Businesses Still Navigating Economic Challenges Despite Fed Easing

The Federal Reserve resumed rate cuts this month to boost a slowing job market that lower rates alone won't fix the hiring drought anytime soon.

Now interest rate cuts can help by boosting demand for interest sensitive purchases like homes, but many businesses are struggling with high costs, not to mention tariffs and tighter credit.

Now traditional boosters like rising stocks and lower mortgage rates are less effective right now, and August core PC inflation held steady with monthly inflation trends.

Some normalization, spending rose, adding to Q3 growth prospects.

Well joining me as we wrap up the third quarter of 2025 is Jeffrey Roach, chief economist at LPL Financial.

Jeffrey, great to have you here.

Thank you so much for joining me now.

October 1st isn't just the beginning of a new month and new quarter.

A government shutdown, tariffs and the markets all question marks.

So where does the US economy stand right now?

Is it half empty or half full?

Well it's a great question.

Great to be with you today again, and there are a number of factors that could push the economy up or down, if you will.

So there are certainly some headwinds from the uncertainty on the government shutdowns.

Now granted, I think it's, it's really important for listeners to remember there's a difference between a government shutdown and a debt ceiling crisis.

So in this case, you know, you think about the uh the government shutdown certainly headwind with with the uncertainty.

We, we do think that we could have in the very near term a little bit of a shock because if the government does indeed shut down for a few days, if not more than a few days, we will probably not receive the non-farm payroll report which we normally get the first Friday of each month.

So clearly there are a lot of factors that investors need to work through at this point.

Yes, Jeffrey, I'm glad you made that distinction between the debt ceiling and the government shutdown.

And as you mentioned, if the government does shut down, we won't be getting those non-farm payrolls figures at the end of this week.

But do you think this low, higher low fire job market signals a stable economy or a warning sign for future growth and since we will also be getting jolt's figures as well as ADP, what are your expectations?

Well, that's right.

So in just a little bit we'll get the latest on the jolt data job opening labor turnover survey.

Uh, the, uh, a good way to measure churn within the labor market, clearly as things slow down, workers are less inclined to jump ship, quit, move from one job to another.

That was certainly a problem, uh, in the years immediately following, uh, the pandemic.

I think where we sit the latter half of 2025.

Big businesses are not excited about firing because they worked a very hard time, had a hard time finding qualified workers.

So that explains, I think, the low firing in terms of the low hiring component.

Yes, the economy is slowing, the middle and upper income consumer is still spending.

Look at the pressure on services inflation.

But I think what we're seeing is somewhat of an asynchronous slowdown.

So it's not your normal slowdown, certainly not really seeing a lot of strong signs for a recession in the near future.

And so that's why I think the low, higher low fire kind of scenario suggests that we'll skirt the recession, but we'll see a slowdown in growth in Q4 of this year as well as the first half of 2025.

Yeah, and I think moving forward into the final quarter this year, growth is going to be key, and we're going to be keeping a close eye on the consumer, the American consumer, especially as we go into the months of October, November, as well as the holiday season.

But given the latest PCE data which you hinted about as well as the GDP data, do you think this is sustainable?

I think it's fair to say that in the very near term we might get one more report out of the inflation numbers that could surprise us to the upside.

So services inflation is very sticky, especially financial services, insurance, uh, vehicle repair.

That was one of the things that contributed to the numbers that we saw last Friday.

We'll probably have one more month of hot inflation readings, but we should indeed see those numbers come down by the time we roll into November.

But this is certainly adding a little bit of a headache for policymakers.

Remember, we had a Fed action in September.

We have a Fed meeting in October and December, so there's 2 more meetings.

We actually do think that they will cut by 25 basis points the remaining 2.

But perhaps they'll have to kind of grin and bear it in the October meeting, given the fact that inflation is still running a little bit hotter.

And Jeffrey, finally, we have less than 60 seconds here, but we're seeing mixed signals from housing as well as consumer data, whether we're talking about sentiment or confidence.

So what does all of this tell you about how Americans are really faring?

Well, the challenge of course is not just interest rates when you look at residential housing, but the low supply of homes on the market and the continuation of median prices staying very elevated.

So housing affordability, which tracks the cost of a house relative to income growth, housing affordability is at its lowest in decades.

We do expect mortgage rates to continue to come down a little bit, but it's important for our listeners to remember mortgage rates follow the 10-year treasury a lot tighter than mortgage rates following the Fed funds rate.

So just a very important distinction there.

But we do think that mortgage rates will come down, borrowing costs will come down by the time we roll into 2026.

But the fact is we have a very low supply of homes, which means the median prices will continue to stay elevated.

OK, Jeffrey, we will have to leave it there, but thank you so much for joining me as we head into the final quarter of 2025.

Thank you.