A summer cooldown?

Last week, the Federal Reserve left its target interest rate unchanged in the range of 4.25-4.50%. Despite numerous attempts from the journalists in attendance, Powell would not tip his hand toward a September rate action, reinforcing the committee’s plan to gain more clarity from the incoming late-summer data. If only it were that easy.

Last week’s economic data revealed an intriguing trend, highlighting how difficult the Fed’s job is at this stage: soft data, such as consumer sentiment surveys, were generally stable at levels much improved from the March lows, while the hard data is now beginning to show some meaningful areas of concern. This marks a stark reversal from the trends experienced earlier in the year and potentially complicates the Fed’s belief that restrictive monetary policy is not holding back the economy “inappropriately.”

This was most evident in the employment data last week. The US added 73,000 jobs in the month of July, falling below expectations and the important 100,000 marker generally consistent with a growing economy. Even more concerning, June’s figures were revised significantly lower to show the economy added only 14,000 jobs during that month. While the headline unemployment rate increased just one-tenth of a percentage point to 4.2%, which may seem rather benign, underlying summer employment trends appear notably weaker than expected.

A slowdown was apparent in the GDP data last week as well. Second quarter GDP increased 3.0%, sharply rebounding from a negative growth rate in the prior quarter. However, the data was filled with distortions as volatile swings in net exports, inventories, and front-loading activities related to tariffs all skewed the result. Removing the noise, a cleaner comparison showed a modest increase of 1.2% this quarter, slowing down from 1.9% growth in the prior quarter.