The Federal Reserve tried to slow down the world’s largest economy for years. And it’s finally happening.
A swath of US economic data points to weaker economic activity in the second quarter of 2024. Last week’s measurements include jobless claims, housing construction, and building permits for May and the first half of June.
Claims for state unemployment benefits dropped by 5,000 last week to a total of 238,000; slightly worse than market expectations of 235,000. The four-week moving average of jobless claims reached its peak since September 2023 at 232,750.
In May, the US unemployment rate broke the 4% level for the first time since January 2022. It had remained below 4% for the longest streak of time since the Vietnam War. Under President Joe Biden’s administration, the unemployment level reached one of its lowest levels in history at 3.7%.
Increasing unemployment, albeit at a very manageable level, is a sign that the US economy is weakening.
Building permits dropped by 3.8% to 1.39 million, the lowest level since June 2020 and below the 1.45 million expected. Construction of new houses also dropped to a multi-year low at 1.27 million, a 5.5% month-on-month drop and far below the 1.37 million forecast.
Engineering a soft landing
The decline in economic activity is good news for the Federal Reserve, which tried to slow it down for years to tame inflation. At its peak, inflation reached 9.2% in the United States, prompting the Fed to bring interest rates to their 23-year high of 5.25%.
Although significantly lower, the US inflation hasn’t even come close to the 2% target yet. Prices hovered around the 3% mark since December 2023: in May 2024 inflation reached the 3.3% level.
This forced the Fed to delay interest rate cuts, especially as the US job market remained as strong as it did.
But the Q1 GDP growth reading came in far lower than expected at 1.3%, signaling that high interest rates were starting to put a toll on US consumers. This week’s slate of data is another indication the Fed will hardly ignore.
“Economic indicators for the second quarter largely point to another slow quarter of economic activity,” said Bill Adams, chief economist at Comerica. “Soft activity and labor market data reinforce expectations for the Fed to begin cutting interest rates in a few months... an initial cut in September, and a second cut in December.”
Cutting interest rates in September would also be a nudge to Biden’s reelection campaign. It would signal the end of the fight against inflation and the beginning of a new growth cycle.
But the Fed needs more solid data of a low inflation-slow economy situation before taking its decision. The Fed’s Chairman Jerome Powell will unlikely commit to any rate cut before the absolute certainty that inflation is on a stable path toward the target.
