In US jobs, it’s (still) too damn hot…
Two data points this week suggest that the Fed’s battle against inflation is showing results — but in all the wrong places, and in a way that increases the recession threat.
First, jobs: The US economy added 253,000 jobs in September. Unemployment is at a half-century low. This would be good news in a normal economic environment. But today’s is anything but. The Fed is almost certain to read these job figures as indication that the labor market is still too hot, and not a Goldilockian “just right.” Markets noticed: The Dow fell over 600 points on Friday, the Nasdaq slid 3.8 percent, and the S&P 500 lost 2.8 percent.
One wrinkle: The number of new job openings in the US plunged by over a million in August from the previous month. It’s the steepest drop in nearly two and a half years. That could mean that relaxation of the labor market is on the horizon, with it a slowdown in monetary tightening. But job opening data is a tough one to read – and a still-low layoff rate cautions against reading too much into the indicator.
…while manufacturing cools: Not brilliant
The second data point is manufacturing: US factory activity grew at its slowest pace in September since May 2020, according to an Institute for Supply Management (ISM) survey. The PMI for September came in at 50.9, versus 52.8 in August – apparently a function of dwindling demand as the effects of monetary tightening hit. That reality is evident even in the hot industrial sectors that for the past years have been synonymous with shortage: Samsung’s operating profit sank 32 percent this quarter as the tech downturn depressed demand.
This is a worrying development. It suggests that the Fed’s rate raising is succeeding in cooling the very parts of the economy that need more heat (read: manufacturing) – but not those driving the hiking calculus (read: labor). Today’s inflationary trends are in large part a function of industrial shortage. The high-level, if difficult, answer to solving them without sparking recession is to raise supply to meet demand. But it seems that US monetary policy is instead encouraging demand to drop to meet supply, a reality that fails to address the fundamental economic imbalance and, if taken to its logical conclusion, ends in recession. Plus, with the labor market still tight, the Fed is unlikely to correct course.
Global FX reserves are plunging
Bloomberg data show that global foreign currency reserves are falling at their fastest pace ever. This year, reserves shrank by 1 trillion USD, or 7.8 percent, to 12 trillion USD. That’s the biggest drop since 2003, when Bloomberg began compiling the data.
Partly, the slump is due to the strong dollar, which has pushed down other reserve currencies like the yen and euro, reducing the dollar value of holding those currencies. Another related and perhaps more worrying reason: Central banks are being forced to draw from their FX coffers to defend their own currencies. India, Japan, the Czech Republic, Hong Kong, and others have all had to intervene to fend off depreciation.
With the US Fed continuing to hike rates, strengthening the dollar, other countries will increasingly depend on their reserves to enable interventions. For emerging markets, this can be a daunting prospect: Depleted reserves imply insufficient funds for critical imports of food and energy – at a time when those are already in short supply.