Trend watch and what’s new this week
Our concern about rail freight volumes, which are the lifeblood of the economy, was tempered by a 28.1% rebounded in January to a three-month high. However, it remains well-below the 2022 trend.
Meanwhile, most of the remained activity-based data (slides 5 and 6) is firmer than compared to 2022. Dining reservations nationwide continue to run about 15 percentage points higher than in 2022. But frigid temperatures and ice storms caused a wave of flight cancellations and soft hotel occupancy in certain parts of the U.S.
Also, the back-to-office index broke 50.4 (pre-pandemic indexed to 100) for the first time since the pandemic, which is a positive sign.
Job growth surges in January, but wages continued cooling
U.S. payrolls in January jumped by 517,000, more than double the consensus of 188,000 and the largest monthly rise in six months. Upward revisions to the prior two months added 71,000 more jobs. Meanwhile, the unemployment rate drifted down to 3.4% in January from 3.5% in December. That is the lowest level for the current cycle and the lowest since May 1969. Both are on slide 7.
On slide 8, the annual pace of average hourly earnings cooled to a 17-month low, though it remains well-above the pre-pandemic rate. The monthly pace for rank & file workers (officially known as production & nonsupervisory employees) also cooled in January on both a month-over-month (up 0.2%) and year-over-year basis (up 5.1%). The month-over-month pace was coolest in 27-months.
Manufacturing contracted for third straight month
Two separate gauges showed continued weakness with manufacturing. Institute for Supply Management (ISM) Manufacturing Index fell to a reading of 47.4 in January from 48.4 in December; a reading below 50 signifies a decrease in manufacturing activity for the month (slide 9). The prices paid component ticked higher, though remained under 50, meaning prices stabilized compared to December but were dramatically lower than a year ago. Similarly, the final January reading of S&P Global’s U.S. Manufacturing Index also contracted for the third month in row.
Services indices mixed
On slide 10, the Institute for Supply Management (ISM) Services Index rebounded to a reading of 55.2 in January, expanding once again after contracting in December (49.2). The price paid component continued its sharp decline, down for the eighth time in nine months (May through January).
Meanwhile, the final January reading of S&P Global’s U.S. Services Index edged upward to 46.7, but still contracted for the seventh straight month.
The January jobs report was more data reinforcing the notion that the labor market is cooling but solid. The January headline job gains appear to be impacted by the seasonal adjustment, though after digging a little deeper, it’s not as distorted as it might appear.
Furthermore, the improvement jives with several other reports; most notably, weekly initial jobless claims, which have trended down in recent weeks and are hovering near the lowest level since 1968. Also, the so-called quit rate – or the percentage of employees voluntarily quitting – has bumped higher in the past few months after peaking in late 2021. Despite recent headlines about job cuts, these reports suggest that many of these workers are finding other jobs, skipping the unemployment line at least for now.
This report – though backward looking – also supports our view that 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.
That was also coupled with the biggest two-month gain in part-time workers, 1.2 million in December and January, since the reopening months of 2020 after holding steady for roughly a year. Additionally, supplemental data, including the Atlanta Federal Reserve’s wage growth tracker and the Employment Cost Index, corroborate that wages are cooling.
In terms of the implications, we believe the Fed will stay the course, having just stepped down the size of hikes to 0.25% this week. The bulk of the Fed’s rate hikes, which took overnight rates up to 4.75%, are now behind us.
Market expectations, which currently anticipate rates peaking near 5.0% in mid-2023 then falling to 4.5% by year-end, are offsides in our view. We remain cognizant of the elevated upside risk to the Fed taking the Fed funds target above 5% during this cycle. Nonetheless, while there is a healthy debate as to how high the Fed hikes rates during this cycle, rate cuts in 2023 are becoming less likely.
Similarly, the rebound in the ISM Services Index is notable, particularly since services account for the largest portion of the U.S. economy.
To clarify, while the chances of soft landing have increased, a recession in the coming 12 months remains our base case. That said, the chances for “no landing” are growing.
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