Stock prices rose last week, with the S&P 500 index increasing by 0.2% to close at 4,604.37. The index is now up 19.9% since the beginning of the year, and 28.7% from its lowest closing on October 12, 2022, at 3,577.03, and down 4% from its all-time high closing on January 3, 2022, at 4,796.56.
Cooling the Economy
While it’s good that the U.S. economy is still creating many jobs each month, it’s important to address how to cool the economy honestly. As can be seen in the chart above, the pace of job gains has significantly declined from the summer 2021 levels.
A Quick Look Back
A year ago, many economists were warning that the U.S. was heading for a recession. At that time, it was hard to understand these negative forecasts amid the huge economic winds pointing to future growth and many other reasons for optimism. Notably, inflation at that time had already been declining for several months despite ongoing economic growth – a sign that we could see a positive “Goldilocks” scenario where inflation cools to manageable levels without the economy having to plunge into recession. Looking at reality, we now know that the economy has created jobs every month thus far, consumer spending has risen to all-time highs, and GDP growth remained positive and even accelerated in the third quarter.
We’re Shifting from Great Times to Good Times
One of the most visited and shared newsletters on TKer is the March 4, 2022 issue: Three Huge Economic Winds I Can’t Stop Thinking About. These measures are notable because they are leading indicators: excess savings represent extra money that hasn’t been spent yet; high job openings represent hiring that hasn’t occurred yet, which also means increased consumer spending power that hasn’t materialized yet; and core capital goods orders represent capital goods that companies haven’t implemented yet, meaning there’s more work to be done by manufacturers and that more production capacity is coming for companies that ordered these things. In recent months, these forces have receded to more normal levels. Excess savings have declined from peak levels, and most economists agree that these balances will run out soon. Job openings have dropped significantly. According to the Labor Department’s Job Openings and Labor Turnover Survey, employers had 8.73 million job vacancies in October. This was the lowest reading since March 2021, and much lower than the peak reading of 12.03 million in March 2022. During this time, there were 6.50 million people unemployed – meaning there were 1.3 job openings for each unemployed person. These metrics – one of the clearest signs of excess demand for labor – continue to approach pre-pandemic levels. Non-defense capital goods orders excluding aircraft – or business investment – declined by 0.3% to $73.59 billion in October. Although this figure is still trending toward record levels, growth seems to be stalling.
Let’s Not Rush
Just because excess savings have decreased doesn’t mean that people have run out of money. People definitely have money. People hold significant wealth. It’s just that the extra cash sitting on top of all that money and wealth has largely been spent. And just because job openings have decreased doesn’t mean the labor market has ended. There are still plenty of job opportunities. Moreover, hiring activity remains low, employment activity is high, and unemployment claims are low. It’s just that employers are not as desperate to fill job vacancies as they were in recent years. And just because capital investment orders have tapered doesn’t mean business activity is waning. There is still a lot of this equipment that has not been delivered. Once it’s put in place, companies are likely to be more productive than they have been before.
Review
Economic Implications
There were some noteworthy data points and economic developments last week to consider:
- The labor market continues to add jobs. According to the Labor Department’s employment situation report released on Friday, American employers added 199,000 jobs in November. Although the pace of job growth has generally cooled, the 35th consecutive month of increases confirms a strong demand for labor.
- Employers have now added 2.6 million jobs since the beginning of the year. Total payroll employment stands at 157.1 million jobs.
- The unemployment rate – the number of workers who consider themselves unemployed as a percentage of the civilian labor force – fell to 3.7% during the month. While it is above the current cycle low of 3.4%, it remains near 50-year lows.
- Wage growth cools. Average hourly earnings rose by 0.3% month-over-month in November, compared to 0.4% in October. Year-over-year, these measures increased by 4.0%, a rate that has cooled but is still elevated.
- Workers changing jobs are receiving better pay. According to ADP, which tracks private payrolls and uses a different methodology from the Labor Department, annual wage growth in November for those who changed jobs was up 8.3% compared to a year ago. For those who remained in their jobs, wage growth was 5.6%.
- Labor productivity increased. According to BLS: “Business sector labor productivity increased 5.2% in the third quarter of 2023 … as output increased 6.1% and hours worked increased 0.9%. This increase in labor productivity is the highest rate since the third quarter of 2020, when productivity rose 5.7%.”
