As Rate Cut Nears, More Regions Report Weaker Economic Activity

The US economy has remained remarkably resilient throughout the Federal Reserve’s two-year rate hiking cycle as the central bank has fought to get post-pandemic inflation under control. However, firms are signaling weakness just as the Fed looks to turn the page at its upcoming September meeting.

In the latest Beige Book, which covers national economic activity during the six weeks ending on September 4th, nine of the twelve Federal Reserve districts reported slow or declining activity, up from five in the previous period. Zooming out to all of 2024, we see that after a trend of improvement during the first five months of the year, economic activity has steadily weakened over the past three months.

The latest Beige Book sentiment echoes the trend of data in recent weeks showing a cooling labor market and worsening small business optimism. According to data tracked by the National Association of Independent Business, small business optimism in the US declined in August to its lowest level in three months.

For businesses and borrowers looking for a reprieve in financial conditions, encouraging CPI data from August makes a September rate cut almost a certainty. Nonetheless, following consecutive months of slowing job growth and anecdotal signals of deterioration, markets are now weighing whether the Fed should opt for a larger half-point rate cut instead of a more conventional quarter-point reduction.

When signs of labor market cooling became more apparent in early August, Federal Funds Rate futures markets increasingly priced in the chances of a 50 basis point cut in September, reaching 50% by August 12th. However, days later at Jackson Hole, Powell telegraphed a readiness to pivot but with nuance. With the unemployment rate stabilizing in August, futures markets have settled back into a consensus of a 25-basis point cut as of September 11th.

On balance, anecdotal and sentiment-based data paint a more pessimistic picture than recent quantitative indicators. Making sense of this balance will prove determinative for the FOMC’s upcoming decision.