By Zack Fritz, Sage Policy Group
The economy is, by all appearances, in good health as we head toward the end of 2024. Employment growth, which slowed during the middle of the year, reaccelerated in September, and the unemployment rate remains low by historical standards, having fallen in each of the past two months. Labor shortages, a pressing issue for much of the past few years, have eased. Inflation has slowed to within spitting distance of the Fed’s 2% year-over-year target, and consumers continue to spend at a healthy clip.
As far as anyone can tell, the Fed has the economy gliding toward a soft landing. The problem, however, is that it has become increasingly difficult to know what’s happening with the economy.
Hurricane Helene, which rocked the southeastern U.S. in late September, and Hurricane Milton, which slammed into Florida’s gulf coast just two weeks later, have distorted a few of the most real-time economic indicators. While this is obviously a minor consideration in light of the loss of life and catastrophic property damage caused by the storms, the economic implications are far reaching.
Initial claims for unemployment insurance, for instance, are the most real time indicator of labor market health and perhaps the earliest indicator of an imminent recession. While these shot up by nearly 16% during the week of October 5, the largest jump since late-2020, a large portion of that increase was due to the workers temporarily displaced by the storms.
While initial claims subsided somewhat in the following two weeks, continuing claims for unemployment insurance continue to trend higher and now stand at the highest level since November 2021. Continuing claims are a close proxy to long-term unemployment, a major signal of labor market deterioration. An uptick caused by hurricanes suggests a very different trajectory for the economy than one caused by more fundamental economic weakness.
The Bureau of Labor Statistics’ October employment report, released on November 1st, didn’t provide much clarity; Hurricane Milton occurred during the week that the BLS distributes the survey that is the source of both payroll employment and unemployment rate data. This will have the compounding effects of showing reduced employment and higher unemployment for October and lowering the survey response rate.
Of course Federal government employment could briefly rise due to the temporary personnel needed to respond to the storms, and this came at a time when election campaigns for all levels of government had hired short-term workers. Which is to say, the jobs data for October was extraordinarily difficult to interpret.
Beyond short-term hiring, presidential elections introduce significant economic uncertainty. The October Beige Book, a Fed publication that summarizes anecdotal information gathered from interviews with policymakers, business leaders, and economists, mentioned election uncertainty fifteen times, with many suggesting they are delaying hiring and capital investment decisions until after the next president is known.
The upshot is that the Federal Reserve will have to approach its next interest rate decision with limited visibility. Even so, it would take a significant economic surprise to derail the anticipated pace of rate cuts, and in all likelihood the Fed will continue to cut rates at their coming meetings.