- Job openings are declining. According to the Labor Department’s Job Openings and Labor Turnover Survey, employers had 8.73 million job openings in October. This was the lowest reading since March 2021. Although this is still well above pre-pandemic levels, it has decreased from the peak reading of 12.03 million in March 2022.
- During this period, there were 6.50 million unemployed people – meaning there were 1.3 job openings for every unemployed person. Although down from its peak, this is still considered one of the clearest signs of excess demand for labor.
- Layoffs remain low, and hiring is ongoing. Employers laid off 1.64 million people in October. While this poses challenges for all affected, this number represents only 1.0% of total employment. This measure continues to trend below pre-pandemic levels.
- Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.89 million people.
- Unemployment claims are increasing. Initial claims for unemployment benefits rose to 220,000 for the week ending December 2, up from 219,000 the previous week. Although this is an increase from the September 2022 low of 182,000, it continues to trend at levels associated with economic growth.
- Fuel prices continue to decline. According to AAA: “After a day of price increases, the national average for a gallon of fuel resumed its steady decline, losing four cents from last week to $3.20. The main reason is weaker oil costs, which are struggling to stay above $70 per barrel. The price drop comes just a week after OPEC+ announced voluntary production cuts of about 2 million barrels per day. But instead of being seen as a sock in the coal, the oil market’s response so far has been ‘meh’.
- Continues
Mortgage rates are declining. According to Freddie Mac, the average 30-year mortgage has dropped to 7.03%. From Freddie Mac: “The average 30-year mortgage was about 7% this week, down from around 7.80% about six weeks ago. When rates started falling quickly, purchase applications initially rose, but that improvement in demand faded last week. Although these lower rates are still seen as a welcome relief, it is clear that they will need to drop further to reactivate demand more consistently.”
- Used car prices continue to decline. From Manheim: “Wholesale used car prices (on a mix of mileage, season, and adjustments) fell 2.1% in November compared to October. The Manheim Used Vehicle Value Index (MUVVI) dropped to 205.0, down 5.8% from a year ago.”
- Consumer confidence has improved. The University of Michigan’s Consumer Confidence Index jumped in December. From the survey: “Consumer confidence surged 13% in December, erasing all the declines from the previous four months, primarily due to improvements in the expected trajectory of inflation. … There was broad agreement on improved confidence across age, income, education, geography, and political identity. An increasing percentage of consumers – about 14% – mentioned the impact of the upcoming elections next year. These consumers seem to expect that the elections are likely to result in outcomes that benefit the economy.”
- Regarding inflation expectations: “Inflation expectations for the next year fell from 4.5% last month to 3.1% this month. The current reading is the lowest since March 2021 and is just above the range of 2.3% to 3.0% seen in the two years prior to the pandemic. Long-term inflation expectations fell from 3.2% last month to 2.8% this month, matching the second lowest reading seen since July 2021.”
We continue to receive evidence that we may see a positive “Goldilocks” scenario where inflation cools to manageable levels without forcing the economy to slip into recession. This comes as the Federal Reserve continues to implement very tight monetary policy in its ongoing efforts to reduce inflation. While it is true that the Fed has adopted a less hawkish tone in 2023 compared to 2022, and most economists agree that the last rate hike of the cycle has already occurred or is near, inflation still needs to cool more and stay cool for a short while before the central bank feels comfortable with stable prices.
Therefore, we should expect the central bank to maintain a tight monetary policy, which means we should be prepared for tighter financial conditions (such as higher interest rates, stricter lending standards, and lower equity valuations) to continue. All this means that monetary policy will be unfriendly to the markets for now, and the risk of the economy slipping into recession will be relatively high.
At the same time, we also know that stocks are discounting mechanisms – which means that prices will have likely bottomed out before the central bank signals a major shift in liquidity policy.
Additionally, it is important to remember that although the risks of recession may be high, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those who are employed are receiving pay raises.
Similarly, corporate financial conditions remain healthy as many companies have locked in low-interest rates on their debt in recent years. Despite the threat of rising debt service costs, high profit margins give companies room to absorb higher costs.
In
At this stage, it is unlikely that any decline will turn into an economic disaster as the financial health of consumers and businesses remains very strong.
As always, long-term investors should remember that recessions and bear markets are part of the deal when entering the stock market with the aim of achieving long-term returns. Although markets have gone through a tough period in recent years, the long-term outlook for stocks remains positive.
A version of this article was published on TKer.co.
Source: https://www.aol.com/very-hot-economy-cooling-great-154057831.html
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