The markets have received a breath of fresh air to start the year, a welcome reprieve from one of the worst years on record. This is due to recent data coming out suggesting that the job market, as well as inflation are going in the preferred direction of the Federal Reserve.
In early January, the December jobs report was published and the data it contains is giving many analysts optimism due to the goldilocks nature of the numbers. The economy continues to add a healthy amount of new jobs, however the pace is moderating. Wages are rising, but not too fast to alarm the Fed. And more workers are entering the workforce, which eventually might heal the current labor shortages. If this trend continues throughout 2023, we could likely see the Fed pause their rate hiking cycle.
The annual inflation rate has decreased to 6.5%, compared to 7.1% for the previous month. The federal reserve has a target inflation rate of 2%, so still quite a ways to go. While the price of eggs have doubled, many headline inflation rates of the pandemic have subsided, including lumber, used cars, gas prices, and commercial shipping rates. This trend, combined with the high inventory that many large retailers still hold, will continue to put downward pressure on prices we all pay for goods and services. The longer this trend goes on, the more likely the Fed will be to pause or reverse their rate hiking regime.
The Anticipated Recession
Most of the post-WWII recessions were caused by the Fed arguably over tightening monetary policy to slow inflation. This policy decision brings the possibility that they will tighten too much, and will lead to a hard landing (recession) vs. a soft landing. One area to watch will be housing, as it is the main conduit to view real time effects of Fed monetary policy. Specifically, single family housing starts and new home sales tend to have a high correlation with the business cycle. A recession typically follows after the year over year change in new home sales drop between 20% and 30%. Last year registered a 17% drop, so this year's number will be one to monitor.
The next question looming in the financial world is if/when the anticipated recession will begin. Most analysts and leading economic indicators are pointing to between April and August of 2023 to notice tangible recessionary effects. As noted in previous emails, employment is the key metric to watch because of the financial and emotional impact it has on the US workforce and their spending (which drives the economy). Many are jumping into the camp that this will be a tech-heavy or white collar recession, which would be a much preferred outcome to an economy wide recession like we had in 2008-2009. The recent data about jobs and inflation are making a more compelling case that we could indeed have a very mild recession - arguably healthy for the economy - and then return to another period of expansion.
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.