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The numbers: A survey of consumer confidence fell in April to a nine-month low of 101.3, reflecting nagging worries about a possible recession and a softening labor market.
The closely followed index dropped 2.7 points from a revised 104 in the prior month, the Conference Board said Tuesday. The level of confidence in April was the lowest since July 2022.
Consumer…
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Seemingly every day, U.S. investors are being buffeted by a flurry of sometimes conflicting economic data.
Take this past week, for example: the U.S. leading economic index sank 1.2% in March, its biggest decline in three years. The indicator has now declined for 12 straight months.
Then, one day later on Friday, investors received readings…
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The numbers: An early reading of the U.S. economy in April from S&P Global showed that business activity has escaped the doldrums after struggling over the fall and winter months.
The S&P Global U.S. service sector purchasing managers index rose to 53.7 in April from 52.6 in the prior month. This is a 12-month high.
The flash U.S. manufacturing…
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The numbers: The number of Americans who applied for unemployment benefits last week rose by 5,000 to 245,000 and pointed to a small erosion in a robust U.S. labor market.
New jobless claims increased from a revised 240,000 in the prior week, the Labor Department said Thursday. The figures are seasonally adjusted.
The number of people applying for unemployment benefits is one of the best barometers of whether the economy is getting better or worse.
New jobless claims are still very low, but they have risen from less than 200,000 in January in a sign the labor market has cooled slightly as higher interest rates dampen U.S. growth.
Key details: Thirty-five of the 53 U.S. states and territories that report jobless claims showed a decrease last week. Eighteen posted an increase.
Most of the increase in new jobless claims were in New York, where new filings typically rise during school breaks and fall immediately afterward.
Other states reported little change.
The number of people collecting unemployment benefits in the U.S., meanwhile, jumped by 61,000 to 1.87 million in the week ended April 8. That’s the highest level since November 2021.
The gradual increase in these so-called continuing claims suggests it’s taking longer for people who lose their jobs to find new ones.
Big picture: Wall Street is watching jobless benefits closely because it’s one of the first indicators to start blinking red when the U.S. is headed toward recession.
New jobless claims have crept higher this year after touching a 54-year low, pointing to some cooling in a hot labor market. But the labor market is still quite strong
The Federal Reserve wants the labor market to cool even further to temper a sharp increase in wages and help the bank combat high inflation. A series of interest-rate increases by the central bank have slowed the economy and eventually should curb the appetite for workers.
Looking ahead: “With talk of deteriorating economic conditions and in the wake of the recent bank failures, businesses may turn more cautious in their hiring practices,” said senior economic advisor Stuart Hoffman of PNC Financial Services.
“Our view remains that layoffs will rise less dramatically than normally might occur as companies do all they can to avoid shedding workers who have been incredibly difficult to recruit and retain,” said chief economist Joshua Shapiro of MFR Inc.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open lower in Thursday trades.
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JD.com
and other Chinese stocks fell Tuesday despite the country’s economy rebounding at a faster-than-expected pace in the first quarter.
China’s gross domestic product (GDP) rose 4.5% in the first three months of the year, convincingly beating the FactSet economists’ consensus for 3.4% growth.
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The U.S. economy could slip into recession given the fast pace of interest rate rates over the past year, said Chicago Fed President Austan Goolsbee on Friday.
“There is no way you can look at current conditions around the U.S. and not think that some mild recession is on the table as a possibility,” Goolsbee said, in an interview on CNBC.
At the same time, while inflation is coming down, there is “clear stickiness” in some categories of prices, he said.
Goolsbee said he is focused on whether there is a credit crunch in the wake of the collapse of Silicon Valley Bank in March.
The Chicago Fed president, who is a voting member of the Fed’s interest rate committee, said he wanted to see more data before deciding what to do at the Fed’s next meeting on May 2-3 .
“What I am looking at quite clearly coming into the next FOMC meeting is what’s happening on credit…how much of a credit crunch is there,” he said.
“Let’s be mindful that we’ve raised a lot. It takes time for that to work its way through the system,” Goolsbee said.
