Markets Shake Off Higher Rates
September 9th, 2022
Wall Street managed to break its three-week losing streak as kids headed back to school and workers returned to cubicles following the Labor Day holiday. Stocks seesawed early in the abbreviated trading week as investors digested last week’s nonfarm payrolls report. The August jobs report showed that businesses added 315K new hires to the payrolls, down from July’s 526K. Wall Street initially cheered the report as a sign that the labor market may be softening, which could help lower overall inflation, but on a second reading, investors grew more wary. While the new hire figures were lower, jobless claims have recently fallen to a 3 ½-month low of 222K. Furthermore, August’s employment data has historically been noisy with many people on vacation and slow to respond to the government’s monthly employment survey. Over the past five years, the average upward revision between the first and third estimates of August job growth has been 119K jobs. If the upward revision average holds, the August jobs report would prove to be exceptionally strong, requiring that the Fed sustain its aggressive rate hiking path. Economic news for the week showed little change. The services indices painted a mixed overall picture while the U.S. trade report was hampered by the strong dollar. With markets having sold off over the past several weeks on rate concerns, and this week’s economic data not showing any significant change in current economic conditions, investors showed a greater appetite for risk helping the S&P 500 add 3.65%.
A Tale of Two Services Indices
The odd divergence between the US ISM Services Index and the S&P Global US Services PMI continued to grow in August. The ISM Services Index showed that business conditions at companies such as restaurants and hotels rose to 56.9 in August from 56.7 the prior month. August’s reading was also the highest level since April. Numbers above 50 indicate expansion while numbers below indicate contraction. The overall services sector growth was driven by improvements in supply chain, logistics, employment, and costs. Prices also continued to trend lower, falling for the fourth straight month. Meanwhile, the S&P Global US Services PMI painted an entirely different picture of the service sector. The U.S. Services PMI Business Activity Index fell to 43.7 in August, down from an earlier estimate of 44.1 and a reading of 47.3 in July. That was its weakest level since May 2020. The slide underscores the risk of a recession with service providers recording a solid decline in new business, hampered by elevated prices and rising interest rates. Market watchers have been perplexed by the divergent readings, but they can be explained by the different methodologies employed by the two reports. The S&P Global PMI only includes data provided by companies operating in the private sector. The ISM, on the other hand, also includes the public sector which usually holds up better in a downturn and can distort the overall reading for services sector. ISM data is also based on readings from ISM members which tend to consist of larger companies that can better navigate a high inflation environment than their smaller competitors. On the other hand, the S&P Global surveys use a mix of small, medium, and large firms that are more representative of GDP and provide a better read on the state of economic activity. In the past, the ISM has tended to converge to the S&P, suggesting that the services sector is slowing but it has just not permeated to the public sector just yet since tax rolls are still high.
U.S. Trade Deficit Shrinks
Demand for goods continued to fall with consumer budgets challenged by high inflation and a greater preference for service spending. Imports to the U.S. fell -2.90% to $329.4 billion in July, its second consecutive monthly decline, while exports were little changed, up 0.20% to $259.9 billion. Services exports grew during the month, helped by spending by foreign visitors now that travel restrictions eased, and more vacationers came to the U.S. The drop in imports and rise in exports helped shrink the trade gap by 12.60% from the prior month. From an accounting perspective, the decline in the trade deficit bodes well for US economic growth in the third quarter since a lower trade deficit reduces the drag on US GDP.
The market’s three-week slide came to an end on Friday as investors were finally able to shake off their disappointment with the Fed having dashed their hopes for a pivot on rates anytime soon. With easy money off the table, investors have shifted to now having accepted higher rates as a consolation prize if it means that the Fed sticks to its guns and squashes inflation. A 75-bps hike later this month is a virtual certainty, which will bring the benchmark lending rate to a range of 3.00%-3.25%. Investors have tolerated higher rates because economic data has remained surprisingly resilient. The strong job market and consumers’ willingness to continue to spend have bolstered hopes the Fed really can engineer a soft landing, but key tests for the market remain and next Tuesday’s inflation reading will have a big bearing on whether this week’s optimism has any meaningful follow through.
The Week Ahead
Another round of hot inflation reports could add more volatility to markets as we head into the Fed’s late September meeting. Retail sales will also take center stage as consumers have continued to spend during these times of high inflation by using a mix of savings, credit cards, and buy now/pay later services.
Americans are Retiring Later, Reversing a Century-Long Trend
Several recent studies have shown that Americans are now retiring three or four years later in life than they did three decades ago. The American Enterprise Institute (AEI), a think tank in Washington, DC, reported earlier this year that Americans aged 62 to 65 are participating in the labor force at the highest rates since the early 1960s. AEI said that from 1990 to 2019, the average retirement age rose from 62.6 to 65.6. The annual Economy and Personal Finance survey conducted by Gallup in April 2022 also showed that Americans are retiring later, with the average retirement age rising from 57 in 1991 to 61 in 2022. These findings were further validated by the Center for Retirement Research, a non-profit research group at Boston College, that found that from 1991 to 2021, the average retirement age climbed from 61.9 to 64.7.
What makes this so interesting for economists, public policy experts, businesses, and workers is that for nearly 100 years, there was a trend of Americans retiring earlier, and now that trend appears to have reversed with workers delaying retirement and working longer. It’s true that Americans are living longer, healthier lives. Research also shows that longer life expectancies and better health strongly correlate to later retirement. Today’s jobs are generally less physically strenuous than in the past, so it’s easier to work longer.
A number of additional factors are tied to delayed retirement, including rising inflation and health care costs and the volatility of the stock market that may weigh on workers’ minds. Other reasons for delayed retirement may be changes to Social Security, including an increase in the program’s full retirement age from 65 to 67. Americans who claim Social Security benefits earlier than their full retirement age receive reduced benefits, so there is an incentive to continue working. The Social Security Administration also introduced the delayed retirement credit, which offers increased benefits for those who retire after reaching their full retirement age. We’ll address some of the major components of social security in next week’s Week in Review.
Another contributing factor to delayed retirement is a shift from defined benefit plans, such as company-sponsored pensions, to defined-contribution plans, such as employer-sponsored 401(k)s. In 1940, about 58% of American households had access to a defined-benefit plan, according to Center for Retirement Research data, where an employee would receive a specific pension amount in retirement. By 1965, less than 5% did. With this shift, there’s a lot of individual planning, investing, and saving required to ensure a financially secure retirement.
Over the past century as more women joined the workforce, they began to push their male partners’ retirement age back a few years since many couples prefer to retire at the same time, and women are typically younger than their male partners by about 2.2 years in the U.S., according to Pew Research.
Experts say that continuing to work can offer a number of benefits. Work can create social connections, keep us mentally engaged, and help us build greater financial security to support our longer, healthier lifespans. Researchers at the University of Pennsylvania found a correlation between employment, social engagement, and longevity, noting that the employment of older workers not only adds more years to those individuals’ lives, but also adds more ‘life’ to their later years.