In the years following the Global Financial Crisis (GFC) of 2008-9, consumers focused on lowering overall debt levels. Today, overall consumer debt levels are significantly lower than the peak levels we experienced back then.1 Much of that focus on lowering debt has been related to lowering mortgage debt. However, over the last 3 years, the delinquency rate for auto loans and credit card balances has been trending upwards and is now on par with levels not seen since the post-GFC period (2010-2011). As more consumers are struggling to keep up with credit card balances and car payments, the personal savings rate has been falling.
A falling personal savings rate is often a sign that consumers have better things to do with their income than keep it in a bank, which is often a good thing. On the other hand, it may also indicate an increased reliance on borrowing.
In our view, lower overall debt levels, full employment, and decent wage growth (on par with inflation) keep us comfortable with the state of the consumer. That said, the warning signs related to delinquency rates are something we'll be tracking over time.
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U.S. equities finished the week little changed, but beneath the surface, investor expectations shifted considerably as a series of labor market reports altered the outlook for interest rates. Early in the week, softer employment data supported the view that the economy may be gradually cooling. By Friday, however, a much stronger-than-expected jobs report had investors reconsidering how long the Federal Reserve may need to keep interest rates elevated.
Labor Market Data Shifted Expectations
Employment data dominated the week, though the message was not always clear.
The week began with the August ADP employment report, which showed private employers added just 38,000 jobs, well below expectations.2 The report initially reinforced the idea that hiring activity was slowing and supported expectations that the Federal Reserve could remain on hold in the coming months.
The Job Openings and Labor Turnover Survey (JOLTS) painted a somewhat different picture. Job openings increased modestly in July, suggesting that while hiring has cooled from the rapid pace seen in recent years, demand for workers remains relatively healthy.3
That set the stage for Friday's employment report, which became the week's most influential market event.
The U.S. economy added 162,000 jobs in August, nearly three times economists' expectations and a significant improvement from the previous month's reading.4 The report challenged the growing narrative that labor market conditions were weakening and highlighted the economy's continued resilience despite elevated interest rates. The stronger-than-expected report also pushed Treasury yields higher as investors reassessed the likelihood that the Federal Reserve may need to keep policy restrictive for longer.
For investors, the report mattered less because of the jobs number itself and more because of what it may mean for future interest-rate decisions. A stronger labor market supports consumer spending and broader economic activity, but it can also make it more difficult for inflation to return to the Fed's 2% target. Following the report, expectations for a potential rate increase later this year moved higher as markets adjusted to the possibility that interest rates may remain elevated for longer than previously anticipated.
The broader takeaway is that the economy continues to show resilience in the face of higher borrowing costs. While inflation has improved in recent months, labor market conditions remain firm enough that policymakers are unlikely to feel pressure to quickly change course.
Key Takeaways
Last week's employment data highlighted the challenge facing the Federal Reserve. Inflation has moderated from its peak, but economic growth and labor market conditions remain stronger than many anticipated. The question facing policymakers is whether the economy can cool enough to bring inflation lower without requiring additional policy tightening.
For now, interest rates remain the market's primary focus. The strong payroll report reinforced that the outlook for monetary policy will continue to depend heavily on incoming labor market and inflation data. As we move further into the fourth quarter, employment trends, inflation readings, and Treasury yields are likely to remain the key drivers of market sentiment. Last week's data served as a reminder that stronger economic news is not always interpreted positively by markets if it increases the likelihood of interest rates remaining elevated.
While stronger employment may create short-term uncertainty around interest rates, it also reflects an economy that continues to demonstrate resilience despite elevated borrowing costs. From a long-term perspective, healthy labor market conditions remain an important foundation for consumer spending, corporate earnings, and overall economic growth.