The March retail sales report, released earlier this morning, might be a sign of further slowing in the economy, he said. The government reported a 1% drop in retail sales, the biggest decline since November.
“If you add financial stress on top of that, let’s not be too aggressive,” he said.
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The numbers: Sales at retailers dropped 1% in March and declined for the fourth time in the past five months, reflecting a slowdown in the U.S. economy and a shift in consumer-spending habits.
Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales had been forecast to drop 0.4%, based on a Wall Street Journal poll of economists.
Receipts shrank a smaller 0.3% if auto dealers and gas stations are excluded. Car and gasoline purchases exaggerate overall retail spending.
Key details: Sales in March posted the biggest decline in four months, largely because of lower auto and gasoline sales.
A late Easter holiday might have also shifted some sales into April that normally would have taken place in March, economists say.
Sales of new vehicles and parts, an up-and-down category, fell a sharp 1.6% last month.
Receipts at gas stations declined 5.5% largely because of lower oil prices. It’s a good thing when Americans spend less on gas, however.
Americans are likely to pay more for gas in April, though, after the oil cartel OPEC cut production and prices surged.
Even after setting aside car dealers and gas stations, retail sales were weak. Sales fell in most major categories, including home centers, electronics stores and department stores.
The only segment to stand out: Internet retailers. Sales jumped 1.9%.
One category economists watch closely is bars and restaurants, the only service sector in the retail report. Restaurant receipts rose a tepid 0.1% last month after a 1.6% decline in February.
Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales slack off during times of economic distress.
Big picture: Retail sales haven’t fallen off a cliff, but they also aren’t rising rapidly like they did in 2021 and early 2022.
How come? High inflation has eaten away at household incomes. Government pandemic stimulus has dried up. And rising interest rates have made purchases of big-ticket items such as cars more expensive.
Americans are still spending plenty to get out and about, however.
Americans have been spending more on services such as travel, hospitality and recreation and less on goods such as consumer electronics and home-office supplies. That’s a big reversal of what happened during the pandemic.
That’s helping to keep the economy afloat. If the economy continues to slow, however, spending on services could also go slack.
Looking ahead: “U.S. retail sales fell sharply in March as consumers became more cautious, adding to other recent data releases that have signaled a deterioration [in the economy],” said economist Katherine Judge of CIBC Economics.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trades after Federal Reserve Gov. Chris Waller said interest rates need to keep rising to squelch high U.S. inflation.
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Federal Reserve officials, meeting days after the collapse of Silicon Valley Bank, agreed that the stress in the banking sector would slow U.S. economic growth, but were uncertain about how much, according to minutes of the meeting released Wednesday.
The twelve voting members on the Fed’s interest-rate committee “agree that recent developments were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation, but that the extend of these effects were…
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The U.S. and global economies are likely to struggle to grow over the next few years as countries fight to reduce high inflation and cope with rising interest rates, the IMF said Tuesday.
The latest projections paint a gloomy picture of the challenges facing the world. Chief among them is high inflation, a problem the IMF said has proven stickier than expected compared to “even a few months ago.”
Price increases in goods and services other than food and gasoline are still high, the IMF said, and a tight labor market could keep upward pressure on wages.
Inflation globally is likely to average about 7% in 2023, up almost 1/2 point from the IMF estimate just three months ago.
The fund said inflation probably won’t return to the low levels that prevailed around the world until “2025 in most cases.” In the U.S., for example, inflation rose less than 2% a year in the decade before the pandemic.
Stubbornly high inflation, in turn, is likely to force the U.S. and other countries to keep interest rates high for some time.
“This may call for monetary policy to tighten further or to stay tighter
for longer than currently anticipated,” IMF director of research Pierre-Olivier Gourinchas said.
Yet rising interest rates and higher borrowing costs also risk destabilizing financial institutions as witnessed by the failure of Silicon Valley Bank in the U.S. and the emergency rescue of Switzerland-based Credit Suisse.
Recent banking instability reminds us,” Gourinchas said, “that the situation remains fragile.”
“Once again, the financial system may well be tested even more,” he added. “Nervous investors often look for the next weakest link, as they did with Crédit Suisse.”
