1/6 - Weekly Economic Highlights

The U.S. economy added 223,000 jobs in December, slightly higher than market expectations of 203,000, but a decline from November’s revised increase of 256,000. In somewhat of a surprise, jobs in the goods producing sector were up 40,000 in December with an increase of 28,000 in construction, 8,000 in manufacturing, and 4,000 in mining and logging. The unemployment rate dipped to 3.5%, returning to its pre-pandemic level, and lower than the Bloomberg survey of 3.7%. The labor participation rate increased only slightly to 62.3% from 62.1% in November indicating the supply of labor will likely remain a challenge for employers in 2023.  The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons declined to 6.5% from the prior month at 6.7%. The report reflected lighter than expected wage gains with average hourly earnings up 4.6% year-over-year in December, down from a revised 4.8% in November, welcome news for Fed officials concerned about wage pressures. Overall, the December labor report supports the case for the Fed to continue raising the federal funds rate but perhaps at a slower pace with an increasing likelihood of a 25-basis point vs 50-basis point increase at their next meeting. Although we are starting to see signs of cooling, historically, the labor market remains exceptionally strong. On Wednesday, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) remained elevated at 10.46 million open jobs.

The release of the minutes of the Federal Open Market Committee’s December 13-14 meeting re-affirmed their commitment to remain aggressive in their efforts to bring down inflation. No official predicted a rate cut in 2023 and seventeen of nineteen officials projected rates at or above 5.1% in 2023. Also on Wednesday, Neel Kashkari the Minneapolis Fed President and historically a very dovish member of the Fed emphasized the need for continued rate hikes, with his own forecast of a policy rate of 5.4% before a pause.

Earlier in the week, the Institute for Supply Management (ISM) manufacturing index dropped to 48.4 in December from 49.0 in November. This is the second consecutive month of readings below 50.0 which is indicative of contraction in the manufacturing sector.  The report also reflected the disinflationary path of the goods sector with a sharp drop in prices paid from 43.0 to 39.4 which is the lowest level since April of 2020. The ISM services index released on Friday had a significant decline to 49.6 in December from 56.5 in November, this level is the lowest since May of 2020.

Treasury yields trended higher earlier in the week but in the aftermath of the jobs report reflecting below expectations for earnings, and an exceptionally weak ISM index, both the 2-year and 3-year yields fell over 20 basis points. The Treasury curve inverted further this week, with the 2-year at 4.29%, and the 10-year at 3.58% as of Friday morning. The Chandler team expects volatility to continue as markets struggle with the Fed’s path forward to curtail inflation, and a slowdown in economic growth.

Next week’s key economic releases include the Consumer Price Index (CPI) and the University of Michigan’s Sentiment Index which will provide short and long-term inflation expectations which along with today’s labor report will further influence the direction of the Federal Reserve’s monetary policy. Before their next meeting concluding on February 1^st, the Fed will have a significant amount of additional economic data to consider including their preferred inflation gauge, the Personal Consumption Expenditures (PCE). The Chandler team expects the Fed to continue monetary policy tightening until inflation decelerates further and members of the FOMC determine they have reached the appropriate restrictive policy stance.

Next Week:

NFIB Small Business Optimism Index, Consumer Price Index (CPI), University of Michigan's Sentiment Index, Import Price Index, Export Price Index

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