Steady As She Goes
The economy seems to have settled down into a steady expansion. It remains to be seen if this growth rate is compatible with a “soft landing”, or the Fed getting close to its 2% inflation target, or with the investor expectations that 6 to 7 rate reductions will be implemented by the Fed this year. It doesn’t appear that economic growth had moderated sufficiently to hit those objectives, even as growth has moderated somewhat.
Job growth remains solid and above the economy’s long-term growth potential, which implies that further progress in reducing inflation will become harder to achieve. The labor market remains tight. Hiring averaged over 150,000 monthly last year, well above the estimate by demographers of 50,000 to 100,000 new job seekers. However, the latest BLS data reported an influx of more than 200,000 new job seekers in 2023, which is shockingly high given our population mix. So even with all of the hiring, there was a slight increase in the unemployment rate from 3.5% to 3.7%. All of these numbers should be taken with a grain of salt, however. According to the official data, 676,000 workers dropped out of the labor market just in the month of December. That’s possible, but a bit implausible and unlikely to be sustained no matter how poorly it is measured. So, we infer that growth is solid and we are likely to see some additional tightening in the labor market this year, since we think labor supply will slow more than hiring.
Indeed, wage behavior is consistent with a tight labor market. Wage inflation increased in December to 0.4% month-over-month and 4.1% year-over-year. Most visibly, unions were very successful in extracting large pay gains in the auto, airline and transportation industries among others, so unions are raising their sights for this year. If the influx of workers into the job market eases, wages will come under more pressure to rise more quickly. The market is betting quite heavily on the opposite outcome.
The bond market repriced only slightly after Friday’s employment report to reflect investor expectations of at least 6 reductions by the Fed in overnight money rates to be implemented this year. At least one of two conditions would be needed for such an outcome. Inflation would have to continue moving fairly quickly towards the Fed’s 2% target, or the economy would have to lapse into recession, perhaps both. Since we see little prospect for either on the horizon, we conclude the market continues to engage in some wishful thinking. It isn’t the first time.
The many uncertainties that cloud the outlook will take some time to dissipate, which implies investors can enjoy what could turn out to be a several month period of calm. That calm could be disrupted at any time if the data lurches visibly in either direction. But until that happens, investors can enjoy the solid economic recovery, growing corporate profits that will buoy stock prices, maintain hopes for continued moderation in inflation, and a Fed that maintains an unchanged monetary policy while it waits for clear direction. Such a benign economic environment will be a welcome relief from what is likely to be a somewhat tumultuous political landscape.
Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.
