Service-sector, Powell, and the Beige Book
Three important things today: service-sector ISM, an interview with Jerome Powell, and the Beige Book
1. The service sector PMI (purchasing manager’s index) from the Institute of Supply Management was released this morning, falling almost 4 points from its last reading to 52.1 from 56.0. The service sector component of the Lantern Daily Economic Index (LDEI) was the biggest contributor of its rise from 8/1/2024 – 11/13/2024, and I’ve been watching these indicators for a sign of weakness. It came today. From mostly this, the LDEI dropped 0.11 today which is significant (see chart below.)

In monitoring this tentative local peak in the economy, 6 of the 9 categories of the LDEI have made definitive or slight peaks. The biggest remaining question is what the non-farm payroll number and unemployment rate will be on Friday to see how the labor market is doing.

2. Jerome Powell was interviewed by Andrew Ross Sorkin of CNBC and the New York Times for about 30 minutes today. Powell wasn’t asked about his intentions for lowering rates in December; it was a broader interview. A comment he made about the fiscal situation was new,
Sorkin: Do you think the Fed should or could take the debt and deficits and that cost, in where you think rates can or should be, ever?
Powell: No, never. I mean, you see this in some emerging market countries for example. If the central bank can’t raise rates to deal with inflation because the fiscal situation is so bad that they can’t raise rates; that’s called fiscal dominance, and we are so far from that. We will never, we will never. We will always use our tools to achieve price stability and maximum employment; 2% inflation. We are not thinking, oh we better not raise rates because of the budget. If we ever get to that point…we are far from that.
This corroborates what I wrote back in July, that it will be years, if not a decade, for the U.S.’s fiscal situation to become unmanageable based on several metrics.
3. The Fed releases a new Beige Book before every FOMC meeting which is an anecdotal summary of what businesses are saying about growth in each of the twelve Federal Reserve districts. The most recent one came out today and it improved considerably. There is now just one district, Boston, that was contracting and one district, San Francisco, that was flat. The percentage of the country in recession is 5%, see chart below:

But, this is just further confirmation that the economy improved from August through mid-November, as seen in the LDEI above. Economic data has since weakened. I doubt today’s Beige Book will be surprising news to change the Fed’s mind about cutting in December. The bond market prices a December cut at a 76% chance now. Most of the Fed want to cut ahead of economic weakness to encourage a soft-landing. If the payrolls data on Friday and CPI next Wednesday aren’t shockingly high, the Fed will cut 25 basis points on the 18th. The Fed’s blackout period begins this Saturday.