Wentz Weekly Insights
Why Slower Wage Growth Was Perceived as Positive for the Markets
Recent Economic Data
- Construction spending during November increased 0.2%, better than the 0.4% decline that was expected. The better than expected numbers were from a solid 0.9% increase in spending on nonresidential construction, which was offset by a 0.5% decline in residential construction as the housing market continues to cool. Compared to a year ago, total construction spending is up 8.5%, slowing from 9.7% in the prior month, with nonresidential spend up 11.8% and residential spend up 5.3%. We expect this to continue as the housing market returns to normal, before picking back up again over the longer-term due to the undersupply of homes.
- The U.S. PMI manufacturing index was 46.2 for December, down from 47.7 in November (remember anything below 50 represents contracting activity, anything above 50 represents growing activity), stemming from weak demand that caused a drop in new orders and output and led to a smaller increase in employment, but helped the backlog of orders. The positive news is the trend continues with price pressures coming down to the slowest since July 2020.
- The ISM manufacturing index was 48.4 for December, the lowest since 43.5 in May 2020, and contracting at a faster pace compared to the 49.0 reading in November. Very good news on the inflation front – the prices paid index at 39.4 was the lowest since April 2020, however this is on the goods side, the ISM “services” index still shows substantial price increases. Weaker demand led to a contraction in new orders at 45.2 while employment still grew at 51.4.
- The ISM services index unexpectedly fell into contraction territory for the December survey with the index at 49.6, down from 56.5 in November and much lower than the 55.0 expected. There was a general slowdown in activity, with the business activity index down to 54.7, dropping 10 points, while new orders fell to 45.2 from 56.0. The employment index fell into contraction as well at 49.8, while prices paid decelerated at 67.6 versus 70.0 in November.
- In 2022, just 13.7 million vehicles were sold for the worst year of sales since 2011. This represents an 8% decrease from 2021 and comes after sales eclipsed 17 million for five consecutive years prior to the pandemic. GM took back the title of being the top selling auto manufacturer in 2022, with 2.2 million vehicles sold, taking the title from Toyota in 2021.
- The latest trade data shows the trade deficit fell substantially in November, down to $61.5 billion, a decline of $16.3 billion from October’s $77.8 billion deficit. Trade activity declined across the board – exports fell $5.1 billion to $251.9 billion while imports fell a much larger $21.5 billion, standing at $313.4 billion in the month. The drop was broad based with large declines in imports of cell phones (Apple?), pharmaceuticals, crude oil, and vehicles. Year-to-date exports are up 18.9% while imports are up 18.1% compared to the same period in 2021. While a reduction in the deficit is a good thing and will be a net positive to fourth quarter GDP, the drop in trade activity is just another sign of slowing activity around the world.
- For the week ended December 31 there were 204,000 initial jobless claims, down 19k from the previous week and the lowest since September, with the four-week average at 225,000. Continuing claims were 1.694 million, down 24k from the prior week, with the four-week average relatively unchanged at 1.687 million.
- As of the last business day of November, there were 10.458 million job openings, above the 10 million expected, bouncing higher after a couple months of declines. The number of job openings has not fallen below 10 million since mid-2021, and for comparison purposes averaged around 7 million prior to the pandemic. Separations were little changed, and within separations, the number of quits was 4.2 million, unchanged as well, with the quits rate at 2.7%, still high and indicating employees are comfortable and confident in finding a better/higher paying job.
- ADP’s private payroll report shows private employers added 235,000 jobs in December, almost doubling expectations and more than the 182,000 jobs added in November. Most job gains were seen in small and medium sized businesses, with a decline of 151,000 in large sized businesses.
