If you wanted to, you could describe Wednesday’s key data out of the world’s largest economy as a kind of worst-case conjuncture.
I don’t think it’s necessary to be quite that pessimistic, but if you’re so inclined, I wouldn’t blame you.
The US labor market remained a funhouse mirror headed into the final month of 2022, the closely-watched JOLTS report showed, while the December vintage of America’s marquee manufacturing survey printed in contraction territory again.
Together, the data painted a picture of an overheating jobs market and a cooling economy. Because the Fed is determined to realign labor demand with a still scarce supply of workers, policymakers will likely ignore evidence of a broader economic slowdown up to and until wage growth decelerates consistent with the inflation fight.
ISM manufacturing printed a below-consensus 48.4 for December, the lowest since May of 2020, as a gauge of new orders slipped to 45.2 and a measure of production fell below the 50 demarcation line.
The final read on S&P Global’s manufacturing PMI for the US, released on Tuesday, matched the flash print, which in this case isn’t a good thing.
“Regarding the overall economy [the headline ISM] figure indicates contraction after 30 straight months of expansion,” ISM’s Tim Fiore said Wednesday. “More attention will be paid to demand as we enter the first quarter.”
The silver lining is an ongoing moderation in goods prices. The ISM prices paid gauge dropped to 39.4 for December, the ninth straight decline and the lowest since April of 2020.
That left an even wider disparity with the services price gauge. The December vintage of ISM’s services survey is due later this week. “This is the longest stretch of declines in the [prices] index since 1974-75, underscoring how significantly price pressures have swung from one extreme to another as supply chains ease and demand softens,” ING remarked.
Anecdotes from ISM panelists suggested supply chain issues and logistical frictions have nearly resolved, but demand concerns were pervasive. “Orders are really slowing down,” one respondent said. “Customer demand continues to be depressed,” said another.
In addition to more evidence of goods disinflation, another silver lining in the ISM report was the employment gauge, which moved back into expansion territory. That said, I’d expect pressure on factory payrolls going forward considering that whatever’s left of the spending impulse in the US will likely be concentrated in the services sector.
Sian Jones, a senior economist at S&P Global Market Intelligence, summed up the situation well in remarks accompanying the final read on December’s factory survey. “The rate of input price inflation fell below the series trend [and] selling price hikes also eased, albeit still rising steeply,” Jones wrote, adding that although “slower upticks in inflation signal the impact of Fed policy on prices, growing uncertainty and tumbling demand suggest challenges for manufacturers will roll over into the new year.”
I wonder to what extent the post pandemic gig economy is distorting employment and JOLTS numbers.
That’s a good question. I should have an answer. I’ll write something about that at some point soon.
The US economy is services-dominant, but the S&P 500 is goods-dominant. The rapid decline in goods inflation is, I think, more positive than negative for stocks. Not that declining pricing power is “good”, but getting that decline over with relatively quickly is good. For investors, if not for managements. They have to manage through this, we can sit on our hands until they do.
For this and other reasons, I think we may see 2023 play out as the opposite of 2022. In 2022, US stock prices were punished more than the broad US economy – admittedly it won’t have felt like this to mortgage bankers, real estate agents, Target’s executives, etc, but I think that is a broadly defensible characterization. The close of 2023 may see Main Street more teary-eyed than Wall Street.
Of course, if the no-recession camp is correct, maybe Main Street won’t be all that teary (except for the lowest income, whose life is basically all tears), but it’ll be Wall Street popping the champagne.