Spotlight: Weak economic data bolsters expectation for U.S. Fed rate cut

by Xinhua writers Xiong Maoling, Gao Pan

WASHINGTON, Oct. 4 (Xinhua) — Recent weak economic data have rattled financial markets and raised concerns over a U.S. recession, bolstering expectations for the U.S. Federal Reserve to cut rates again at its next policy meeting later this month.

According to data released by the Institute for Supply Management (ISM) earlier this week, the purchasing managers’ index (PMI), which gauges the performance of the manufacturing sector, fell to 47.8 percent in September, the second month of contraction in a row and the lowest since June 2009.

The non-manufacturing index (NMI), which gauges the performance of the services sector, meanwhile, registered 52.6 percent in September, the lowest reading since August 2016.

On Friday, the U.S. Bureau of Labor Statistics reported that U.S. employers added fewer-than-expected 136,000 jobs in September, down from August’s revised number of 168,000. The September figure is lower than the economists’ estimates of 145,000 polled by Dow Jones.

“The weak data increase the odds of another rate cut. I wouldn’t have thought that the data were that weak,” Krista Schwarz, an assistant professor of finance at the Wharton School of the University of Pennsylvania, told Xinhua via email.

“The Fed would cut because news since the last FOMC (Federal Open Market Committee) meeting, such as the economic recent data, increase the risk of a slowdown, or even a recession,” Schwarz said, while adding that a full recession still seems “unlikely,” unless the trade situation “worsens quite a bit.”

Despite a five-decade low unemployment rate of 3.5 percent in September, job growth has been slowing over the past few months, with an average monthly gain of 161,000 so far this year, below the 223,000 in 2018, the government’s job report showed. Over the last three months, job growth decelerated further to 157,000.

Payroll data company Automatic Data Processing (ADP) has reported similar slowdown in job growth, with an average monthly gain of 165,000 so far this year, below the 222,000 last year, according to a report released on Wednesday.

Diane Swonk, chief economist at Grant Thornton, a major accounting firm, wrote in an analysis Friday that job gains in September remained heavily concentrated in professional services and health care, “but further weakened in the retail sector where the move from in-store to online shopping has triggered a surge in retail bankruptcies,” according to the government’s job report.

Calling the employment data “mixed,” she noted that “manufacturing jobs also contracted in response to weakness related to tariffs and trade.”

Swonk pointed out that average hourly earnings fell by a penny to 28.09 U.S. dollars per hour, decelerating to 2.9 percent from one year ago, “the slowest pace in more than a year.”

“There is little in this report to change votes regarding another rate cut by the Federal Reserve,” she said, adding that the inflation data next week and upcoming U.S.-China trade talks could also influence the Fed’s rate decision at the end of October.

U.S. Fed trimmed interest rates by 25 basis points last month amid growing risks and uncertainties stemming from trade tensions and a global economic slowdown, following a rate cut in July that was its first in more than a decade.

According to the Chicago Mercantile Exchange Group’s FedWatch tool, the probability of a 25-basis-point rate cut at Fed’s next policy meeting was over 70 percent on Friday, compared to about 50 percent a week ago.

“To prevent another rate cut, the Fed needs a reason to believe that they have eased enough to offset the forces weighing down the U.S. economy. It is difficult to see that they can reach such a conclusion without an improvement in the data flow,” Tim Duy, a Fed expert and professor at the University of Oregon, wrote in a blog post Thursday.

“It is almost impossible how they can reach this conclusion now that it appears the negative forces on the economy are intensifying,” he said.

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