Threats to banks could add to the stress on the economy by spurring them to lend less to businesses and consumers. Lending is critical for economic growth.
“We are therefore entering a tricky phase during which economic growth remains
lackluster by historical standards, financial risks have risen, yet inflation has not yet
decisively turned the corner,” Gourinchas said.
The U.S. economy is forecast to slow from 2.1% growth in 2022 to 1.6% in 2023 and 1.1% in 2024. Notably, the IMF does not predict a U.S. recession.
By contrast, the Federal Reserve predicts U.S. growth will slow to just 0.4% in 2023 and then rebound to a 1.2% annual pace in 2024.
Most countries in Europe are also expected to keep growing aside from the U.K. and Germany, whose economies have been harder hit by high energy prices.
The world economy is forecast to expand 2.8% in 2023 and 3% in 2024, a shade lower compared to the IMF’s forecast in at the start of the year.
Looking out to 2028, global growth is forecast at 3%, the weakest five-year outlook since the IMF began publishing them 33 years ago.
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Normally a big increase in new U.S. jobs is cause for celebration. Not right now.
The Federal Reserve sees a tight labor market as a big obstacle in getting high inflation under control and wants hiring to slow as soon as possible, but it might not get its wish in March.
…
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The numbers: A key barometer of U.S. factories was negative in March for the fifth month in a row, reflecting an ongoing struggle by a key part of the economy to resume growth.
The Institute for Supply Management’s manufacturing survey dropped to 46.3% from 47.7% in the prior month. That’s the lowest level since May 2020, when the pandemic show down much of the U.S. economy.
Numbers below 50% signal that the manufacturing sector is contracting. The last time the index fell five months in a row was in 2019, during a trade fight with China.
The ISM report is viewed as a window into the health of the economy, and it shows growing strains. New orders shrank to a level historically associated with recession, for example.
Economists polled by the Wall Street Journal had forecast the index at 47.3%.
Key details:
Big picture: Manufacturers have battled supply shortages, high inflation and rising interest rates over the past year.
While the shortages are clearing up and inflation is slowing, interest rates are still rising, boosting the odds of recession both in the U.S. and abroad.
The result: The near-term outlook for manufacturers is still quite cloudy. More companies are tackling the problem with hiring freezes or even layoffs.
“Now companies are facing the reality that demand is not going to come back to support the current level of employment,” said Timothy Fiore, chair of the ISM survey.
Looking ahead: “The new orders index is very much in recessionary territory, with only one previous occasion over the past 60 years where the index has fallen to that level without an economic contraction following,” noted deputy chief U.S. economist Andrew Hunter of Capital Economics.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Monday trades.
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The numbers: The cost of U.S. goods and services rose by a milder 0.3% in February, perhaps a sign the Federal Reserve’s fight against high inflation is showing grudging progress.
Prices had risen by a sharp 0.6% in January, based on the so-called PCE index.
The yearly increase in prices declined to 5% from 5.3% in the prior month, the government said Friday, marking the lowest level in more than a year and a half.
That’s still about three times the rate of inflation before the pandemic, however.
Senior Federal Reserve officials have signaled they plan to raise interest rates just once more before pausing to determine how much a sharp increase in borrowing costs brings down inflation. The Fed has jacked up its key short-term U.S. rate to a top end of 5%, a remarkably fast acceleration from nearly zero one year ago.
Higher interest rates temper inflation by slowing the economy, but the effects can sometimes take up to a year or more to be fully felt. The Fed wants to avoid going too far or cause any more stress on the U.S. financial system after the failure of Silicon Valley Bank.
After the PCE report, Boston Federal Reserve President Susan Collins said the central bank “has more work to do” to get inflation lower in an interview with Bloomberg.
Key details: The more closely followed core index also increased 0.3% last month, matching Wall Street’s forecast.
The core rate of inflation in the past 12 months slipped to 4.6% from 4.7%.
The PCE is viewed by the Fed as the best predictor of future inflation trends. It is formally known as the personal consumption expenditures price index.
The central bank pays especially close attention to the core gauge that strips out volatile food and energy costs.
Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.
