Why a 50bps rate cut could 'work against the economy': Economist

the Commerce Department revising second quarter GDP Higher by 2/10 of a percent in today's personal consumption expenditures data showing a half of 1% increase in consumer spending joining us now we've got Gus fosche Chief Economist at PNC Financial Services Group to discuss and Gus it's great to have you on here on this Friday afternoon so we got a lot of economic data this week we got jobless claims pce obviously earnings painting a bit of a contradictory picture on the state of the consumer what thesis about the health of the economy did you derive from the totality of that information this week uh we are seeing continued economic growth in the summer of 2024 but growth is slowing and that's a good thing and then we're also seeing inflation slow so the today's inflation numbers were quite good and I think that means that the FED can cut rates when they meet in September and then cut rates multiple times in 2024 and 2025 and when they cut in September Gus what are you looking for is it going to be the traditional 25 super siiz 50 what would be your expectation uh unless we get a really bad jobs report I think we see a 25 basis point cut in the FED funds rate in September I think a 50 basis point cut would actually work against the economy because that would indicate that the FED is concerned about growth I think growth is still solid we saw that in today's consumer spending numbers so I think the FED can gradually ease the FED does have the flexibility if the labor market weakens to cut more rapidly but as of now I think we see 25 basis point Cuts every meeting for at least the next six months or so uh that will support economic growth and that will allow for soft Landing I I want to talk to you about something that we heard from the Dollar General CEO and how that might be impacting the potential for a soft Landing the CEO saying in our latest survey 25% of our customers surveyed noted they anticipated missing a bill payment in the next six months and that's just one data point of a slew of issues that decided about the health of the consumer here does it still hold to you that the lower income consumer can sometimes be kind of the first Domino to fall in a strain of issues with consumer spending and is that something that could challenge this sof Landing narrative not for the next six months but for some years to come here oh absolutely I mean obviously higher income households are benefiting from rising stock values Rising house prices so they're doing quite well we're seeing the slowing and growth coming primarily from lower income and middle income consumers they've been hit hard by higher inflation that being said when you look at aggregate consumer balance sheets they're still in pretty good shape Consumer Debt burdens are low relative to incomes uh and I think that generally consumers are in solid shape with a little bit more concern among those lower and middle inome households but it is the upper inome households that account for the bulk of consumer spending Gus let's spin ahead to that payrolls report I'm interested to get your forecast what what do are you expecting uh to see there Gus uh I think we see about 170,000 jobs added in August I think uh we had some weakness in July in part because of hurricane Burl and we'll see a reversal there uh I think we see the unemployment rate move a tenth of a percentage Point lower to 4.2% uh and that would be a good solid number uh consistent with slowing inflation and easing economic growth and I think that allows the FED for a 25 basis point rate I think if if the report is much worse than that let's say we get you know flat jobs uh increase in the unemployment rate then maybe we see the FED cut 50 basis points uh but I think if we get something in line with expectations that's what the FED wants to see and then we get that quarter of a percentage point cut on September 18th Gus while we're on the subject of the labor market I'm just curious to get your take on that big revision we saw 88,000 Gus uh I'm just curious to hear what you made of that and also the role immigration played there Gus that was another question that was being asked um yeah so obviously that was a much larger downward revision than we normally see it was about five times larger than the typical revision uh I think some of that is due to the uh more updated data not capturing some people who uh undocumented workers in the economy um I don't think it changes the story very much I think we had a very strong labor market in 2023 uh we have seen job grow slow over the past year or so uh you know and it perhaps is a little bit weaker than we thought prior to those revisions but we still have a good job market just not as good as it was last year we still have a low unemployment rate just not as low as it was last year and I think this story is consistent with softening economic growth and something moving closer to to Trend you know over the next couple of years that's exactly where I wanted to go is are we seeing slowing that's a trend are slowing that is potentially uh not so great to see the labor force taking a look at some stats here the labor force is expected to grow by 4/10 of a perc per year for the next decade according to BLS data that we got today that's a third of the prior decades gains is is that a new normal or is it a sign of slowing over the next decade that is potentially concerning um no that is concerning I mean uh obviously we have the Baby Boomers retiring and they're going to be leaving the workforce over the next decade or so uh one way we can make that up is through higher immigration levels it looks like we're still not quite sure but it looks like one of the factors supporting economic growth over the past couple of years has been higher immigration uh but we need to think longer term about an aging Workforce where we're going to find workers uh find ways to increase labor force participation among native born Americans but also figure out ways to bring more people into the economy because they will be needed for long run economic bro