Nationwide Economic & Market Commentary

February 2, 2024 | Kathy Bostjancic

January employment growth blows past all estimates, but Fed focused on inflation

  • The 353,000 gain in payrolls in January topped all estimates, and this comes on top of upward revisions of 126,000 additional jobs counted in December and November. December’s gain was revised up to 333,000.
  • In the details, the employment gains were more widespread than in prior months – widening out beyond the more concentrated increases in acyclical sectors of government, healthcare, and education.
  • Average hourly earnings leapt 0.6% higher on the month, the strongest gains since March 2022 and this lifted the year-on-year rate to 4.5% from an upwardly revised 4.3% in December.
  • The unemployment rate held steady at a low 3.7%, indicative of a still tight labor market which also reflected in the across-the-board increases in average hourly earnings.
  • The one weakness in the report that stands out is the continued drop in average weekly hours. In January they declined a large 0.6 of an hour, following a 0.3 hour drop in December, leaving the workweek at just 34.1 hours, down 0.5 hour over the past year. These type of declines in the workweek resemble recessionary readings and stand in strong opposition of employment and income gains. Companies are decreasing hours worked for employees, but still adding more workers and hoarding others. 
  • The large drop in the workweek offsets much of the positive income impact from the large rise in employment and wages, leaving overall private wage and salary up just a soft 0.2% in January.
  • The question for the bond market is how does the Fed balance this largely very strong employment picture when considering the timing and extent of policy easing? Importantly at the FOMC-post meeting press conference Powell indicated that the Fed now has an asymmetrical reaction function regarding the strength of employment and the economy. He said a stronger labor market or economy would not make the Fed slower to cut rates since inflation has cooled faster than they previously forecast with activity remaining strong. It would only be an unexpected weakening in the labor market or economy could prompt a faster start and larger amount of rate cuts. So, we still see May as the likely start to the rate cut cycle. The degree of easing seemingly will be dictated more by inflation than a weakening in employment.
The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2024 Nationwide [NFM-22503AO]

 

January 25, 2024 | Kathy Bostjancic

Q4 GDP tops off a resilient year

  • Fourth quarter GDP surpassed all forecasts rising 3.3% (annualized) and topped off a resilient year for economic growth despite the Federal Reserve lifting the policy rate above 5%. Real GDP growth accelerated to 2.5% in 2023, from 1.9% in 2022.
  • In the details, consumer spending came in line with our expectations and accounted for 1.9ppts of the overall gain in Q4.
  • The sectors adding more than forecast were inventories and net exports. Expectations were for inventories to decline and be a drag on growth after a large run-up in Q3, but instead inventories added 0.1ppt. Net exports contributed 0.4 ppts. The government sector, as anticipated, continues to be a solid contributor to GDP growth, adding 0.6 ppts after a 1.0 ppt contribution in Q3.
  • The core GDP readings – final sales to domestic purchasers and final sales to private domestic purchasers – showed moderation in domestic activity though are still quite resilient on the quarter. Final sales to domestic purchasers (excludes inventories and net exports) rose a more moderate 2.7% after a 3.5% jump in Q3. Final sales to private domestic purchasers (excludes inventories, net exports, and government sector) rose 2.6% after a 3% gain in Q3.
  • Despite the strong finish to 2023, we look for economic activity to slow meaningfully in 2024 and still foresee a mild recession by mid-year. We expect that the slowing in employment gains in cyclical sectors of the labor market will continue as companies continue to manage the loss of pricing power as inflation fades, which hurts their top-line revenue growth. With domestic demand easing and global growth sagging, companies will not be able to make up the difference with higher quantities of goods and services sold. The best way for them to cut costs is to reduce hiring and eventually rely on layoffs. However, we see the unemployment rate only rising to around 4.8%, still low historically.
  • The silver lining is that the quarterly PCE inflation data imply (as we forecasted) just a 0.2% rise in both headline and core PCE inflation in December, which keeps headline y/y% inflation at 2.6% and lowers core PCE inflation to 3% from 3.2% in November.
The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2024 Nationwide [NFM-22503AO]

 

