After a year of the Fed raising rates, bubbles deflating and inflation surging to levels last seen in the 1980s, economists and investors are girding themselves for 2023. The first signpost of where the economy is headed was the January Jobs report on 1/6/2023.
Will the employment market continue its strong run of reports? Is the economy slowing? Will the Fed be forced to continue hiking or, as markets hope, will they start cutting rates?
Expectations are for the Fed to continue hiking rates to a level above 5%; currently rates are 4.25%.
Sarah House, Wells Fargo Senior Economist
“We are hardly falling apart” said House on Bloomberg Surveillance. (1)
House continued, “We see demand coming down some, but still a very strong jobs market. I think we will see more of a slow down as we move through the year, as the financial environment gets increasingly challenging.”
One of the issues continuing to drive the inflation is wages continuing to rise. One of the developments over the pandemic is an acceleration towards e commerce. The expansion of warehouses has increased wages for many people above $17/hr and this is driving wages throughout the services economy, both through competition for people drawing people out of other service industries, and the need to raise wages to attract workers.
That said Amazon announced additional layoffs this week.
Expectations for the jobs report at 830am is for 203,000 jobs created and for wage growth to slow.
Earlier this week James Bullard, Fed governor, has stated rates are getting close to restrictive policy while Fed governor Kashkari said earlier this week that he sees the need to raise rates above 5.4%, significantly more restrictive. (1)
On Wednesday the JOLTS (job openings and labor turnover survey) numbers revealed an large increase in job openings, 1.75 job openings for each person, which is what the Fed does not want to see… Increased demand for labor is expected to drive wage inflation, and with it overall services inflation.
On looking at the JOLTS data Jon Ferro of Bloomberg stated, “It depends where you look; industry to industry it’s a very different look.”
Lisa Abramowitz of Bloomberg added, “Do wages come in hotter than expected; that’s the question.”
Priya Misra, TD Securities
TD Securities has an estimate of 350K, which is at the high end of expectations.
Misra explained, “It is hard to see how we get from 7% to 2% inflation this year. The market is getting ahead of itself…” (1)
Misra stated, “I don’t think things will slow down till 3rd quarter; it will take time for cracks to show up. The Fed needs the unemployment rate to go up and that will take several weak employment reports.
She added, “The Fed will struggle with inflation high and wages high. It will be a while til they cut rates.”
In 2022, Misra nailed the deep yield curve inversion we are currently seeing in bond markets. The yield curve of 2s/10s is at -74.94bp. Higher short-term rates compared to longer term rates is a precursor sign of recession.
On Thursday Bed Bath and Beyond filed a “notice of ongoing concern” on Thursday. Such notices are required by the SEC when a company may have to file bankruptcy. Over the past few years many unprofitable companies were able to borrow money cheaply because rates were low for so long. The era of low rates having ended means many companies that are unprofitable will struggle to survive. This could have a real impact on the economy in the years to come.
“If you get disinflation and a shrinking economy you have to believe earnings come in some.” Said Tom Keene of Bloomberg.
Ferro injected, “If you see 200k jobs, 3% unemployment, 5% wage growth, how does that make sense with recession calls?”
Randy Kroszner, Univ Chicago Booth School
Kroszner said, “We haven’t seen crack in labor market, but when it happens it usually happens quickly. The Fed is going to end with rates between 5-6%, but it depends on conditions within the economy. Fed has done a lot of the heavy lifting raising rates and will have to keep rates higher for a long period.” (1)
Michael McKee of Bloomberg explained, “The change in service industry wages is the focus; the Fed is paying attention to its impact on inflation. Earlier this week the Fed Beige Book Survey said it’s getting a little bit easier to find workers, but it also said employers are holding onto workers.”
Jobs data was released at 830am…
223,000 jobs created, “Not a huge beat…” said McKee
Unemployment rate drops to 3.5 from 3.7
Average hourly earnings also fell.
McKee continued, “This will continue to put pressure on labor markets.”
“This doesn’t really clarify much,” adds Abramowitz
Tom Keene asks the question many are wondering, “These are good numbers. Why does the Fed want fewer jobs?”
Kroszner responds, “They don’t want fewer jobs, they want slower wage growth to keep inflation under control. This is just one month’s number so we can’t declare victory…”
Abramowitz asks, “How many reports does it take?”
Kroszner says, “The Fed is going to continue to raise rates, maybe at 25bps instead of 50bps.”
“The bond guys must have their heads spinning based on this data,” adds Keene.
An important aspect of the jobs data wasn’t addressed. In the data released by BLS, all of the jobs created were Part-Time; in fact, there was a net loss of 1000 Full-Time jobs. (3) One possible explanation for lower hourly earnings is a cutting back on hours worked by employees and an increase in part-time employment, as the economy slows and companies not wanting to let people go.
Later in the day on Friday the ISM survey was released showing a broad weakening in the economy.
“The Institute for Supply Management (ISM) said on Friday its non-manufacturing PMI dropped to 49.6 last month from 56.5 in November. It was the first time since May 2020 that the services PMI fell below the 50 threshold, which indicates contraction in the sector that accounts for more than two-thirds of U.S. economic activity.” (2)
“The ISM survey’s gauge of new orders received by services businesses fell to 45.2 from 56.0 in November. That was the lowest level since May 2020 and weakest reading since 2009, excluding the collapse during the pandemic.”
As the economy slows and possibly falls into recession, it becomes increasingly important for investors and savers to evaluate the risks being taken in their portfolios. Managing risks around rates, inflation, growth and liquidity are vital to have your portfolio grow over the long haul. To learn more about options you have to manage such risk, reach out to me at james.cox@glic.com
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