We had some pretty wild data releases over the past few weeks. From November through December, retail sales declined each month, and so did manufacturing activity. Then, we had a bit of a recovery in January. Nonfarm payroll growth was astonishingly high throughout that whole three-month period. How can investors make sense out of the mixed macroeconomic messages?
We can’t. Don’t try. Monthly data are backward looking, released with a lag, subject to revisions, and often messy. Short-term macroeconomic data are poor guides for investors. It’s more important to pay attention to trends and notice when they’re changing.
Data can tell us where we were, and we can use that information to try to figure out where we’re headed. Importantly, we also have to figure out how the Federal Reserve (Fed) is processing that same data. It doesn’t matter what I think Fed officials should or shouldn’t do in light of the data. What matters is what they think they will or won’t do. Based on their commentaries, they think “disinflation” (that is, a slowdown in inflation) is taking hold, and—thankfully—they seem to be giving up on the idea that the unemployment rate must rise to convincingly tamp down inflationary pressures.
Fed Chair Powell is looking at “core services excluding housing” inflation because he thinks a hot labor market can lead to fast wage growth, which in turn can lead to sticky inflation through core services prices. His model of sticky inflation doesn’t have a lot of statistical support, but that doesn’t matter. What matters is that he believes in the model and will use it to set policy.
Maybe he’s updating his model, though. Wage growth isn’t accelerating despite an incredibly low unemployment rate. Core services excluding housing inflation peaked in September and has trended lower. This means the Fed is likely to just accept that lower inflation does not require higher unemployment. The officials can “take the win” as long as wage growth and consumer price inflation continue their trend lower regardless of what happens with payrolls or the unemployment rate.
For the rest of 2023, we still have to figure out what the fallout from the Fed’s aggressive rate-hiking strategy will be. After the first two quarters of 2022, when there was negative growth in gross domestic product, we characterized the environment as a “roving recession.” Housing was hit first, and it continues to struggle. Interest-rate-sensitive autos and durable goods were the next areas to falter. Consumer spending and manufacturing experienced recessionary qualities to wrap up 2022. Strength was concentrated mostly in the labor market.
Unlike most recessions, there hasn’t been a synchronized downturn across all sectors of the economy. Why? After the Global Financial Crisis era, there was a “jobless recovery.” This time—probably because employers found (and find) it so hard to find talent—we’re likely living through a “job-full recession.” It’s an unusual environment and it can create unusual volatility, but there’s opportunity in the volatility to position for an eventual recovery. A roving recession can give way to a roving recovery.
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