On The Economy, Inflation, China & Odds For Fed Liftoff by Gary D. Halbert

by Gary D. Halbert

September 8, 2015


  1. August Unemployment Rate Fell to Seven-Year Low
  2. US Economic Outlook For the Second Half of 2015
  3. Inflation Still Running Well Below the Fed’s 2% Target
  4. Stronger Dollar Could Hamper Growth This Year & Next
  5. New China Economic Data Point to Further Slowdown
  6. Fed Funds Rate Futures Show Odds For Sept. Rate Hike


The investment markets remain fixated on whether the Fed will hike interest rates for the first time in almost a decade on September 17. Stock market volatility spiked in late August and so far this month, with most global equity markets in “correction” territory. It remains to be seen if the latest stock market chaos will cause the Fed to delay lift-off until December or later.

Other than global equity market weakness and below target inflation, other factors that would lead the Fed to tighten are in-line, although last Friday’s unemployment report for August could have been stronger. Today, we will examine the August jobs report, the strength of the US economy in general, inflation trends and the outlook for the US dollar. We’ll also take a look at the latest disappointing economic news out of China.

We’ll end today with a look at the Fed Funds rate futures market to see what the probability is for a rate hike next week. At the end of last week, Fed Funds futures indicated an 81% chance of a rate hike on September 17, up from a 74% chance in August.

It’s a lot to pack into one E-Letter, so let’s get started.

August Unemployment Rate Fell to Seven-Year Low

The Bureau of Labor Statistics (BLS) reported on Friday that the unemployment rate fell to 5.1% in August, down from 5.3% in July. This was lower than the pre-report consensus which called for the rate to remain unchanged. While the drop to 5.1% was a surprise, that level falls squarely within the Fed’s range for “full employment” which is 5.0%-5.2% (more on this below).

While the jobless rate fell more than expected, the US economy added only 173,000 jobs in August, well below the pre-report consensus for 220,000 new jobs. New jobs created in June and July were revised up by a combined 44,000 and most forecasters believe that August jobs will be revised higher over the next couple of months as well. We’ll see.


According to the BLS, the main reason why the unemployment rate tumbled to the lowest level since April 2008 is because another 261,000 Americans dropped out of the labor force in August. This pushed the total number of US working-age, available workers who are not in the labor force to a record 94 million, an increase of 1.8 million in the past year. That’s a whopping 14.9 million who dropped out since the start of the Great Recession in December 2007.

The Labor Force Participation Rate remained unchanged in August at 62.6% for the third consecutive month – a level not seen since the 1970s.

Average hourly earnings of private-sector workers rose by 8 cents to $25.09 last month. That’s a 2.2% increase from a year earlier. Wages had been advancing at a modest 2% pace during most of the expansion. Many economists point to the slow gains in wages as a reason that consumer spending and the broader economy aren’t growing more rapidly.

The average workweek also increased by 0.1 hour last month to 34.6 hours. The number of Americans working part-time because they can’t find full-time jobs (also called “involuntary part-time workers”) was little changed in August at 6.5 million. A study earlier this year by Rutgers University found that 63% of involuntary part-time workers are struggling financially.

A broader measure of unemployment – the U-6 rate – that includes people looking for work, stuck in part-time jobs or discouraged about finding a job dropped to 10.3% in August, down from 12% a year earlier. While headed in the right direction, that number is still very high.

In conclusion, the August unemployment report was a mixed bag. While the drop to 5.1% in the headline unemployment rate is welcome news, it also falls into the range which the Fed considers to be full employment –  which could result in a Fed Funds rate hike. On the other hand, the much weaker new jobs at only 173,000 last month might give the Fed a reason to pause yet again.

US Economic Outlook For the Second Half of 2015

So far, we know that GDP increased by a wimpy 0.6% in the 1Q. Most forecasters believe that was due to yet another extremely cold winter in many parts of the US. Initially, the Commerce Department reported that 2Q GDP rose by 2.3%; however, on August 27 the government revised that estimate all the way up to 3.7%. So, overall growth for the first half of 2015 was 2.15%, if the 3.7% estimate for the 2Q holds.

So what was driving the big bounce in the 2Q? Pent-up demand from the 1Q was one part, but strong consumer spending played a big role in fueling the economic resurgence, helped by strong gains in disposable income and lower gasoline prices. Also helping was a ramp-up in construction activity, including home building. The housing market is having a good year, propelled by a stronger job market, low interest rates, slowly rising wages and an increase in household formations.

So how about the 3Q? We won’t get our first glimpse at 3Q growth until the end of October when the Commerce Department’s advance estimate of 3Q GDP will be released.  However, most forecasters agree that 3Q GDP growth will not match the 2Q.

3Q growth should slow from the strong 2Q as inventories grow more slowly and state and local government spending slow from an unsustainable pace. As of last week, the Atlanta Fed’s GDPNow reading forecasts growth of just 1.5% in the 3Q. On the other hand, most forecasts I’ve seen for the 3Q are in the 2.5-3.0% range.  We’ll see.


Most forecasters expect similar growth in GDP in the 4Q. The consensus currently is that GDP growth will average about 2.7%-3.0% for the second half of this year, resulting in an overall pickup of just 2.5% or less for the full year, only slightly ahead of 2014’s pace – still not impressive.

Inflation Still Running Well Below the Fed’s 2% Target

The thing central bankers fear the most is deflation. While the US economy is not experiencing deflation, our inflation rate is very low. According to the Bureau of Labor Statistics, the Consumer Price Index rose just 0.2% for the 12 months ended July. The Fed, however, prefers to gauge inflation by watching the Personal Consumption Expenditures Price Index (PCE), and specifically the Core PCE which excludes food and energy prices.

Personal consumption expenditures are the primary measure of consumer spending on goods and services in the US economy. It accounts for about two-thirds of domestic spending, and thus it is the primary engine that drives future economic growth.

The Fed believes that US core inflation needs to be at least 2% to keep the

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