Fed Cuts Rates in Second Consecutive Meeting as Manufacturing and Services Surveys Diverge

Key Takeaways:

• The Federal Open Market Committee (FOMC) voted unanimously to cut the target federal funds rate by 25 basis points at its November 6-7 meeting, the second rate cut in as many meetings. The target range is now 4.5 – 4.75 percent. During his remarks, Chair Powell noted that the labor market remains in a strong position and future policy actions would be aimed at avoiding additional slowing in labor market conditions.
• Nonfarm business productivity increased at a 2.2 percent annualized rate in Q3 2024, roughly even with the downwardly revised 2.1 percent rate in the second quarter, according to the Bureau of Labor Statistics. Unit labor costs rose at an annualized rate of 1.9 percent in the third quarter, though revisions to previous data shows that unit labor costs remain elevated at 3.4 percent compared to a year ago, the fastest pace since the end of 2022.
• The Institute for Supply Management (ISM) Manufacturing Index declined seven-tenths to 46.5 in October, its lowest level since June 2023. While the new orders index rose 1 point to 47.1, the production index fell by 3.6 points to 46.2. The employment index rose five-tenths but remained deeply in contractionary territory at 44.4.
• The ISM Services Index increased 1.1 points to 56.0 in October, its highest level since July 2022. While the business activity index declined by 2.7 points to a still-strong 57.2 and the new orders index was down 2 points to 57.4, the employment index jumped 4.9 points to 53.0, the strongest reading since August 2023.
• Consumer (non-mortgage) credit outstanding increased by $6.0 billion in September, according to the Federal Reserve Board. Revolving credit outstanding (largely credit cards) rose by a modest $1.0 billion after a decline the month prior. Nonrevolving credit outstanding (largely student and auto loans) increased by $5.0 billion.
• Light vehicle sales increased 0.8 percent in October after a 4.9 percent gain in September, according to Autodata. The annualized sales pace was 16.2 million in October, a six-month high.
• The real goods U.S. trade deficit widened by $11.6 billion in September, according to the Census Bureau. Real exports declined 1.2 percent after a 3.8 percent jump the month prior, while real imports rose 4.1 percent.

Forecast Impact:

The 25-basis point cut to the federal funds rate was in line with market and our expectations. We continue to expect another rate cut at the December meeting before the Fed likely slows the pace of rate reductions next year. The latest estimate of productivity growth remained strong in the third quarter, though it also showed that unit labor costs are elevated following data revisions to the national accounts. This is worth monitoring moving forward as unit labor costs at this level would have historically added to inflationary pressures. It remains to be seen whether robust productivity gains can be sustained allowing for above-average wage growth without above-target inflationary pressure.

Elsewhere in the economy, the ISM manufacturing index sunk further into contractionary territory, though other measures of manufacturing output remain relatively flat. The strong gain in the employment component of the ISM services index was more positive and suggests that we may see a bounce-back in payroll gains in November.

Nathaniel Drake
Economic and Strategic Research Group
November 8, 2024

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