity.  Paraphrasing Chicago Fed President Goolsbee's recent comment, the economy will slow sharply ahead if the Fed does not lower the funds rate quickly.  This may not be a majority opinion at the Fed, as other officials have indicated a more cautious approach to easing.  However, the data may have to be particularly strong to preclude another 50 BP cut.  How the longer-end of the Treasury market behaves could influence the Fed's decision, as well.  Longer-term yields already have moved up a bit after the September funds rate cut.  If they move up more sharply, the Fed could settle for a 25 BP rate cut.

Consensus estimates for this week's key US economic data -- September Mfg ISM, August JOLTS and September Employment Report -- should keep a 50 BP rate cut in play:

Consensus looks for a steady 47.2 Mfg ISM.   The Index would remain below the 48.8 Q224 average, signaling a sluggish manufacturing sector.  

Consensus expects the JOLTS data to show little change in Job Openings in August, 7.65 Mn versus 7.67 Mn in July.  This would keep Openings in line with pre-pandemic levels, indicating that the post-pandemic excess demand for labor indeed has been eliminated.  The Fed views elimination of excess demand for labor as a way to hold down wage inflation without having layoffs lift the Unemployment Rate.

Consensus expects the September Employment Report to look similar to the August Report.  Nonfarm Payrolls are seen rising 145k m/m, versus 142k in August.  The Unemployment is expected to be steady at 4.2%.  And, Average Hourly Earnings (AHE) are back to a 0.3% m/m trend, after volatility in June and July (0.2% and 0.4%, respectively).  

The risk is for Payrolls to climb by more than the consensus estimate, based on the Unemployment Claims data.  Both Initial and Continuing Claims fell below July levels in August.  However, Payrolls may have to have to climb substantially, say 200k+ m/m, to raise doubt about a 50 BP rate cut.

The risks for the Unemployment Rate, are mixed.  There is a possibility of a decline, as the consensus Payroll estimate is above the 125k m/m pace consistent with a steady Unemployment Rate (assuming steady Labor Force Participation Rate).  In contrast, the Labor Force Participation Rate could resume climbing after it stabilized in August.  A higher or steady Unemployment Rate stemming from an increase in the Participation Rate would show the economy has more room to grow without stirring inflation.  Unfortunately, there is no reliable evidence regarding the m/m direction of the Participation Rate or Unemployment Rate. 

There is no reliable way to predict AHE, as well.  AHE has been in a tight 0.2-0.4% m/m range since March 2024, average 0.3%.  The same is true for all of 2023.  As long as AHE does not break to the upside of this range, it should not be a problem for the Fed.

The Atlanta Fed model still estimates Q324 Real GDP in the 3% (q/q, saar) range.  Its estimate was raised to 3.1% from 2.9% after the last couple of weeks' data.  Consumption was revised down sharply, but upward revisions in exports and inventory investment more than made up for it.  There is a possibility, however, that the downward revision to Consumption was underestimated and the upward revision to Net Exports overestimated.   Nevertheless, a near-3% pace is above trend and should be accompanied by good-sized increases in jobs.  At this point, it also suggests strong productivity growth, which should help hold down inflation.