Economic Outlook - February 2024
- The widely followed ISM gauge that measures U.S. manufacturing activity rose to 49.1% last month from 47.1% in December, according to the Institute for Supply Management. Economists surveyed had forecast the index to rise to 47.2%. A number below 50% reflects a shrinking economy. Manufacturing has contracted for 15 straight months. Regional manufacturing surveys were very weak in January, but the national ISM index showed some returning vigor. Economists said it will take time before the sector stabilizes even if the Federal Reserve cut interest rates. Timothy Fiore, chair of the ISM’s manufacturing-survey committee, said that the January data show “the beginning of a next growth cycle, but it’s early.” The manufacturing sector appears to be off the bottom, but there are few signs of a raging rebound looming in the data; a gradual sustained uptrend in activity is a better bet.
- The U.S. economy added an impressive 353,000 jobs last month, according to Bureau of Labor Statistics [BLS], registering a stronger-than-expected gain to kick off 2024 and underscoring the resilience of the U.S. economy in an election year. The BLS added that U.S. unemployment remained at 3.7% from the month before. It is the 24th consecutive month that the U.S. jobless rate has been under 4.0% for the first time since 1967. More than a year ago, it seemed all but certain that the labor market would feel the effects of the Fed’s recent rate-hiking campaign. Eleven hikes and a handful of pauses later, the U.S. job market is registering one of the longest periods of expansion this century. The productivity of U.S. businesses and their workers rose in the fourth quarter at a 2.7% pace compared with a year earlier, possibly a sign the economy could grow faster than expected even as inflation slows. Productivity advanced 3.3% in the fourth quarter, after a frothy 4.9% surge in the third quarter. The recent improvement in productivity is a welcome sign after it declined in 2022. Higher productivity is the secret sauce for an economy. When it rises, businesses earn bigger profits and workers reap bigger wages. Higher productivity also helps to reduce inflation. Some economists contend that new technologies such as artificial intelligence could boost productivity in the years to come.
- Employment costs rose 0.9% in the fourth quarter to notch the smallest increase in two and a half years, another sign that spiraling wage growth after the pandemic is subsiding. The rise in the employment cost index was the smallest since the spring of 2021. Compensation had climbed at least 1.0% for ten straight quarters for the first time since the late 1980s. Higher wages can add to inflation if they rise faster than the economy’s natural rate of growth. Compensation increased at a 4.2% pace in the year ended in December. While that’s the smallest increase in two years, it’s still above the 3.5% rate or so that the Fed would like to see.
- Federal Reserve Chair Powell used his recent press conference to dampen market expectations that the Fed would begin to cut interest rates next month. “Based on the meeting today, I would tell you that I don’t think it is likely that the [FOM] Committee will reach a level of confidence by the time of the March meeting… but that is to be seen,” Powell said. “So, I wouldn’t call it … the most likely case.” he added. Powell wouldn’t say how many months it might take until the Fed has more confidence to ease. “I’m not going to put a number on it,” he said. Stocks closed lower and the 10-year Treasury note yield fell below 4% after the press conference. The Chair seemed to suggest that cuts will come at each meeting once the easing cycle starts. Many analysts think June is a likely start date at this point.
- GDP grew 3.3% annualized in Q4 of 2023, a brisker pace than anticipated. Real GDP increased 2.5% in 2023 to a level of $27.36 trillion, compared with an increase of 1.9% in 2022. Current modeling suggests the pace is slowing slightly to 2.5% to 3.0% this quarter. Depending upon Fed rate decision timing (and whether they have engineered a soft landing for the economy) 2024 growth is likely to be in the 1% to 1.5% range with lots of potential to vary.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve
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