Analyzing October's Economic Slowdown and Inflation in the US

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The US economy experienced a slowdown in October, with Americans reducing their spending and inflation continuing to cool. The labor market also showed signs of easing, with more Americans applying for unemployment benefits and an increase in the number of people on jobless rolls. This deceleration follows a fast-paced third quarter, where spending rose by 7%. However, the increase in October was the slowest since May. Americans' ability to sustain their spending at the same pace as during the summer has been eroded. Inflation has also cooled significantly this year, potentially signaling an end to the Federal Reserve's interest rate increases.

Consumer Spending

In October, personal income saw a modest increase of 0.2%, with wages slightly up by 0.1%, a deceleration from September's 0.5% rise. Disposable personal income (DPI) rose by $63.4 billion, or 0.3%. Personal outlays, encompassing personal consumption expenditures (PCE), grew by $43.8 billion (0.2%), with consumer spending also up by $41.2 billion (0.2%). The personal saving rate stood at 3.8%. This trend reflects a continued decline in consumer savings alongside a slowdown in income and wage growth. The slower wage growth, coupled with the recent reinstatement of student loan repayments, is anticipated to impact consumer spending in the upcoming year.

Jobless Claims

During the week ending on November 25, initial jobless claims climbed to 218,000, marking an increase of 7,000 from the prior week's revised number, which itself was adjusted upward by 2,000 from 209,000 to 211,000. The four-week moving average marginally declined to 220,000. The rate of insured unemployment rose to 1.3%, with the total number of insured unemployed reaching 1,927,000, the highest level since November 27, 2021. While current jobless claims remain within historical norms, there's a significant deceleration in the rate at which individuals are rejoining the workforce, in contrast to previous years. This slower pace of re-entry into the labor market is contributing to the increase in continued unemployment claims.

Inflation and Interest Rates

The personal-consumption expenditures price index, the Federal Reserve's preferred inflation gauge, showed mild price growth of 5% in October compared to a year ago. This is a significant improvement from the 5% increase observed in the six months through April. As a result, Federal Reserve officials are likely to maintain interest rates at a 22-year high during their upcoming meeting in December.

The inflation predictions made by the Fed policy makers just over two months ago now seem unlikely to materialize. It is highly unlikely that prices will pick up enough to meet the Fed's projections. This apparent miss in inflation by the Fed is a major reason why the final rate increase of 2023, which policy makers had planned for September, now seems unlikely to happen. The cooling of inflation makes it easier for the Fed to cut rates if the economy shows signs of softening too much for comfort. In fact, interest-rate futures now suggest that the Fed will probably start cutting rates in early May, whereas just a month ago, they indicated that the first rate cut would likely not come until the Fed's mid-June meeting.

Federal Reserve Bank of New York President John Williams has reiterated that the Fed's benchmark lending rate is at or near its peak level and that monetary policy is quite restrictive. San Francisco President Mary Daly has echoed other policymakers' views on keeping rates on hold as well. She noted that interest rates are in a range that is appropriate to control inflation. Richmond Fed President Thomas Barkin has stated that he is picking up clear signals that companies' pricing power is diminishing. In that context, there are reports of more and more companies sacrificing profit margins to maintain market share by offering discounts and price promotions or swallowing cost increases.

Global Economic Outlook

The Organization for Economic Cooperation and Development (OECD) projects a slowdown in the global economy for next year. The United States and China, the world's two largest economies, are expected to decelerate. The European Union, particularly the 20 countries that share the euro currency, is also likely to contribute to the global slowdown. Rising costs have led to a cost-of-living crisis and impacted factories in countries like Germany.

The organization forecasts that global growth will increase to 3% in 2025 as price rises slow and real income grows. However, Europe's major economies are expected to experience slower growth, with Germany projected to grow at 1.7% in 2025, France at 1.6%, and Italy at 1.2%.

Clare Lombardelli, the chief economist of the OECD, stated that while the organization expects a soft landing for the economy, it is still too early to lower borrowing costs. Lombardelli emphasized the need for restrictive monetary policy due to concerns about persistent inflation. The OECD warns that rate cuts should only occur when there are clear signs of sustained reduction in underlying price pressures and a decline in short-term inflation expectations.

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