Trend watch and what’s new this week
As we’d expect, the holidays have certainly skewed most of the activity-based data (slides 5 and 6). For instance, dining reservations spiked to their highest levels since the pandemic (compared to 2019). Though some of that spike was boosted by favorable the day of the week comparisons – Christmas and New Year’s Day both fell during the weekend in 2022 versus mid-week during 2019 – it doesn’t explain all of the increase, which appeared to be broad based.
Similarly, air passenger counts hit their highest post-pandemic level of 16.2 million during the week before Christmas. That topped Thanksgiving week, which is traditionally the heaviest air travel week of the year. Hotel occupancy rose in the most recent week to close out the year (slide 7).
Job growth surprises again in December, but wages cooling
U.S. payrolls in December increased by 223,000, above the consensus of 203,000. Along with downward revisions to the prior two months, the six-month average fell to 307,000. Meanwhile, the unemployment rate slipped down to 3.5%, revisiting the lowest level for this cycle and the prior cycle. Both are on slide 8.
On slide 9, average hourly earnings cooled to a 16-month low, though it remains well-above the pre-pandemic rate. Additionally, there were more cracks visible at the industry level, including general merchandisers and temporary help (slide 10).
Manufacturing data weaker; inflation appears to be retreating
Two separate gauges showed continued weakness with manufacturing. The Institute for Supply Management (ISM) Manufacturing Index (slide 11) declined for the second straight month in December. The prices paid component continued its sharp decline, down for the ninth month in a row, which confirms that inflation within manufacturing has already peaked.
Similarly, the final December reading of S&P Global’s U.S. Manufacturing Index also contracted for the second month in row.
Services index unexpectedly weak
The ISM Services Index dropped unexpectedly to a reading of 49.6 in November. That snapped a 30-month expansion streak dating back to May ’20. The price paid component continued its sharp decline, down for the seventh time in eight months (May through December). However, despite the recent weakening, service sector prices remain significantly above pre-pandemic levels (slide 12).
Meanwhile, the final December reading of S&P Global’s U.S. Services Index fell to 44.7, contracting for the second straight month.
The December jobs report was truly a goldilocks report for markets – not too hot (wage gains waning), not too cold (still has solid overall job gains). That said, labor market conditions are clearly cooling, which reflects a slowdown in the broader economy.
Yet, despite recent high-profile job cuts, layoff announcements actually improved in December compared to November, at least according to outplacement firm Challenger, Gray, and Christmas. This was also supported by several other labor market reports, including JOLTS. These suggest that many of these workers are finding other jobs, skipping the unemployment line at least for now.
It is important to understand, however, that most of the employment data – are lagging indicators, including the unemployment rate and headline jobs growth. The notable exception is weekly jobless claims, which continue to hover just above historic lows.
Equally, the economic plunge that some expect due to a recession hasn’t happened. That’s very consistent with historic job loss patterns, which tend to be gradual rather than falling off the proverbial table.
More importantly, this report – though backward looking – indicates the U.S. economy is stronger than many are giving it credit. Again, not as strong as it was in 2021, but not so weak as to see companies dumping workers in big numbers. As we’ve repeatedly mentioned, there appears to be an increasing trend of firms using attrition – so-called “hiring freezes” – ratcheting back on hiring plans, particularly large companies.
It also props open the door for a possible soft landing, which is a euphemism for sidestepping a recession or simply having a mild slowdown. This is especially true given other receding inflationary pressures from a wide range of indicators from commodities and energy prices to wholesale prices and housing.
In turn, we believe this report opens the door for the Fed to possibly stepdown the size of hikes to 0.25% in February from 0.50% at the December meeting and 0.75% at the prior four straight meetings. Of course, there is a lot of coming economic data that will influence the Fed’s decision making; most notably, next week’s inflation data along with a raft of housing figures and retail sales.
To clarify, while the chances of soft landing have increased, a recession in the coming 12 months remains our base case.
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