'No landing' risk returns as US economy refuses to cool

Consumer spending, jobs hold up despite high oil prices and rates

Retail sales up 1.2%; payrolls add 162,000

Fed may tighten further as inflation stays elevated

10-year Treasury yield tops 5%; PCE, jobs data in focus

Traders monitor market conditions on the floor of the New York Stock Exchange. [Yonhap]

With US consumer spending and employment holding up better than expected despite high oil prices from the Iran war and elevated interest rates, analysts are again raising the prospect that the American economy could enter a "no landing" scenario — one in which growth continues without a recession but inflation fails to cool sufficiently. The concern is that a resilient economy could prolong inflation and give the Federal Reserve room to tighten further, pushing Treasury yields even higher in the process.

Spending and jobs hold firm despite high oil prices and rates

The Guardian and CNBC reported Sunday (local time) that recent US economic data has continued to outperform expectations even as interest rates remain high and energy prices have surged.

US retail sales rose 1.2 percent in August from the previous month, well above the market forecast of 0.7 percent, rebounding within a month after a decline in July. Sales excluding gas stations also climbed 1.1 percent, indicating that underlying consumer demand remained strong even after stripping out the effect of higher fuel prices.

The labor market has also held steady. Nonfarm payrolls grew by 162,000 in August, and job gains for June and July were revised upward by a combined 55,000. The unemployment rate held at 4.1 percent, and weekly initial jobless claims recently fell below 200,000.

The Guardian noted that American consumers have kept spending and business investment has remained solid despite high interest rates and rising energy costs from the Iran war. Michael Strain, director of economic policy research at the center-right American Enterprise Institute, said the economy has proven highly resilient even in the face of elevated energy prices. "Unemployment is very low and the economy is very resilient to high energy prices," he said. "Consumers are also showing resilience to the trade war, and investment spending is very strong."

The concern, however, is that the economy's underlying strength could make it harder for inflation to slow.

The US inflation rate has risen to 3.4 percent from 3.0 percent when former President Joe Biden left office. The Iran war has driven a sharp jump in energy prices, and with consumer spending and employment remaining firm, price pressures are building from both the supply and demand sides.

Strain said inflation remains the weak spot. "Where we are not doing well is inflation," he said. "Inflation is eating into wages and incomes and is a headwind facing households."

The Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75 to 4.00 percent on Sept. 16 — its first tightening move since July 2023. With inflation running above the Fed's 2 percent target, both the labor market and consumer spending appear strong enough to withstand further rate increases.

Susan Collins, president of the Federal Reserve Bank of Boston, said the likelihood has grown that inflation will remain well above the Fed's 2 percent goal and called for "a somewhat more restrictive federal funds rate." Tom Barkin, president of the Richmond Fed, warned that recent price pressures may not be limited to temporary factors such as energy costs and tariffs.

Recession fears fade, but now markets worry about more rate hikes

Federal Reserve Chair Kevin Warsh holds a press conference at the Fed's Washington headquarters on Friday (local time). [Reuters]

CNBC said the stronger-than-expected performance of the US economy is now being priced into the long-term Treasury market, with investors factoring in the possibility of additional Fed rate hikes. The yield on the 10-year US Treasury note surged to 5.34 percent during trading Thursday, its highest level since 2002.

Treasury yields continued to climb even as crude oil prices fell. West Texas Intermediate dropped 7.9 percent over the past week as hopes grew for US-Iran negotiations, but selling in the bond market did not let up. Analysts said the bond market is focused not just on energy prices but on the strength of US demand and the prospect of further Fed tightening.

CNBC said a resilient US economy, strong investment demand driven by the AI industry, and heavy Treasury supply from the fiscal deficit are all simultaneously pushing long-term yields higher.

Rising long-term yields are in turn increasing borrowing costs across the economy. The 10-year Treasury yield serves as a benchmark for mortgage rates, auto loans and corporate bonds. The stronger economic data appears, the more markets expect the Fed to keep rates higher for longer — and that expectation feeds directly into higher market rates.

However, analysts caution that robust consumer spending does not reflect the financial situation of American households broadly. The Guardian reported that the top 10 percent of earners account for nearly half of all consumer spending in the United States, effectively propping up overall consumption figures even as middle- and lower-income households lose spending power. Rather than broad-based economic health, strong spending by the wealthy may be masking financial stress among lower-income Americans.

The strain of high prices and borrowing costs is also showing up in consumer sentiment. A University of Michigan survey found that consumer confidence in September fell to its second-lowest level in the survey's 74-year history. The gap between solid headline economic data and what households actually feel on the ground remains wide.

Markets are watching this week's inflation and jobs releases as potential turning points for Fed policy. The August personal consumption expenditures price index — the Fed's preferred inflation gauge — is due Wednesday, followed by September nonfarm payrolls, the unemployment rate and average hourly earnings on Nov. 2.

If employment and wages continue to beat expectations and core PCE inflation stays elevated, market attention is likely to shift away from recession risks and toward how much further the Fed may raise rates.

Debriefing: The Korea Herald's international desk breaks down the hidden stories behind the hottest global issues. Have a question? Leave a comment below.

sjy@heraldcorp.com