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A number of recent data show that US economic activity continues to slow down, demand remains sluggish, the labor market has further cooled, and the foreign trade situation continues to deteriorate. Signs of weakness are mounting and the outlook for the US economy is reigniting concerns. Analysts generally believe that the urgency to boost the economy, coupled with easing inflation worries, the Federal Reserve will most likely start to cut interest rates at its monetary policy meeting later this month.

Economic data have been weak across a range of sectors

On September 4, local time, the Federal Reserve released the National Economic Situation survey report (also known as the "Beige Book"), showing that the recent economic performance of most regions in the United States has been poor, and the number of districts where economic activity has been flat or declining has increased from 5 to 9, and economic activity has increased slightly in 3 districts.

The Beige Book showed that consumer spending fell in most districts and manufacturing activity declined. While overall employment levels have remained stable, companies have filled only essential positions and reduced working hours and shifts or reduced overall employment levels through attrition. Amid concerns about demand and an uncertain economic outlook, U.S. employers are becoming more selective about who they hire, and "job seekers face more difficulty and a longer time to get a job."

The number of job openings in the US fell to 7.67 million in July from 7.91 million in the previous month, the lowest level since January 2021, according to data released by the US Labor Department on Thursday. Layoffs rose to 1.76 million, the highest level since March 2023. Earlier, the monthly jobs report released by the Labor Department showed that the U.S. unemployment rate rose in July to its highest level since October 2021.

Reports such as Agence France-Presse and Bloomberg pointed out that this is another sign of slowing labor demand in the United States, showing that the U.S. labor market is increasingly weak. Job growth has slowed, the unemployment rate has risen and job seekers are having an increasingly difficult time finding work, fueling concerns that the U.S. economy could fall into a recession.

At the same time, the sluggish manufacturing data also reflects the lack of domestic momentum in the United States. According to the data released by the Institute for Supply Management (ISM) on the 3rd, the US manufacturing purchasing managers Index (PMI) recorded 47.2 in August. While that was better than July's reading of 46.8, it fell short of market expectations of 47.5 and has been below the 50-point line for five consecutive months. The new orders sub-index fell to 44.6 from 47.4 in July. The production sub-index fell to 44.8 from 45.9, the lowest level since May 2020.

The U.S. manufacturing sector contracted at a modest pace in August, while a further drop in new orders and a rise in inventories suggested factory activity could remain subdued for some time.

Domestic demand is sluggish, and the foreign trade situation is not optimistic. The U.S. trade deficit widened 7.9 percent from the previous month to $78.8 billion in July, the largest deficit since May 2022, Commerce Department data showed on Thursday. According to foreign media reports, the main reason for the widening US trade deficit is a surge in goods imports, as companies stock up ahead of higher goods tariffs and possible worker strikes. Analysts believe trade will likely continue to weigh on U.S. economic growth in the third quarter.

Slowing inflation reinforces expectations of a rate cut

At the same time of repeated weakness in economic data and increased concerns about the economic outlook, the US inflation level has continued to fall, providing more support for the Federal Reserve to open the channel of interest rate cuts.

The latest Beige Book report noted that, on balance, prices rose modestly and non-labor input costs increased moderately. Specifically, freight and insurance costs continued to rise in some regions, while cost pressures on food, timber and concrete eased in some regions. Price and cost pressures are expected to stabilize or ease further in the coming months.

Labor Department data also showed that the U.S. consumer price index (CPI) rose 2.9 percent in July from a year earlier, 0.1 percentage point slower than in June, in a sign that inflation continues to slow. Many analysts said that this means that the Federal Reserve in September to reduce the federal benchmark interest rate expectations have been further strengthened, the market's long-awaited interest rate cut cycle or will start.

To combat inflation, the Fed raised interest rates 11 times in a row from March 2022 to July 2023, with a cumulative increase of 525 basis points. Over the past year, the Fed has kept its target range for the federal funds rate at 5.25 per cent to 5.5 per cent, its highest level in 23 years.

The negative effects of high interest rates on the U.S. economy continue to emerge. Observers said that compared with the second half of last year, the slowdown in the US economic growth trend is still obvious, especially the slowdown in the growth of personal real disposable income, which means that the future consumption ability of Americans will be affected. Bloomberg also noted that consumer spending and broader economic activity have cooled as the Federal Reserve maintains high interest rates, and a cooling labor market and slowing income growth are expected to exacerbate the slowdown in consumer spending.

Last year, Fed officials predicted three rate cuts this year. However, due to setbacks in the progress of the fight against inflation in early 2024, the inflation situation has recurred and the rate cut has been repeatedly delayed. With inflation numbers back on a steady downward path, the Fed senses an opportunity for a policy shift.

The Fed has signaled interest rate cuts several times recently. Federal Reserve Chairman Jerome Powell recently said that "the time has come" to adjust monetary policy. He argued that a significant cooling in the Labour market was unlikely to be a source of increased inflationary pressures in the short term. Upside risks to inflation have diminished, while downside risks to employment have increased.

Dean Baker, senior economist at the Center for Economic and Policy Research, previously told Xinhua News Agency that the Federal Reserve has two major responsibilities to achieve price stability and full employment, unless there is a major surprise, otherwise the Federal Reserve will most likely cut interest rates in September.

Interest rate cut in September may be on course

The Fed's next monetary policy meeting is on September 17-18. At present, the market is widely expected that the Fed will announce a rate cut at this meeting, but the rate cut is not certain. The Associated Press reported that underperforming numbers such as the jobs data raised fears of serious weakness in the economy and sent stock prices plunging. If the Fed decides it needs to offset the negative effects of slowing hiring, it could accelerate the pace of rate cuts.

Agence France-Presse reported that futures traders generally believe that there is a high probability that the Federal Reserve will cut interest rates by 25 basis points at the September meeting. However, some analysts have suggested that the Fed may expand the rate cut in September, from the widely expected 25 basis points to 50 basis points. According to Reuters, data from the Chicago Mercantile Exchange's FedWatch tool showed traders now see a 44 percent chance that the Fed will cut rates by a significant 50 basis points in September, up from 38 percent a week ago.

International observers believe that falling inflation pressures and a weak job market in the United States are the main reasons why the Federal Reserve is preparing to adjust monetary policy. Some economists worry that the Fed's move to cut rates too slowly could pose risks to the U.S. economy.

However, observers believe that even if the Federal Reserve starts to cut interest rates, the high borrowing costs caused by high interest rates will remain for some time, continuing to drag down the development of the United States' own economy.

Ted Rothman, senior industry analyst at Bankrate.com, said that from a consumer perspective, the decline in interest rates will be a gradual process, with a 25 to 50 basis point cut likely to make only a small difference in consumer borrowing costs. The process of falling interest rates is likely to be much slower than the process of previous rapid increases in interest rates.

On the other hand, the direction of the Federal Reserve's subsequent monetary policy has also brought great uncertainty to global financial markets and economic development. At present, some economies are experiencing risks caused by the divergence between their monetary policies and those of the Federal Reserve. Some experts pointed out that the Federal Reserve did not consider the impact on other economies, especially developing countries, when making monetary policy, which exacerbated the economic difficulties of some countries.