They might substitute cheaper goods such as chicken thighs for more expensive ones like boneless breasts to keep costs down. Or buy generic medicines instead of brand names.
The CPI showed inflation rising at a 6% yearly rate in February.
Big picture: The Fed is trying to straddle a fine line: Bring inflation back down to its 2% target, but without causing a severe economic reaction.
Whether the Fed will be able to hold the line on just one more rate hike is far from certain.
If inflation stays high, the central bank would have to end its pause on rate hikes and risk a recession. A slim majority of economists, in fact, already believe a downturn is imminent.
Steadily falling inflation, on the other hand, could allow the Fed to pull a rabbit out of the proverbial hat.
Looking ahead: “For an economy looking to avoid recession, this was a good report,” said Robert Frick, corporate economist at Navy Federal Credit Union.
“For the Fed, it could be one and done in May,” said senior economist Sal Guatieri of BMO Capital Markets.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Friday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
declined several basis points to 3.53%.
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The numbers: The U.S. economy accelerated in March, S&P Global surveys showed, but so did inflation as companies raised selling prices.
The S&P Global Flash U.S. services-sector index rose to an 11-month high of 53.8 from 50.5 in the prior month. Most Americans are employed on the service side of the economy.
The S&P Global U.S. manufacturing sector index, meanwhile, increased to 49.3 from 47.3. That’s a five-month high.
Any number above 50 points to expansion. Figures below that signal contraction.
The S&P Global surveys are among the first indicators each month to assess the health of the economy.
Key details: New orders, a sign of future sales, rose for the first time since last September at service-oriented companies.
Booking at manufacturers fell again, but at the slowest pace in six months. More positively, production increased for the first time since last September.
Employment rose across the economy as both service companies and manufacturers said they added new workers.
On the downside, the increase in demand allowed companies to raise prices at the fastest pace in five months.
Business leaders said rising costs, especially labor, contributed to their decision to raise prices.
That’s not good news for Federal Reserve officials who worry that rising wages could make it harder to get high inflation under control.
Big picture: The service and industrial sides of the economies are following different trajectories.
Americans are spending relatively more money on services such as travel and eating out and spending less on goods. As a result, service companies are still hiring and growing at a faster clip.
Manufacturers are basically treading water due to the shift in consumer spending patterns as well as the depressive effects of higher inflation and interest rates.
Adding it all up, though, the S&P reports paint the picture of a expanding economy that is not on the doorstep of recession.
What remains to be seen is how much the recent stress in the banking sector hurts lending and makes it harder for businesses to borrow and invest.
Looking ahead: “March has so far witnessed an encouraging resurgence of economic growth,” said Chris Williamson, chief business economist at S&P Global.
“There is also some concern regarding inflation,” he said. “The inflationary upturn is now being led by stronger service sector price increases, linked largely to faster wage growth.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trades.
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The numbers: Orders for U.S. manufactured goods fell 1% in February because of less demand for passenger planes and new cars. Yet business investment rose for the second month in a row in a sign the industrial side of the economy is still growing.
Economists polled by the Wall Street Journal had forecast a 0.3% drop in orders. Durable goods are products like cars, appliances and computers meant to last at least three years.
Orders rise in an expanding economy and shrink in a contracting one. They are still rising but at a slower pace compared to last year.
Orders are up 2.3% over the past 12 months, marking the smallest year-over-year increase since 2020.
Key details: Orders for commercial jets and new cars both fell last month. Bookings dropped 6.6% for airplanes and almost 1% for new autos.
The transportation segment is a large and volatile category that often exaggerates the ups and downs in industrial production. Orders for both the aircraft and carmakers have been very choppy since the pandemic.
Orders excluding transportation were unchanged in February, reflecting recent weakness in manufacturing.
The most positive news in the report was the second straight increase in business investment — a sign of future demand. So-called core orders rose 0.2%.
These orders exclude military spending and the auto and aerospace industries. They are up 4.3% in the past year, but that’s also the smallest increase since 2020.
Big picture: The industrial side of the economy has slowed since last year because of steep inflation and rising interest rates. Higher borrowing costs curtail demand for expensive manufactured goods and discourage investment.
