Economics

Fed close to pulling off the elusive economic soft landing in 2024 after great September jobs report

Published

5 months ago

October 4, 2024

A hiring sign is posted on the exterior of Urban Outfitters at the Tysons Corner Center mall on August 22, 2024 in Tysons, Virginia.

Anna Rose Layden | Getty Images

September’s outsized payrolls boost takes the U.S. economy out of the shadows of recession and gives the Federal Reserve a fairly open glide path to a soft landing.

If that sounds like a Goldilocks scenario, it’s probably not far from it, even with the lingering inflation concerns that are straining consumers’ wallets.

A gravity-defying jobs market, at least a slowing pace of price increases and declining interest rates puts the macro picture in a pretty good place right now — a critical time from a policy and political standpoint.

“We’ve been expecting a soft landing. This just gives us more confidence that it seems to remain in place,” Beth Ann Bovino, chief economist at U.S. Bank, said after Friday’s nonfarm payrolls report. “It also increases the possibility of a no-landing as well, meaning even stronger economic data for 2025 than we currently expect.”

The jobs count certainly was better than virtually anyone figured, with companies and the government combining to boost payrolls by 254,000, blowing away the Dow Jones consensus for 150,000. It was a big step up even from August’s upwardly revised numbers and reversed a trend that started in April of decelerating job numbers and rising concern for a broader slowdown — or worse.

Economy's still very solid if you look at a broad range of indicators, says Goldman's Jan Hatzius

Beyond that, it virtually eliminated any chance that the Federal Reserve would be repeating its half percentage point interest rate cut from September anytime soon.

In fact, futures markets reversed positioning after the report, pricing in a near-certain probability of just a quarter-point move at the November Fed meeting, followed by another quarter point in December, according to the CME Group’s FedWatch gauge. Prior, markets had been looking for a half-point in December followed by the equivalent of quarter-point cuts at each of the eight Federal Open Market Committee meetings in 2025.

Not a perfect picture

No more, though, as the Fed, barring any more disappointments from the labor market, can stake a moderate pace through its easing cycle.

“If we continue to see a stronger than expected economy that may give the Fed reasons to slow the pace of rate cuts through 2025 with that exit rate being a little bit higher than they currently expect, all with the economy still maintaining its strength,” Bovino said. “That would be good news for both the Fed and the economy.”

To be sure, there remain some blemishes in the jobs picture.

More than 60% of the growth for September came from the usual suspects — food and drinking establishments, health care and government — that have all been the beneficiaries of fiscal largesse that has pushed the 2024 budget deficit to the brink of $2 trillion.

There also were a few technical factors with the report, such as a low response rate from survey participants, that could cast some clouds over Friday’s sunny report and lead to downward revisions in subsequent months.

But broadly speaking, the news was very good and raised questions over just how aggressive the Fed will need to be.

Questions for the Fed

Bank of America economists, for instance, asked “Did the Fed panic?” in a client note referencing the half percentage point, or 50 basis point, cut in September, while others wondered about the wild vacillations and miscalculations among Wall Street experts. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that “it is doubtful” the Fed would have cut by so much “if it had known this report would be so strong.”

“The question becomes, how does everybody keep getting it wrong?” said Kathy Jones, chief fixed income strategist at Charles Schwab. “How is it we can’t get this number right with all the information we get?”

Jones said the Fed will have a dilemma on its hand as it figures out the proper policy response. The FOMC next meets Nov. 6-7, right after the U.S. presidential election and following a five-week span during which it will get plenty more to digest.

Some commentary after the meeting suggested the Fed may have to raise its estimate of the “neutral” rate of interest that neither boosts nor restricts growth, an indication that benchmark interest rates will settle at a higher place than they have in the recent past.

“What does the Fed do with this? Certainly, 50 basis points is off the table for the next meeting. I don’t think there’s any case to be made there,” Jones said. “Do they pause? Do they do another 25 [basis points] because they’re still far from neutral? Do they just weigh this against other data that might not be as strong? I think they have a lot of figuring out to do.”

In the meantime, though, officials are likely to be content knowing that the economy is stable, the labor market isn’t in nearly as much trouble as had been suspected, and they have time to weigh their next move.

“We’ve witnessed a pretty remarkable economy over the past few years, despite some naysayers and lackluster consumer sentiment,” said Elizabeth Renter, senior economist at NerdWallet. “In an election year, passions run high and every economic report or event can garner intense reaction. But the economic aggregates tell us the U.S. economy has been and is strong.”