January 5, 2024 | Ben Ayers

Few signs of slowdown within the labor market

  • The labor market was relatively impervious to the many headwinds for hiring at the end of 2023. Demand for workers, especially within more cyclical sectors, is waning slowly. But workers still have the upper hand in the current environment, with strong wage growth and plenty of job opportunities. Unfortunately, this creates further upside risk for service costs and makes the Fed’s inflation reduction goals that much harder to achieve.
  • Despite building concerns for employers, hiring has remained remarkably solid with 216,000 jobs added in December. Downward revisions to October and November took a little of the steam out of the headline figure as the 3-month average for job growth dipped to 165,000 – the slowest reading of 2023. Still, the 2.7 million total jobs gains over 2023 speaks to the resiliency of labor demand that continues to support consumer spending and economic growth more broadly.
  • Job growth continues to be concentrated in the few sectors, particularly health care, education, and local governments. Excluding these three areas, there were only 90,000 jobs added in December. But even this is more indicative of a general slowdown in more cyclically-sensitive parts of the economy, rather than a sharp retrenchment in reaction to tighter credit conditions and compressed profit margins.
  • Labor conditions remained tight in December too, with the unemployment rate steady at 3.7 percent. The supply of workers disappointingly retreated as the labor force participation rate posted its sharpest decline in nearly three years. The decline in December wiped out nearly all of the steady improvement in participation seen over the year, so this may be revised in coming months.
  • The tight market for labor continues to place upward pressure on wages with average hourly earnings spiking by 0.4 percent in December. Annual wage growth still sits at 4.1 percent, another sign that elevated services inflation is likely to linger well into 2024. This adds another blow to the odds that Fed will cut rates early this spring; we expect them to hold off until at least the May or June FOMC meetings before easing policy.
The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2024 Nationwide [NFM-22503AO]

 

January 2, 2024 | Kathy Bostjancic

2024 Outlook - does the resiliency last?

  • The economy proved to be incredibly resilient in 2023, despite the Fed lifting the fed funds target range to a restrictive 5.25 – 5.5 percent. However, we see the economy losing some of its luster in 2024 and continue to forecast a mild recession — though the latest economic data as we exited 2023 provide credibility to expectations of the Fed successfully achieving a soft landing.
  • Importantly, inflation has cooled more quickly than most anticipated, even with lingering stickiness in the services side of the economy. The personal consumer expenditure (PCE) price index, the Fed’s preferred inflation measure, fell on a year-on-year basis to 2.6 percent in November, while the core PCE inflation reading decelerated to 3.2 percent — both readings the slowest since early 2021. Moreover, the six-month annualized pace of core PCE inflation eased to 1.9 percent, the first sub-two percent reading since September 2020.
  • Rapid disinflation has fueled market expectations for a sizeable amount of Fed rate cuts, starting as early as March. In turn, this has ignited a powerful rally in the bond and equity markets. We continue to foresee the Fed waiting until May to start the easing cycle, but also see a significant 125 basis points (bps) in rate cuts, lowering the fed funds target rate to 4 - 4.25 percent by year end. The significant easing in financial market conditions can increase the likelihood of a soft landing, but we see the cumulative impact of prior rate increases, tighter bank lending conditions, and a slowing in employment among cyclically-sensitive sectors leading to a downturn around midyear. Still, the projected recession should be short and mild, with the economy bouncing back in the latter part of 2024.
  • Taming price pressures so that inflation trends back to the two percent target has been the Fed’s main goal since it aggressively started raising rates in mid-2022. Now that inflation appears to be well on the path towards that target, Fed officials can also focus on their other mandate, which is attaining full employment. As such, policymakers can start to lower rates with the goal of preventing a sharp rise in the unemployment rate and have it stabilize around 4 percent (it’s currently at 3.7 percent).
  • However, as we cheer the cooling in inflation, it means that companies are losing the strong pricing power acquired during the period of high inflation, which boosted profit margins and profits. If companies do not receive an offsetting rise in the volume of sales, then revenue growth will slow, squeezing margins. This in turn will lead companies to cut expenses — notably labor costs.
The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2024 Nationwide [NFM-22503AO]