Manufacturers are still growing, but further weakness would be a bad omen. Heavy industry is at the leading edge of the economy.
The recent turmoil in the banking sector after the failure of Silicon Valley Bank could also add to the stress if banks scale back lending to businesses.
Looking ahead: “Business investment is definitely a vulnerability for the economy in the event of a severe tightening in credit conditions,” said chief economist Stephen Stanley of Santander Capital Markets. “Thus, it will be important to watch these numbers going forward.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open sharply lower in Friday trades.
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The numbers: The U.S. leading economic index fell 0.3% in February — the 11th decline in a row — continuing to signal an upcoming recession.
Economists polled by the Wall Street Journal had forecast a 0.4% drop.
The leading economic index, also known as the LEI, is a gauge of 10 indicators designed to show whether the economy is getting better or worse. The report is published by the nonprofit Conference Board.
Big picture: The economy has slowed due to the end of pandemic stimulus and the effects of high inflation, which has forced the Federal Reserve to raise interest rates.
Higher borrowing costs typically tame inflation, but at the cost of weaker economic growth.
Although the leading index has been signaling a recession for months, the economy is still expanding. A big question is whether the latest banking crisis ends up becoming a tipping point. So far, regulators appear to have contained the damage.
Key details: Eight of the 10 indicators tracked by the Conference Board fell in February.
A measure of current economic conditions, meanwhile, rose a scant 0.1% in February.
The so-called lagging index — a look in the rearview mirror — also increased by 0.1%.
Looking ahead: “The leading economic index still points to risk of recession in the U.S. economy,” said Justyna Zabinska-La Monica, senior manager of business cycle indicators at the board.
“The most recent financial turmoil in the U.S. banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists,” she said.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trading amid nagging worries about the U.S. financial system after the failure of Silicon Valley Bank.
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The numbers: A survey of consumer sentiment slid to 63.4 in March and fell for the first time in four months, reflecting angst among Americans about high inflation and the health of the economy.
The preliminary reading in March was down from 67 in February, the University of Michigan said. Most of the survey was completed before the collapse of Silicon Valley Bank.
Consumer sentiment helps gauge how Americans feel about their own finances as well as the broader economy.
The index had fallen to a record low of 50 last summer before partly rebounding. Sentiment is still well below a recent peak of 88.3 in 2021, however, and a pre-pandemic high of 101.
Inflation expectations tapered off a bit but remained fairly high. Consumers expect prices to increase 3.8% in the next year, down from 4.1% in the prior month. That’s the lowest reading since April 2021.
Key details: A gauge that measures what consumers think about the current state of the economy dropped to 66.4 in March from 70.7in the prior month.
Sentiment fell the most among lower-income and younger Americans who tend to suffer disproportionately from high inflation. Some wealthier people with large stock holdings were also less confident in light of a recent decline in equities.
Another measure that asked about expectations for the next six months declined to 61.5 from a prior 64.7.
Americans think inflation will persist for some time. In the longer run, consumers believe inflation will increase about 2.8% a year, down slightly from 2.9% in the prior month.
That’s still well above the Federal Reserve’s 2% target, however.
Fed officials pay close attention to inflation expectations because they could be a harbinger of future price trends.
The rate of inflation over the past 12 months is 6%, based on the consumer-price index. It’s fallen from a 40-year peak of 9.1% last summer.
Big picture: Consumer sentiment is still far below levels associated with a healthy economy and it’s hard to see a big improvement anytime soon.
The Fed is raising interest rates to tame high inflation, a strategy that typically slows the economy.
Higher rates have also destabilized parts of the U.S. financial system as witnessed by the sudden collapse of Silicon Valley Bank. That’s adding new stress on the economy.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trades amid nagging worries about the U.S. financial system after the SVB failure
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The numbers: The U.S. created a robust 311,000 new jobs in February, raising the odds of another sharp hike in interest rates by the Federal Reserve later this month.
Economists polled by The Wall Street Journal had forecast 225,000 new jobs.
The increase in employment last month followed a revised 504,000 gain (initially 517,000) in January, the government said Friday.