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Economics

Germany’s election will usher in new leadership — but might not change its economy

Published

1 day ago

February 21, 2025

Business Finance News

Production at the VW plant in Emden.

Sina Schuldt | Picture Alliance | Getty Images

The struggling German economy has been a major talking point among critics of Chancellor Olaf Scholz’ government during the latest election campaign — but analysts warn a new leadership might not turn these tides.

As voters prepare to head to the polls, it is now all but certain that Germany will soon have a new chancellor. The Christian Democratic Union’s Friedrich Merz is the firm favorite.

Merz has not shied away from blasting Scholz’s economic policies and from linking them to the lackluster state of Europe’s largest economy. He argues that a government under his leadership would give the economy the boost it needs.

Experts speaking to CNBC were less sure.

“There is a high risk that Germany will get a refurbished economic model after the elections, but not a brand new model that makes the competition jealous,” Carsten Brzeski, global head of macro at ING, told CNBC.

The CDU/CSU economic agenda

The CDU, which on a federal level ties up with regional sister party the Christian Social Union, is running on a “typical economic conservative program,” Brzeski said.

It includes income and corporate tax cuts, fewer subsidies and less bureaucracy, changes to social benefits, deregulation, support for innovation, start-ups and artificial intelligence and boosting investment among other policies, according to CDU/CSU campaigners.

“The weak parts of the positions are that the CDU/CSU is not very precise on how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” Brzeski said, noting that the union appears to be aiming to revive Germany’s economic model without fully overhauling it.

“It is still a reform program which pretends that change can happen without pain,” he said.

Geraldine Dany-Knedlik, head of forecasting at research institute DIW Berlin, noted that the CDU is also looking to reach gross domestic product growth of around 2% again through its fiscal and economic program called “Agenda 2030.”

But reaching such levels of economic expansion in Germany “seems unrealistic,” not just temporarily, but also in the long run, she told CNBC.

Germany’s GDP declined in both 2023 and 2024. Recent quarterly growth readings have also been teetering on the verge of a technical recession, which has so far been narrowly avoided. The German economy shrank by 0.2% in the fourth quarter, compared with the previous three-month stretch, according to the latest reading.

Europe’s largest economy faces pressure in key industries like the auto sector, issues with infrastructure like the country’s rail network and a housebuilding crisis.

Dany-Knedlik also flagged the so-called debt brake, a long-standing fiscal rule that is enshrined in Germany’s constitution, which limits the size of the structural budget deficit and how much debt the government can take on.

Whether or not the clause should be overhauled has been a big part of the fiscal debate ahead of the election. While the CDU ideally does not want to change the debt brake, Merz has said that he may be open to some reform.

“To increase growth prospects substantially without increasing debt also seems rather unlikely,” DIW’s Dany-Knedlik said, adding that, if public investments were to rise within the limits of the debt brake, significant tax increases would be unavoidable.

“Taking into account that a 2 Percent growth target is to be reached within a 4 year legislation period, the Agenda 2030 in combination with conservatives attitude towards the debt break to me reads more of a wish list than a straight forward economic growth program,” she said.

Change in German government will deliver economic success, says CEO of German employers association

Franziska Palmas, senior Europe economist at Capital Economics, sees some benefits to the plans of the CDU-CSU union, saying they would likely “be positive” for the economy, but warning that the resulting boost would be small.

“Tax cuts would support consumer spending and private investment, but weak sentiment means consumers may save a significant share of their additional after-tax income and firms may be reluctant to invest,” she told CNBC.

Palmas nevertheless pointed out that not everyone would come away a winner from the new policies. Income tax cuts would benefit middle- and higher-income households more than those with a lower income, who would also be affected by potential reductions of social benefits.

Coalition talks ahead

Following the Sunday election, the CDU/CSU will almost certainly be left to find a coalition partner to form a majority government, with the Social Democratic Party or the Green party emerging as the likeliest candidates.

The parties will need to broker a coalition agreement outlining their joint goals, including on the economy — which could prove to be a difficult undertaking, Capital Economics’ Palmas said.

“The CDU and the SPD and Greens have significantly different economic policy positions,” she said, pointing to discrepancies over taxes and regulation. While the CDU/CSU want to reduce both items, the SPD and Greens seek to raise taxes and oppose deregulation in at least some areas, Palmas explained.

The group is nevertheless likely to hold the power in any potential negotiations as it will likely have their choice between partnering with the SPD or Greens.

“Accordingly, we suspect that the coalition agreement will include most of the CDU’s main economic proposals,” she said.