Are Recent Economic Trends Good Enough for the Fed?

The stock market rally should remain intact if consensus estimates of this week's key US economic data are correct.  They would ratify a slowdown and support expectations of Fed rate cuts in 2024.  However, stronger-than-consensus prints for some, such as December Payrolls, are the risk, which could dent the market rally.   A potential problem ahead is that an economic slowdown will not be sufficiently weak to convince the Fed to cut rates in 2024.  However, it is too soon for this issue to be resolved, so the Fed's forecasts of rate cuts in 2024 should still dominate thinking.  

A way to evaluate upcoming economic data in the context of the Fed's Central Tendency forecasts is to compare the data with their recent trends, which at the moment could be considered consistent with the slightly above-trend 2.3% Q423 Real GDP forecast of the Atlanta Fed model.  If so, the data have to weaken relative to these trends to pull GDP growth closer to the Fed's expectation of sub-trend GDP growth in 2024.  

As you can see from the table below, consensus estimates of this week's US economic data are mixed relative to the recent trend.  Job Openings, ADP Estimate, Markit US Mfg PMI and Total Nonfarm Payrolls are expected to soften relative to trend.  In contrast, Construction Spending (for November), Private Payrolls, and Non-Mfg ISM are forecast to be slightly stronger than their recent trend.  So, consensus-like prints shouldn't close the door either way regarding slow-enough economic growth in 2024.

The most important are the labor market indicators.  The expected payroll gain -- both Total and Private -- is still too high relative to the Fed's sub-trend 2024 forecast.  It needs to be sub-100k.  Also, the Unemployment Rate would need to break above its recent range (3.7-3.9%).  So, consensus prints would indicate the Fed is not yet getting what it wants in the labor market. 

A technical change in the January Employment Report, due early February,  could have a bearing on the Fed's view of the economic outlook.  In the January Report, BLS will incorporate revisions to the measurement of the US population.  An upward revision would lift the Labor Force and presumably its growth rate.  The latter could boost the Fed's estimate of the longer-run trend in GDP growth, assuming a higher labor force growth is not offset by lower productivity growth.  A higher trend would allow the Fed to tolerate faster economic growth with less fear of boosting inflation.  The only technical change in the December Employment Report is for revised seasonal factors in the Household Survey.  These typically do not change the Unemployment Rate.

The evidence regarding the December Employment Report is mixed:

1.  Upside Risk to Payrolls:  As mentioned in last week's blog, Initial Unemployment Claims fell modestly since the November Payroll Survey Week, indicating a slight decline in layoffs, while Continuing Claims have stabilized if not dipped from their levels around the November Week.   Both suggest a speedup in Payrolls from November's pace. 

2. Upside Risk to Unemployment Rate: The Claims data, however, also suggest the Unemployment Rate may rebound after falling sharply in November -- and a 3.9% print can't be ruled out.  But, the Claims data are not a reliable predictor of the Unemployment Rate.  

3.  Upside Risk to Average Hourly Earnings: Some lagged boost from the UAW contract is conceivable.  Also, if seasonal factors look to offset softer wage rates of holiday-related temps, the factors may boost them too much if stores hired fewer-than-normal temps this year. 

There is no reliable evidence for the Mfg and Non-Mfg ISMs.  Nonetheless, some surveys suggest a dip in the Mfg ISM -- Markit US Mfg PMI, Chicago PM and Phil Fed Mfg Index.  Evidence is mixed for the Non-Mfg ISM  -- Markit US Services PMI up, Chicago PM down.

                                                         Consensus Estimate        Oct-Nov Avg

Construction Spending                             0.5%                            0.4% m/m

Job Openings                                              8.8 Mn                         9.0 Mn 

ADP Estimate                                            100k                             108k m/m                   

Markit US Mfg PMI                                 48.2                                50.1

Mfg ISM                                                   47.1                                46.7

Nonfarm Payrolls                                     158k                                175k m/m      

Private Payrolls                                         120k                               118k  m/m      

Unemployment Rate                                  3.8%                              3.8%                

Average Hourly Earnings                          0.3%                               0.3% m/m

Non-Mfg ISM                                           52.5                                52.3