How long can the US economy’s ‘Goldilocks’ moment last?
Investors were breathing two big sighs of relief on Friday. Thursday evening brought news that a port workers strike from Maine to Texas, which threatened to paralyze the economy, would end after just a few days. Then came Friday’s ebullient jobs report.
The U.S. economy added 254,000 jobs in September, well above estimates for 150,000. Job totals for July and August were revised up. The three-month moving average of job gains, a helpful gauge to smooth out monthly volatility, stood at 186,000 in September, up from 140,000 in August.
That looks close to a “Goldilocks” report—warm enough to reassure investors that the U.S. economy is chugging along, but not so hot that it dissuades the Federal Reserve from continuing to cut rates at a gradual pace. Futures markets are pricing in a 99% chance of a quarter-point rate cut at the Fed’s next meeting in November, according to the CME Group’s FedWatch tool.
But investors should remember that even Goldilocks didn’t have long to enjoy her porridge before the bears showed up.
The most obvious thing that could go wrong is geopolitics. Tensions in the Middle East show no sign of cooling and could soon explode. A strike on Iran’s oil facilities, or Iranian retaliation in vital energy shipping lanes, could spike oil prices and herald a return of inflation pressures.
Or inflation fears could creep back up through more ordinary means if jobs numbers keep surprising on the upside. Average hourly earnings in September rose 4.0% from a year earlier, up from 3.9% in August and the strongest pace since May.
Should those trends continue, they would make expectations for a long series of rate cuts look complacent. According to CME Group, expectations now center on a further 1.25 percentage points of cuts between now and the Fed’s meeting in June.
But TS Lombard economist Steven Blitz said in a note on Friday that the Fed could well stop after two quarter-point cuts this year. “There is an inherent inflation problem given the room for private-sector employment to recover and slow growth in the labor force,” he wrote.
Even the universally expected November cut could come into question if next week’s inflation reading is hot, warned UBS Global Wealth Management economist Brian Rose.
All that is to say nothing of the volatility that could accompany the presidential election, which takes place just days before the Fed’s November meeting.
Investors should never overreact to a single month’s jobs report. The most likely scenario for the economy is still a soft landing, aided by a gradually easing Fed. But investors shouldn’t unbuckle their seat belts just yet.
Write to Aaron Back at aaron.back@wsj.com