Capital markets perspective: Mixed messages

Capital markets perspective: Mixed messages


Economic data has been sending mixed messages ever since the Federal Reserve began raising interest rates a year and a half ago. Case in point: gross domestic product – the primary measure of whether the economy is growing or contracting – slipped lower during back-to-back quarters at the beginning of last year but has since surged – mostly on the backs of consumers undaunted by the numerous headwinds now obviously blowing in their direction. Last week’s update of third quarter GDP saw the U.S. rack up annualized growth of 5.2%, a meaningful upgrade from the first estimate five weeks ago and the best quarter for growth since the post-COVID reopening began.1 Consumption accounted for just under half of that growth, while government outlays, particularly at the state and local level, accounted for nearly one-fifth. But it’s an open question whether growth in either of those components will persist, with the impact of big fiscal programs now fading and consumers becoming increasingly wary of what might lie ahead. 

In fact, last week’s GDP revision actually included a slight downgrade in the contribution to growth made by consumers to third-quarter growth, and trends so far during the fourth quarter may have eased even more: According to Thursday’s income and outlays release, personal income grew slightly faster than personal spending on an inflation-adjusted basis for the first time since the spring, implying that savings balances drawn down as the windfall of COVID stimulus was spent away might be stabilizing.2

Of course, the headwinds facing the U.S. consumer that might help account for this reluctant slowing and tentative rebuilding of rainy-day funds are well-documented: Waning pandemic stimulus and a restart of student loan payments top the list. But recently, another concern has become more top-of-mind: a softer job market. While the U.S. labor market is still tight almost any way you look at it, the cracks are becoming more evident. Manufacturers are finally reacting to slowing demand by reducing headcount, something that was evident in both regional Fed manufacturing surveys released last week,3,4 as well as various purchasing managers indices (PMIs)5,6 released in recent days, which have now collectively suggested a contraction in employee headcounts and fewer hours for at least a month or two running. 

For now, many of those reductions-in-force are being implemented through attrition – companies are simply declining to fill vacancies as existing employees depart. One way to guess at how prevalent the trend is would be to look at the number of job openings across the U.S. economy, which is released as part of the “JOLTS” survey that we’ll get this week. However, Tuesday’s data will include survey results for October, which seems like forever ago given how quickly things now seem to be changing. That leaves the ratio between consumers who describe jobs as “plentiful” versus those who say jobs are “hard to get” – a data series tracked by the Conference Board for decades as part of its consumer confidence survey – as perhaps the closest and most up-to-date proxy. Not surprisingly, that gap is narrowing: According to last week’s release7, those who responded “plentiful” when asked about the availability of jobs in November outnumbered those who voted “hard to get” by about 2.5-to-1. That’s still pretty strong when viewed historically, but it’s also the toughest self-reported environment for jobseekers in over two years, when the COVID recovery was in full swing. 

Another way to see this apparent softening came to us by way of last Thursday’s weekly unemployment claims release. True to form, new claims remained subdued. But continuing claims continued to inflect higher, suggesting that the job market is having a harder and harder time digesting those who do find themselves out of work. That seems entirely consistent with the attrition theme described above, but if history holds, the strategy of relying simply on attrition to solve over-staffing might soon give way to outright layoffs that will naturally cause initial claims to begin inflecting higher, too.  

So there’s a little something for everyone circulating in the econosphere. If you’re inherently bullish on the economy, you can point to blowout GDP numbers and still-strong readings for the labor market (low initial jobless claims, historically high ratios between plentiful-and-hard-to-get). But if you’re bearishly inclined, you can point to evidence that some of those pillars of growth are starting to weaken (softer real consumer spending, rising continuing claims). And, for what it's worth, the Fed itself has noted slower overall growth: Last week’s Beige Book8 of economic anecdotes from around the various Fed districts opened with this line: “Activity slowed since the previous report…,” which was apparently enough to help convince two traditionally hawkish Fed officials – Christopher Waller and Michelle Bowman – that the Fed might finally be able to take its foot off the gas. Waller said he is “increasingly confident that policy is well-positioned,” and Bowman said she still supports additional tightening, “but only if incoming data suggests progress on controlling inflation has stalled or proves insufficient.” That’s the mildest either member of the Fed collective has sounded in quite a while. Meanwhile, Jerome Powell, warned on Friday that it would be “premature to conclude with confidence that we have achieved a sufficiently restrictive stance.”9

For their part, retail investors are taking the “over,” at least for now. Last week saw a bullish sentiment rise significantly while bearish sentiment fell.10 That, too, likely helped generate some of last week’s ubiquitous green. But there’s a complication here, too: Investor sentiment data seems to do a much better job explaining last month’s performance than it does at predicting next month’s. So the fact that retail investors are becoming increasingly “bulled-up” may not be as positive as it’s made out to be. 

What to watch this week 

All eyes will be on the labor market this week. As described above, the most impactful number inside JOLTS will be the number of job openings available across the U.S. economy, which has inched its way back toward the 10-million level that was once thought to be unassailable. But as also described above, JOLTS data may not be as up-to-date as necessary to provide the close-to-real-time update needed at this point in the cycle. Moreover, it’s possible that job openings data may not be a true indicator: If, as argued above, firms are really relying mostly on attrition to manage headcount as demand continues to cool, then it might simply be a case of leaving job openings active and either slow-playing or forgoing actual hiring decisions altogether.  

It also places even greater emphasis on the other reads of job-market strength due out this week, including ADP payrolls on Wednesday and the Bureau of Labor Statistics’ employment situation report on Friday. That report includes all kinds of reads into job market trends including unemployment, hours worked, payroll growth and participation rates.  

Either way, to say that the labor market is central to the economic narrative right now is an understatement. The Fed cares about it because tightness in the labor market is one of the only remaining dominoes yet to fall in its campaign to rein in inflation; consumers care about it because they still need jobs; investors care about it for both of those reasons.  

That leaves Thursday’s job cut data from outplacement firm Challenger, Gray & Christmas as perhaps the lynchpin to the whole week. On one hand, if Challenger’s numbers continue to rise but remain within an acceptable, non-recessionary range, then the “we can ease the job market by attrition alone” argument can continue to work. If, on the other hand, we start to see a big jump higher in Challenger’s numbers (or, for that matter, in weekly unemployment claims), then we’ll know things are changing in a real way.  

The rest of this week’s data comfortably falls into the odds-and-ends category, including Tuesday’s PMI-based read on the health of the services sector by both S&P Global and the Institute for Supply Management. Last week’s PMI data showed that the manufacturing sector resumed its decline in November when viewed through the PMI lens – something likely to be re-confirmed this week by way of final reads on factory and durable goods orders for October. But expectations suggest that trends may have actually re-accelerated for service providers. If so, that could help temper expectations that a recession is about to start. Either way, Tuesday’s services PMI data could prove interesting.








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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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