On the eve of the election, the economy is hot

Bottom line

With the general election Tuesday and the Federal Reserve's policy-setting meeting Thursday, this week's data dump of third-quarter GDP growth, September's inflation and October's labor report may influence voters, investors and central bankers alike. Surveys and polls have indicated that economic growth is high in voters' minds, along with the federal debt, inflation, immigration and abortion rights. But as we strip away the storm- and strike-related impact on employment, this week's data collectively suggests that the economy is running hotter than expected, which should keep the Fed engaged with another quarter-point cut in November. This late in the game, however, the week's data is neither likely to sway voters nor make a difference even in the extraordinarily tight presidential race.

Labor market distortions With the October ADP private payroll survey running twice as strong as anticipated (gain of 233,000 jobs, consensus at 111,000), and with initial weekly jobless claims hitting a five-month low last week at 216,000, we were expecting a solid October jobs report today. But nonfarm payrolls rose by a much weaker-than-expected 12,000 jobs in October (consensus at 100,000, Federated Hermes at 122,000), with a combined downward revision of 112,000 jobs in August and September. This is the slowest pace of job growth since December 2020, and the adjusted October payroll represents a disastrous loss of 100,000 jobs.

Impact from storms and strikes The labor market was severely distorted last month by Hurricanes Helene and Milton, as well as two significant strikes. About 45,000 dock workers affecting all east coast and gulf ports staged a short walk-out last month, and 33,000 Boeing machinists are currently on strike.

According to the Bureau of Labor Statistics (BLS), the response rate for their October survey of businesses last month was only 47.4%, the lowest level since 1991, due to the twin storms, compared with a normal 90%. Moreover, it reported that 512,000 people in nonagricultural jobs could not work last month due to the inclement weather, compared with the historical average for October of 56,000. So, the deadly storms prevented 456,000 more people than normal from working last month. In addition, another 1.4 million people normally employed full time could only find part-time work because of the weather, compared with the historical average for October of 264,000. Collectively, that suggests October's dismal labor-market performance could be revised up sharply in coming months. At a minimum, we could see a sizable snap-back to trend.

Getting into the weeds Private payrolls lost 28,000 jobs in October (consensus gain of 70,000), with a combined downward revision of 108,000 jobs in August and September. So, October's adjusted private payrolls lost 136,000 jobs. In addition, the household survey shed 368,000 jobs last month, compared with a robust gain of 430,000 jobs in September. The participation rate ticked down to 62.6%, but the unemployment rate and the labor impairment rate were unchanged in October at 4.1% and 7.7%, respectively.

• Temporary help (an important leading employment indicator) lost 49,000 jobs in October for the fifth consecutive month and for the 29th time out of the past 31 months.
• Manufacturing cratered in October, shedding a much worse-than-expected 46,000 jobs (consensus at a loss of 30,000), which was the worst since April 2020. This sector has lost jobs in six of the past nine months.
• Retail lost jobs for the fourth time in the past five months, losing 6,000 in October at the start of the important Christmas season.
• Leisure & hospitality lost 4,000 jobs in October for the first time in six months.

Wage inflation remains a problem Wage growth has surprisingly re-accelerated, rising a hotter-than-anticipated 0.4% month-over-month (m/m) in October, which annualizes to 4.8%, and by 4.0% year-over-year (y/y). The Fed is targeting 3%.

Inflation remains sticky Core PCE (the Federal Reserve's preferred measure of inflation) rose by a firm 2.7% y/y in September (consensus at 2.6%). While this is lower than its February 2022 peak at 5.7% (a 39-year high), the improvement has stalled at 2.7% in four of the past five months. Core PCE rose by a five-month high of 0.25% m/m in September, which annualizes to 3.0%. In its latest Summary of Economic Projections in mid-September, the Fed expects that core PCE will decline to 2.6% by year-end 2024 and to its long-run target of 2.0% by the end of 2026.

GDP solid Gross Domestic Product rose by a 2.8% annualized growth rate in the third quarter of 2024, compared with 3.0% and 1.4%, respectively, in the second and first quarters. The Atlanta Fed's GDPNow estimate for the third quarter was at 3.4%, and the Bloomberg consensus estimate was at 2.9%. But the Blue-Chip consensus and Federated Hermes both forecast 2.3% growth.

What drove the quarter? Personal consumption posted its best quarter since the first quarter of 2023, rising 3.7% in the third quarter (consensus growth at 3.3%), which added 2.46 percentage points to the overall GDP print. Retail "control" sales for goods in September were more than double what was expected at a gain of 0.7% m/m, and the ISM services index has been consistently above the 50 contraction level.

Nonresidential corporate spending also rose a solid 3.3%, due to an 11.1% quarter-over-quarter increase in spending on equipment, adding 0.46 percentage points to GDP. Government spending soared by 5.0%, its highest quarter in a year, due to a surge in national defense spending, adding 0.89 percentage points to GDP growth.

On the negative side of the ledger, housing declined for the second consecutive quarter, plunging by 5.1% (the most since the fourth quarter of 2022) and reducing GDP by 0.21 percentage points. Because of the relative strength of the dollar and the U.S. economy compared with our major trading partners, imports surged by 11.2% versus export growth of 8.9%, so net trade reduced GDP by 0.56 percentage points. Finally, inventory accumulation rose by $60.2 billion in the third quarter, compared with $71.7 billion in the second quarter, which subtracted 0.17 percentage points from overall GDP. We were expecting a smaller inventory build, but because of the port strike, companies grew inventories as a precaution. With the strike now settled, however, we expect that inventory growth which was pulled forward into the third quarter will likely recede in the fourth quarter.

Private domestic final sales solid This metric measures the economy's underlying fundamental strength, as it excludes volatile inventory liquidation or restocking, net trade, and government spending. It rose by 3.2% in the third quarter, compared with 2.7% in the second quarter.

Data may not matter We are inclined to believe the election betting markets. They are favoring Trump, who many polls indicate has a modest lead within the margin of error in all seven of the key swing states. The down ballot impact is crucial. We think the Senate is likely to flip back to majority Republican regardless of the presidency. But control of the House of Representatives is likely to follow the race for the White House, as 80% of the electorate have voted straight ticket over the past 30 years. Consequently, the odds of a Republican sweep have increased to 46%, while the odds of a divided government (with Democratic control of the presidency and the House) at 20%, both of which are market-friendly outcomes. The odds of a Democratic sweep are now at 15%. This week's economic data is eye-opening, but will likely impact the next administration more than the election.

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