Common Cents & Welcome to 2023

Here I was hoping 2023 would be less confusing and confounding than 2022. It seems I was wrong.

You see, this morning the Bureau of Labor Statistics (BLS) released “The Employment Situation – December 2022.” While the name of the report changes, by definition, this is a monthly overview of the strength of the U.S. labor markets. How many jobs did the economy create last month? In what economic sectors? How many hours did Americans work on average? How much did their paychecks increase (or decrease)? Was there a particular demographic that performed better than others? Or worse?

In truth, it is a pretty impressive report and is probably the most consistently important economic release. Simply put, the Employment Situation is never not important. It is always one of the bigger releases in any given month. It usually has the potential to move the markets in a meaningful way. It also has the potential to alter monetary and fiscal policies.

So when the BLS reports the U.S. economy created 223K net, new payroll jobs last month, you would think investors would view it as an indication of economic strength. When the official Unemployment Rate falls to 3.5%, which is historically miserly, one could intuit the labor markets were pretty tight. Am I right? In truth, the headline numbers were pretty darn impressive given where we are in both the economic and monetary policy cycles.

What’s more, it would be understandable to conclude this apparent sign of economic strength would give the Federal Reserve even more of a reason to keep its foot on the brakes. The Fed would seem to have a lot of runway in raising the target overnight lending rate. After all, job stability seems to be a foregone conclusion.

Yes, one would think these things. However, one would be, interestingly, on the wrong side of the thought process this morning.

You see, 223K new jobs is the weakest month since December 2020. Ooh, the horror, huh? What’s more, it has been trending lower for much of the year. While last month’s number would be the biggest city in Alabama and 90K jobs higher than the 50-year average, things are getting noticeably weaker across the country. Right?

Also, wage growth was pretty tepid in December. Average Hourly Earnings were up only 0.3%, relative to the more august estimate of 0.4%. For their part, Average Weekly Hours worked dipped to 34.3 from 34.4. As a result, “average hourly and weekly earnings of all employees on private nonfarm payrolls” fell to $1,125.73/week from $1,125.91 in November. That math equals (0.02%), which probably isn’t going to bring the economy to its proverbial knees.

We all know the price of eggs will do that! Shoot, you have to be a zillionaire to make an omelet these days.

In any event, investors took these marginally weak aspects of this morning’s report as evidence the economy is cooling. This means the Federal Reserve won’t have to be as aggressive as many fear. Essentially, the Fed will have to take its foot OFF the brakes sooner than expected. Sweet Hosannas!

The economy created 223K new jobs making on average $58,538/year last month. This works out to be in excess of $13.05 billion in wages, which will go toward things like rent, groceries, services, etc. Somehow that is an argument for the Fed to stop making money more expensive in the economy. Okay, fair enough. I am not so sure about that.

What I am sure of is the ISM Services Report on Business for December was awful. By awful, I mean it was really bad. IF the markets want to find a reason for the Fed to cool it, this would be it. It certainly wouldn’t be a decent Employment Situation release.

Apart from April and May of 2020 (when the government was shutting down the economy), December’s 49.6 reading for the index was easily the lowest since the Financial Crisis of 2008-2009. Hey, it wasn’t just the headline number that was bad. Nope. Here are all of the underlying criteria that deteriorated last month.

For purposes of elucidation, a reading over 50 suggests expansion. Conversely, a reading under 50 implies contraction.

  December November Change
Business Activity 49.6 56.5 -6.9
New Orders 54.7 64.7 -10.0
Employment 45.2 56.0 -10.8
Supplier Deliveries 49.8 51.5 -1.7
Inventories 48.5 53.8 -5.3
Prices 45.1 47.9 -2.8
Backlog of Orders 67.6 70.0 -2.4
New Export Orders 51.5 51.8 -0.3
Imports 47.7 38.4 9.3

Here is the thing. Recently, you don’t have to try very hard to find data to suggest the Fed doesn’t have to be overly aggressive moving forward. The recent regional purchasing manager reports were brutal, and now the national ones (ISM, et al) are just as bad. There are others. However, to find the dark clouds in an economic report of silver linings is so much mental gymnastics. The markets did just that this morning.

It simply isn’t necessary. The economy is cooling, even if the labor market data doesn’t say it is. The Fed WILL be in a position to start cutting rates by the end of the year, if it so desires. We don’t have to overthink things, seriously.

In the end, as I type here at 11:11 am CST on Jan. 6, 2022, the Dow Jones Industrial Average is up slightly in excess of 600 points. The S&P 500 and NASDAQ are both up over 1.80%, and small caps are doing even better than that. For their part, interest rates are falling through the floor despite the surfeit of debt sloshing about the global financial system. To that end, the yield to maturity on the 10-Year U.S. Treasury Note has fallen 14 basis points (0.14%) today. That is a massive move.

So people are making all kinds of money today on bad news and by making decent news bad as well. If that isn’t confusing and confounding, I don’t know what it is. Welcome to 2023.

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.

John Norris

Chief Economist & Worry Wart

Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.