The U.S. economy has surprised investors with a strong jobs report for January, indicating its resilience and pointing towards economic recovery. The establishment survey showed an increase of 353,000 nonfarm payrolls, with revisions for December boosting the previous tally by 115,000. Additionally, revisions for last year's monthly change figures were upwardly revised in 9 out of 12 months, challenging the previous narrative of labor market weakness.
Although the household survey reported a decline of 31,000 in employment, annual adjustments to population controls revealed that employment actually grew by 239,000, according to Don Luskin of Trend Macro. This means that job growth exceeded expectations according to both surveys.
One potential concern from the report is the increase in average hourly earnings by 0.55% in the month. Economist Jim Glassman, however, highlights that this figure was influenced by a shift in the industry's hiring composition. Other reports, including Q4 productivity estimates, suggest that businesses are experiencing a boost in labor productivity. This allows companies to increase wages without adding to unit costs or eroding profit margins.
The markets had a mixed response to this news. Ten-year Treasury yields surged by 17 basis points, closing at 4.03%. The stock market reached a record high in response to the solid economic news and robust earnings reports for tech companies.
Considering this impressive performance, it seems that the debate about an impending recession in the economy is effectively over. The Atlanta Federal Reserve’s GDPNow model forecasts a growth rate of 4.2% for the current quarter, an increase from the previous estimate of 3.0%. If this holds true, it would mean that growth averaged around 4% in the last three quarters.
Even if growth moderates in the remainder of the year, there are no significant signs of fundamental imbalances in the economy. Moreover, the struggling manufacturing sector is showing signs of stabilization, as evidenced by the rise in the ISM index for January to its highest level since 2022. Additionally, the housing market has stabilized with falling mortgage rates since October.
Strong job growth coupled with low inflation is expected to bolster consumer spending, which accounts for nearly 70% of aggregate demand. The increase in real disposable income will help offset the decline in household savings over the past two years as pandemic relief payments ended.
With these positive indicators, the Federal Reserve is not compelled to ease monetary policy in the near future and has left rates unchanged at the recent FOMC meeting. Bond investors, however, have been pricing in potential rate cuts throughout the year. It is more likely that the Fed will consider lowering rates in May and possibly implement three rate cuts for the remaining part of the year.
The case for easing policy is based on the expectation that inflation will continue to decrease towards the Fed's 2% annual target. Furthermore, with low unemployment and real interest rates around 2.5%, a restrictive monetary policy stance is no longer necessary.
The Fed will also consider that fiscal policy remains expansionary. The federal budget deficit in fiscal 2023 reached 6.3% of GDP, which is typically associated with a high unemployment rate rather than the current low rate of 3.7%. Additionally, the House of Representatives recently passed a bipartisan bill that enhances child tax credits and revives key tax breaks for businesses, potentially providing further fiscal stimulus. This, along with other fiscal policy actions, could amount to over $300 billion this year.
The surprising strength of the U.S. economy has significant implications for the 2024 elections. So far, President Biden's handling of the economy and concerns about border security have been areas of weakness in public opinion polls. However, there are signs that households' perception of the economy is improving. The University of Michigan's survey of household sentiment in January registered the largest one-month increase in 18 years. The index is now close to its normal level around 80, compared to a low of 40 in 2022 during a period of inflation spikes.
Even Larry Kudlow, Trump's former White House economic advisor, admits that his predictions of a recession under Biden were wrong and acknowledges Biden's accomplishments, including the creation of 14.8 million jobs during his tenure.
The big unknown, however, is how quickly public perception of the economy will align with the reality revealed by the economic data.
