2022 Theme: The Strength & Resilience Of The US Economy - Will It Continue In 2023?!
One of the biggest questions heading into 2023 is whether the US economy will continue to hold up.
Hold up it certainly has. As we have said before, whether they will admit it or not, most economists did not believe that the American economy could withstand either the pace or the size of interest rate increases we experienced last year.
However, their expectations of a recession have been misplaced. US economic growth has slowed but it has not cracked so far and that is obviously very welcome.
Unsurprisingly, stronger than expected economic growth is changing some of the expectations about what could be possible in 2023.
The Cassandras who predicted a strong economic recession all of 2022 don't agree though. In the same way that the "inflation was transitory" crowd now points to every declining inflation print as proof they were right all along. The "the recession will be brutal" crew have simply moved their forecasts to 2023.
Must be nice to be able to move the goalposts when circumstances don't suit your game plan....
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The era of cheap money is still over. But this past week saw a great Goldilocks data point that demonstrated that the pace of more expensive money could well slow.
It is only a single data point but we have had a few in the last few months which will encourage people to expect fewer interest rate hikes in the months to come.
Practically speaking, we had the first jobs report of 2023 on Friday. The number is an estimate by the Bureau of Labor Statistics of the number of private economy jobs created last month.
It was a pretty good number!
The details:
The number of new private sector jobs was 223,000 vs 203,000 previously expected.
The US unemployment rate fell to 3.5% versus the 3.7% expected.
Perhaps most importantly, average hourly earnings was 0.3% over the previous month versus 0.4% expected (and therefore at an annual 4.6% rate).
Taking a step back, this report revealed that the unemployment rate in the US is at its lowest in over 50 years. It also means that 2022 saw a total of 4.5 million jobs created, a very high total for any year and a historic start to the Biden Presidency.
Amid all the inflation, crypto winter and war talk some of this can get lost, including perhaps on these pages, so it is important to keep in mind that the economy is still doing very well.
Add it all up and it seems that, yet again, more jobs were created than estimated in December and wages grew but wage growth is moderating quickly.
The stock market didn't lose sight of the significance. Financial markets loved it. The S&P 500 rose ~2%+ on the day. Other markets generally followed suit, not just in the US but around the world.
Why did financial markets react so happily?
It is difficult to understate how excellent a combination of strong employment but moderating wages is. As usual it all has to do with how Federal Reserve will interpret this data:
Continued strong job growth = less chance of a recession but -> less wage growth = less inflation which -> means fewer interest rate hikes from the Federal Reserve.
This is a "just right" Goldilocks scenario for the US economy and raises, yet again, the probability of a "soft landing" for the interest rate cycle. In other words, against the grain of expectations, the economy could hang in there despite the fastest rate hike cycle in American economic history.
Not bad!
The trick for the Federal Reserve has been to moderate a very strong US jobs market by increasing interest rates while not pushing it off a cliff leading to a serious recession.
This was a serious fear, not just in these pages:
In general, so far, that is precisely what is happening, as you can see here:
Job growth is slowing but the unemployment rate is already historically low. So there are real limits as to how many jobs can be created.
What conclusions should we take from this?
The first and most important is that the probability for a US recession in 2023 has to be shrinking. Many negative things could be happening right now but evidently the economy is not falling off a cliff, no matter what some boo birds would have you believe.
The second is that the US economy has proven incredibly resilient. This is both notable and very welcome. We were more positive about this than most but even we will gladly admit to being surprised by this quality. Huzzah.
The third is to just note that on an annualized basis wage increases of 4.6% are still dramatically beneath inflation in 2022. It has been great to see the economy hold up but let us not lose sight of the fact that for most people they are working hard for less pay in real (i.e.: inflation adjusted) terms.
Make no mistake about it, this pain will have unpleasant consequences just maybe not of the interest rate variety. We will likely cover some of them later this year.
A thought experiment that it is sort of better not to do but is interesting to think about is the fact that you have to pay federal taxes on the money you make by lending your hard earned savings to the US Government.
This has always struck us as sort of bizarre. It might even be beyond screwy and be a rather ruder term we won't print. You are lending your funds to the government to help them fund projects and programs and in return they pay YOU (slightly) for the privilege and then you have to turn around and pay THEM a percentage for reasons that are sort of hard to pin down.
It makes your head spin and not in a good way.
Anyway, have a think about your savings and whether you might like to deploy some of it over a short time horizon for a pretty good gain.
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Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
