This Week's Key US Economic Data

A move-up in the stock market may require "goldilocks" prints in this week's releases of key US economic data.  The December Employment Report needs to show a softening in labor market conditions, but not so much as to suggest recession.  Also, and perhaps more importantly, Average Hourly Earnings need to slow.  In addition, the November JOLTS data need to have Job Openings decline significantly.  To a lesser extent, the December Mfg ISM needs to suggest a slowdown in the manufacturing sector, not a downturn.  This combination of prints should support a continuation of moderate Fed rate hikes, with a possible end in sight.  And, it would suggest that the financial markets don't have to "work" as hard to achieve the Fed's goals of slower economic growth, easier labor market conditions and lower inflation.

Most evidence points to a slowdown in December Payrolls and an increase in the Unemployment Rate.  Consensus, however, only looks for a slowdown in Payrolls -- to +200k m/m from +263k in November.  A sub-200k job gain would likely be more to the Fed's liking.  Consensus sees a steady 3.7% Unemployment Rate.  This estimate may be too low.  The increase in the Insured Unemployment Rate, based on the Claims data, points to 3.8-4.0%.  Consensus expects +0.4% m/m for Average Hourly Earnings (AHE).   This would be back to the earlier trend, after large increases of 0.5-0.6% in the prior two months.  While a slowdown in AHE would be a relief, the pace needs to slow to 0.3% or lower to bring it in line with the Fed's 2% price inflation target (taking account of productivity growth).   There is no evidence regarding AHE. 

Consensus expects Job Openings to fall to 10.0 Mn in November from 10.3 Mn in October.   This would be a notable decline, but would still leave Openings well above the 7.0 Mn pre-pandemic trend.  A large decline such as with the consensus estimate would likely support the idea that Fed tightening is working successfully to eliminate excess demand for labor.  But, it would keep further rate hikes on the table, as the problem of excess demand for labor would still be apparent.

Consensus looks for a decline in the December Mfg ISM to 48.5 from 49.0.  This would put it below the 48.7 level that signals a downturn in the manufacturing sector.  The evidence regarding the December Mfg ISM is mixed.  Some regional surveys show an uptick in manufacturing, while others show a decline.  The increase in the Chicago PM raises upside risk.  But, it is no guarantee.  Although Chicago PM has been the most reliable predictor of the m/m direction in the Mfg ISM since April, it has a mixed record for the month of December -- correct only half the time in the past 6 years. 

The Unemployment Insurance Claims data remain important to assess whether the economy is moving into recession.  So far, however, they are inconclusive.  Initial Claims have not moved up as much as they have prior to past recessions, but Continuing have.  There may be less significance of the increases in both if efficiency drives by companies rather than responses to weaker demand are behind them.