The large back-to-back increases could force the Fed to raise interest rates higher than it had planned to slow the economy and loosen up the tightest labor market in decades. The central bank meets March 21-22 to plot its next move.
Scott Olson/Getty Images
Yet there were a few glimmers of hope for the Fed.
The unemployment rate rose a few ticks to 3.6%. Hourly wages rose just 0.2% to mark the smallest increase in a year. And the share of able-bodied people in the labor force climbed to a three-year high.
All of these are pressure valves on the labor market and the broader economy from high inflation.
Investors appeared to put more weight on those factors than another big increase in employment. Stocks rose and bond yields fell.
Big picture: An expanding U.S. economy has shown lots of resilience in the face of rising interest rates, but analysts doubt the good times can last. Higher borrowing costs typically slow the economy by depressing consumer spending and business investment.
Just look at the housing market, where soaring mortgage rates have crushed sales and new construction. The same could happen to the rest of the economy if the Fed has to jack up rates more than Wall Street expects.
Already, a robust U.S. labor market is showing signs of fraying. Job postings have declined, lots of large companies have announced layoffs and workers who lose a job are taking longer to find a new one.
It just might not be enough for the Fed.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
trimmed premarket losses in Friday trades. The yield on the 10-year Treasury fell to 3.78%.
Investors hope some signs of cooling in the labor market will encourage the Fed to keep raising interest rates in smaller increments.
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The numbers: The number of Americans who applied for unemployment benefits in early March jumped to a 10-week high of 211,000. Yet most of the increase was concentrated in New York and might not signal a broader cooling-off trend in the U.S. labor market.
New U.S. applications for benefits rose 21,000 from 190,000 in the prior week, the government said Thursday. The numbers are seasonally adjusted.
It’s the first time in eight weeks claims have topped the 200,000 mark.
An unusually big increase took place in New York. Raw or actual unemployment applications in the state jumped to 30,241 from 13,878 in the prior week.
Chief economist Stephen Stanley of Santander U.S. Capital Markets said school workers in New York City are allowed by contract to apply for benefits during winter and spring breaks.
Asked about the upsurge, a government spokesperson said by email that “the New York State Department of Labor cannot speculate on the increase.”
California also posted a sizable pickup, perhaps a sign that the recent spate of major corporate layoffs are starting to bite. A number of large tech firms have announced job cuts since last fall.
The number of people applying for jobless benefits is one of the best barometers of whether the economy is getting better or worse. New unemployment applications remain near historically low levels, however.
Economists polled by The Wall Street Journal had forecast new claims to total 195,000 in the seven days ending March 3.
Key details: Thirty-seven of the 53 U.S. states and territories that report jobless claims showed an increase last week. Seventeen posted a decline.
Most states aside from New York and California reported little change.
The number of people collecting unemployment benefits across the country, meanwhile, rose by 69,000 to a two-month high of 1.72 million in the week ending Feb. 25. That number is reported with a one-week lag.
These continuing claims are still low, but a gradual increase since last spring suggests it’s taking longer for people who lose their jobs to find new ones.
Big picture: Jobless claims are one of the first indicators to emit danger signals when the U.S. is headed toward recession.
So far, jobless claims remain remarkably low and the economy is still adding plenty of jobs. Economists estimate that the U.S. gained 225,000 new jobs in February.
Economists expect hiring to slow and layoffs to increase later in the year, however, as rising interest rates restrain the economy and reduce demand for workers. A number of large companies, especially in tech, media and finance, have already announced job cuts.
Looking ahead: “Absent [New York], the count would likely have been below 200,000 yet again,” Stanley of Santander said.
“Broadly, initial jobless claims have remained remarkably low despite the flurry of layoff announcements in recent months, underscoring that the labor market retains considerable momentum.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Thursday trades.
Wall Street is hoping for signs of cooling in the labor market, which would discourage the Federal Reserve from raising interest rates more aggressively. The Fed is raising rates to snuff out inflation and reduce upward pressure on wages.
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The numbers: The employment cost index slowed at the end of 2022 for the third quarter in a row, but worker compensation still rose a sharp 1% and didn’t offer much comfort to the Federal Reserve as it fights to tame inflation.
