Federal Reserve Chairman Jerome Powell holds a press conference at the end of Monetary Policy Committee meeting in Washington on Dec. 13, 2023. (Brendan Smialowski/AFP via Getty Images)
As the Federal Open Market Committee (FOMC) met last week for the first time in 2024, they weighed all the economic data and decided to make it clear they would most likely not cut interest rates in March.
Specifically, the FOMC statement on Wednesday said, “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks,” even though it also said the board “has gained greater confidence that inflation is moving sustainably toward 2 percent.” In fact, the Fed’s favorite inflation indicator, the core Personal Consumption Expenditure (PCE) rate, has been under the Fed’s 2% inflation target rate in each of the last seven months, but Powell made clear that interest rates cuts would start no sooner than May 1. Then, the Fed could make a further string of cuts in June, July and September.
At his press conference last week, Fed Chair Jerome Powell said that key interest rate cuts in March are no longer part of the Fed’s “base case,” which triggered a stock market selloff. Specifically, Powell said, “I don’t think that it’s likely that we will reach a level of confidence by the time of the March meeting.”
Last week’s first positive data point emerged on Tuesday, when the Conference Board announced that its January consumer confidence index surged to 114.8, up from a revised 108 in December, marking the third straight monthly gain and the highest reading in over two years (since December 2021)! The “present situation” component surged to 161.3, up from 147.2 in December. Also, the “expectations” component rose to 83.8, up from a revised 81.9 in December. With such an upbeat consumer confidence report, and other positive statistics, the Fed is not likely to cut key interest rate cuts until May 1st or later.
In general, the Fed won’t want to cut rates in a booming economy, and the Commerce Department’s preliminary estimate of annual fourth-quarter GDP was +3.3%, while the Atlanta Fed is now estimating 4.2% annual first-quarter GDP growth, up from its previous estimate of 3%, as higher consumer spending, an improving manufacturing sector and inventory rebuilding are expected to boost first-quarter GDP.
Speaking of manufacturing, the Institute of Supply Management (ISM) reported that its manufacturing PMI rose to 49.1 in January, up from 47.1 in December. This ISM manufacturing report was better than economists had expected, but it still represents the 15th consecutive month of declining growth, since any manufacturing PMI under 50 signals a contraction. Still, there were some “green shoots” in the ISM manufacturing report, since the “new orders” component surged to 52.5 in January, up from 47 in December. The prices component soared to 52.9 in January, up from 45.2 in December, but only 4 of 17 industries surveyed by ISM reported an expansion in January as the manufacturing contraction persists.
Turning to jobs, ADP on Wednesday reported that only 107,000 private sector jobs were created in January, which is substantially below economists’ consensus estimate of 150,000. Normally, a weak ADP report would lower expectations for Friday’s payroll report, but January is the biggest month for positive seasonal adjustments, so I was not surprised that Friday’s January payroll report was far higher than ADP.
Sure enough, the Labor Department on Friday reported a January payroll report that was substantially higher than the ADP report. Specifically, the Labor Department reported that 353,000 new payroll jobs were created in January. Also significant is that the December payroll was revised up to 333,000 payroll jobs, up from the 216,000 previously reported. The Labor Department also revised every month in 2023, and the last three months of 2023 were all positive revisions. The unemployment rate remained at 3.7%. The labor force participation rate remained at 62.5%, which is a bit of a surprise, due to December’s 0.3% drop. Average hourly earnings rose 0.6% ($0.19) to $34.55 per hour and +4.5% in the past 12 months.
There seems to be some conflict in these numbers, considering the many January layoff announcements and the general sense of distress in the labor market, since new claims for unemployment rose to 224,000 in the latest week, a two-month high. Continuing unemployment also rose to 1.898 million in the latest week, up 70,000 from the previous week. After all, major U.S. employers announced 82,300 job cuts in January, more than double the December totals, so unemployment claims will likely continue to rise.