Yellen says there’s no “solid intellectual basis for seeing recession as ‘inevitable’” – our proprietary economic now-caster kind of agrees – labor markets and consumption remain robust despite what is, by the FED’s own admission, a restrictive monetary policy. Markets however seem focused on the inflation downdraft and expect a 100-125bp rate cut a year from now (75% probability) – but why should a goldilocks environment drive policy easing? We see the obsession with inflation as yesterday’s story and see the jobs market as the key to holding up (or not) consumption and the economy – and it is likely that the FED will probably respond to these metrics rather than inflation data – so it is jobs that are likely to define 2024.
Economic Now-caster suggests labor and consumption metrics offsetting residual inflationary and monetary policy headwinds
Chart below (fig 1) shows reversal of the economic deceleration of the last nearly two years – aggregate score trend appears stable and absolute levels in a “happy” equilibrium Recovery led by easing inflationary pressures and consumer and labor markets holding up in positive territory despite deceleration
The model thus echoes the treasury secretary’s statement of not seeing signs of a recession….yet…
Figure 1 – Lighthouse Canton Economic Now-Caster
source: Lighthouse Canton
Jobs Drive Consumption Drives Economy
Consumption (two-thirds of the US economy) holding up despite monetary policy restrictiveness is likely not just due to COVID era savings or a delayed interest rate impact, but likely heavily dependent on the jobs market not retrenching. The two (jobs and retail sales) aren’t merely correlated, but there is a causality (jobs driving consumption).
Job openings have retreated sharply, coincident with monetary policy restrictiveness A Duke university survey (source BCA Research) suggests corporate leaders do not see labor quality/ availability as a top concern. Equally, the same report cites a small business NFIB survey, suggesting a reduction in percent of companies finding it difficult to fill positions
While retail sales have decelerated sharply in tandem (fig 2), our aggregate consumer score (fig 3) suggests a more robust trend, led by a positive trajectory in personal income and spending
Figure 2 – US Job Openings & Retail Sales
source: Trading Economics
Figure 3 – Labor and Consumption Scores
source: Lighthouse Canton
What Will Prompt Rate Cuts – Not Inflation
Market attention remains focused on nuances of inflationary data with a near consensus view of a “bumpy” ride. While we can debate when the FED’s stale 2% target will be achieved, the fact is that the trend in inflation is down. With there being “no solid intellectual basis for seeing recession as ‘inevitable’ ” (per Yellen), will lower inflation alone cause the FED to reverse course? If not, then is the market’s optimism misplaced? Fed Funds Futures suggest easing could come as soon as March-May 2024 100-125bp easing by end 2024
It’s unlikely that that the 2% inflation target will be achieved by the expected timeframe of rate cuts (as per Fed Funds Futures) unless we see a sharp deterioration in other leading factors – jobs Rather than debate whether or not are market’s rate cut expectations, our focus is on what will prompt the FED to act, and in our view, unless there is a deeper deterioration in the labor market, there are unlikely to be pressing reasons for the FED to ease – it’s Jobs that are likely to define 2024, we believe.
Figure 4 – Fed Funds Futures Implied Probabilities
source: CME
#FED #JOBS #INFLATION #2024