Economists polled by The Wall Street Journal had forecast a 1.1% increase in the ECI in the fourth quarter.
Although trending in the right direction, labor costs are still rising far faster than the Fed would like.
Compensation climbed at a 5.1% clip in the 12 months ended in December — up from 5% in the prior quarter — to leave the increase in worker pay near the highest level in 40 years.
By contrast, wages and benefits rose an average of 2.7% a year from 2017 to 2019.
Read: Workers love big raises. The Fed, not so much. Why pay has a big role in the inflation fight.
Key details: Wages advanced 1% in the fourth quarter, but in a good sign, they slowed from 1.3% in the prior period.
The increase in wages in the 12 months ended in December was flat at 5.1%, however.
Benefits rose at a 0.8% pace in the last three months of 2022. The 12-month increase in benefits was unchanged at 4.9%.
The ECI reflects how much companies, governments and nonprofit institutions pay employees in wages and benefits. Wages make up about 70% of employment costs and benefits the rest.
The big picture: Senior Fed officials want to see a tight labor market loosen up and wage growth decelerate further to help ensure inflation returns to pre-pandemic levels of 2% or so.
The central bank on Wednesday is expected to raise a key interest again. It’s likely to keep raising rates — or keep them high for longer — until it sees more signs in the ECI or other wage trackers that labor costs are coming down.
The increase in consumer prices slowed to 6.5% at the end of 2022 from a 40-year high of 9.1% last summer, but it’s still more than triple the Fed’s inflation goal.
Looking ahead: “This result is a decent outcome for the Fed, as labor costs appear to be decelerating, but it would be premature to declare victory,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “With the unemployment rate at a 50-year-plus low of 3.5%, it would be exceedingly optimistic to conclude that wage pressures have rolled over.”
“Wage growth is slowing gradually,” said senior U.S. economist Andrew Hunter of Capital Economics said in a note to clients. “The Fed is still likely to keep raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth over the coming months to convince officials to pause the tightening cycle after the March meeting.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open higher in Tuesday trades. Stocks fell on Monday.
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The numbers: The cost of U.S. goods and services rose a scant 0.1% in December in yet another sign inflation is cooling off, opening the door for the Federal Reserve to stop raising interest rates soon.
The rate of inflation, using the Fed’s preferred PCE index, has tapered off rapidly since last summer. Falling oil prices have played a big role, but inflation more broadly is easing.
The annual increase in prices slowed to 5% in December from 5.5% in the prior month and a 40-year high of 7% last summer, according to fresh government data.
That’s the smallest increase in 15 months, though still well above pre-pandemic levels of less than 2% annual inflation.
Key details: The more closely followed core index rose a modest 0.3% last month, matching Wall Street’s forecast.
The increase in the core rate of inflation in the past 12 months decelerated to 4.4% from 4.7%. That’s also the lowest level in 14 months.
The PCE index is viewed by the Fed as the best predictor of future inflation trends, especially the core gauge that strips out volatile food and energy costs.
Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.
They might substitute cheaper goods such as chicken thighs for more expensive ones like boneless breasts to keep costs down, or buy generic medicines instead of brand names.
The CPI showed inflation rising at a 6.5% yearly rate in December, but it’s also slowed sharply since the summer.
Big picture: The Fed is trying to restore inflation to pre-pandemic levels of 2% or so, and it will keep raising interest rates until it is convinced the genie is back in the bottle. Higher rates reduce inflation by slowing the economy.
Yet with inflation subsiding, Wall Street is raising questions about whether the Fed’s work is almost done. If rates go too high, the economy could sink into recession.
Indeed, many economists think a downturn is likely this year. The central bank has jacked up a key U.S. interest rate to a 15-year high of 4.5% from near zero less than a year ago — and the effects of higher borrowing costs are just starting to bite.
Looking ahead: “With higher interest rates evidently weighing heavily on demand now, we expect core inflation to continue moderating,” said chief North American economist Paul Ashworth of Capital Economics in a note to clients. That “will eventually persuade the Fed to begin cutting interest rates late this year.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open slightly lower in Friday trades.
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