Recent concerns about a potential economic slowdown have stirred considerable debate, but Yardeni Research offers a compelling counter-narrative.
As per the analysts, the U.S. economy displays a resilience that counters the prevailing concerns and suggests that intervention from the Federal Reserve may not be necessary to sustain growth.
“The latest batch of labor market indicators has caused a temporary “growth scare,” in our opinion,” the analysts said.
This sentiment, driven by some weak labor market indicators, is somewhat misleading. Despite these concerns, overall economic conditions—especially within the labor market—remain robust.
While recent payroll and household surveys reflect some vulnerabilities, they also reveal strength in sectors like healthcare, leisure, and construction, which have shown solid employment gains.
A closer look at the labor market reveals that it remains resilient, even if the headline numbers appear softer.
For instance, average weekly hours worked increased by 0.3% in August, which led to a 0.4% rise in aggregate weekly hours. This uptick suggests that real GDP growth could potentially surpass 3% annually, provided that productivity continues its recent upward trajectory.
Yardeni Research expects that productivity growth, which has been strong since the third quarter of 2023, will remain a key driver of economic expansion. This expectation reduces the urgency for major Fed intervention.
The market’s current outlook is heavily tilted towards expecting multiple rate cuts by the Fed in the near future. With predictions ranging from six to nine 25-basis-point cuts over the coming year, the sentiment reflects concerns over a potential recession and a conventional Fed response to such scenarios.
“Since the summer, we’ve been predicting one rate cut in September for the rest of this year and thinking maybe two to four cuts in 2025,” the analysts said.
Despite this, they argue that aggressive easing may not be crucial to maintaining economic momentum.
Yardeni’s skepticism about the necessity of monetary easing is grounded in the belief that the Fed has already met its inflation objectives.
Recent comments by Federal Reserve Chairman Jerome Powell at Jackson Hole acknowledged that inflation is near the Fed’s 2% target, suggesting some room for policy easing.
Nonetheless, Yardeni Research remains unconvinced that additional help from the Fed is essential for continued economic growth. In their view, easing monetary policy might inadvertently stimulate stronger economic growth through enhanced productivity rather than through employment gains.
The labor market data also presents several bright spots that challenge the narrative of a slowdown. Industries such as ambulatory health care, construction, and financial activities reached record employment levels in August.
“Average hourly earnings rose 0.4% during August. So our Earned Income Proxy for private-industry wages and salaries in personal income rose 0.8% to a record high last month,” the analysts said.
Addressing the dynamics of the yield curve, Yardeni notes that while the curve has recently disinverted—an occurrence historically linked to recessions—this does not necessarily signal an imminent downturn.
They argue that the U.S. economy is sufficiently robust to withstand such trends, particularly with the Fed poised to lower rates as a precautionary measure against potential downturns.
The bond market’s reaction to softer employment data further supports Yardeni’s more optimistic view of the economy.
