The Federal Reserve’s recent decision to lower the federal funds rate by 50 basis points has sparked concerns about the potential for economic slowdown. After years of rate hikes designed to control inflation, the Fed’s shift to a more neutral stance suggests that inflation pressures may be easing. However, the question on many minds is whether this signals a growing concern over a potential recession.

The Significance of Job Creation

The key to understanding the broader economic outlook lies in job creation. Despite concerns about declining consumer confidence and shrinking savings, a healthy labor market remains critical to sustaining economic activity. As we’ve discussed previously, the strength of job creation is essential to keeping consumption levels robust, especially when other factors, like increased credit utilization, show signs of weakening.

Employment Trends: A Gradual Slowdown

The unemployment rate has ticked up to 4.3% as of August, from a low of 3.4% earlier in the year. While this rise in unemployment is worth noting, it still remains below historical averages. Since 1990, the unemployment rate has typically hovered around 5.7%, meaning current levels are still relatively strong.

Job creation, while not at the brisk pace seen in 2022, continues to show resilience. In August, 142,000 jobs were added to the economy, a decline from the peak of 482,000 in December 2022 but still above the long-term average of 120,000 from 1990 through 2024. Looking at a rolling three-month average, job creation has stabilized at a rate of about 116,000, closely aligning with historical trends.

Further supporting this positive outlook, initial jobless claims have shown a decline, indicating fewer people are filing for unemployment benefits. Additionally, the number of continuing claims remains below the post-COVID five-year average, suggesting that job losses are not escalating.

In short, while job creation has slowed from its peak, it is still sufficient to maintain a stable economy. Consumer spending is still “reasonable” and not showing signs of significant weakness, even if it’s not booming.

Consumer Confidence Takes a Hit

However, the latest data from the Conference Board paints a more cautious picture of consumer sentiment. The Consumer Confidence Index for September dropped to 98.7, a sharp decline from August’s reading of 105.6, marking the largest monthly drop since August 2021. This decline was particularly pronounced among consumers aged 35 to 54 and those with incomes under $50,000.

Both the “Present Situation” and “Expectations” indexes saw significant declines, signaling a drop in consumers’ willingness to engage in transactions. While a single month’s data is not enough to establish a long-term trend, this sharp decline in confidence raises questions about the future of consumer spending.

What Does This Mean for Economic Growth?

Looking ahead, we expect GDP growth to slow, with projections ranging between 1.5% and 2.0%, down from 2.1% in the first half of 2024. Inflation is also continuing its downward trajectory, which, coupled with slower growth, is enabling the Fed to reduce short-term interest rates.

As for how much further rates will fall, there is uncertainty, even within the Fed. The most recent forecasts suggest that the federal funds rate could drop from 4.87% to 4.37% by the end of 2024, and potentially to 3.37% by the end of 2025. This reduction reflects the Fed’s goal of returning to a more “neutral” stance as the economy cools.

Conclusion

While job creation remains steady and consumption continues at a reasonable pace, the dip in consumer confidence is a red flag for the future. As the economy slows, we expect the Fed to continue lowering rates, but how far they will go remains unclear. The combination of slower growth and inflation is likely to shape the economic landscape in the coming months, but whether these trends will lead to a recession is still uncertain.