- The establishment survey of the Department of Labor’s employment report showed there was growth of 223,000 payrolls in December, slightly ahead of the consensus expectation of 200,000, its ninth consecutive month of beating estimates, and consistent with the past couple months of gains. Job growth was widespread, highest in leisure and hospitality, health care, and construction, with only a notable decline in temporary help services again. The year saw payroll growth of 4.5 million, averaging 375,000 new jobs per month. Moving to the household survey, in more positive news, the labor force grew 439,000 people, moving the labor force participation rate to 62.3%, up from 62.1% in November. The number of people employed jumped 717,000 to 159.244 million, moving over pre-pandemic levels for just the second time of the recovery (last time was in September), while the number unemployed fell 278,000 to 5.722 million for the lowest levels since January 2020 which was tied the lowest level of unemployment since late 2000. This caused the unemployment rate to move lower to 3.5%, with the U-6, the underemployment rate, at 6.5%, down from 6.7%. One of the more important factors – wages – grew 0.3%, a slowdown from 0.6% in November, but that was revised down to 0.4% growth. Compared to a year ago wages are up 4.6%, a sharp slowdown from 5.1% in November (which was also revised lower, to a 4.8% increase). Markets moved higher, celebrating the lower wage growth, but the fact is the labor market is still very tight and the Fed will continue to tighten policy until it sees signs of slowing.
- Roku said at the Consumer Electronic Show it will begin selling its own TVs that it designed and built on its own, giving it complete control of the TV production rather than relying on third parties like it does currently (it currently offers Roku-branded TVs through third parties). Roku currently makes a majority of its revenue from ad sales, and the news will give it access to another revenue stream.
- Salesforce said it will restructure its business to reduce operating costs, improve margins, and continue its commitment to profitable growth which will result in it laying off about 10% of its workforce, citing the pandemic and hiring too many people as revenue accelerated over that period. The company said it would also exit real estate and cut office space in some of its markets. It said the restructuring will result in charges of approximately $1.4-$2.1 billion.
- Nikkei reported Apple has told its suppliers to cut first quarter orders for its Apple Watch, AirPods, and MacBooks in response to weaker demand, citing a manager at an Apple supplier. Separately, it was reported Apple’s main iPhone producer, Foxconn, was near having 90% of its production capacity back on line for its new iPhone 14. Its production in China’s factories were significantly cut due to the Covid outbreak in the country.
- Amazon said it would cut its staff by more than 18,000 employees, almost double the number expected when it initially announced its layoff plans in November, but additional economic uncertainty is causing it to lay off more people. A majority of the job cuts will be in its Amazon Stores and PXT segments.
- Bed Bath & Beyond released preliminary financial results for its most recent quarter that was below consensus expectations due to lower customer traffic and reduced inventory availability. It added that due to recurring losses, negative cash flow, and liquidity projections, there is a substantial doubt about the company’s ability to continue as a going concern. It is considering strategic alternatives such as refinancing its debt, adjusting business activities, and selling assets.
- Southwest said it will report a net loss for the fourth quarter driven by a negative impact of $725-$825 million due to the cancellation of about 16,700 flights over the holiday season. This compares to its most recent financial update December 16, when the company said it was expecting to be profitable. It said operating expenses are expected to rise due to the travel reimbursements to customers, premium pay/additional compensation for employees, but partially offset by lower fuel expenses.
- Shortly after midnight Friday, Republicans finally, after the 15th round of voting over four days, elected Kevin McCarthy as Speaker of the House. Markets will be worried the inability of Congress to elect a Speaker, and the concessions/agreements made by McCarthy and Republican holdouts to secure enough votes to be elected Speaker, could lead to stalemates when it comes time to extend government funding and raising the debt ceiling, which will be the bigger issue sometime in the second half of the year.
- The Hill reported President Biden is preparing to formally run for a second term, planning to make the announcement in the coming weeks.
- The FOMC meeting minutes from the FOMC’s December meeting showed no policymaker thought it was appropriate to cut rates in 2023. Several said history warns against loosening policy too soon. Officials had a big emphasized that just because they slowed the pace of rate hikes does not change their stance on inflation. Economic activity in 2023 expected to be well below trend, but below trend activity is what is needed to bring inflation back to its goal. Persistently tight labor market keeps it on its path to 5.1% peak rates. It seems the Fed is now believing and telling the markets it cannot solve the inflation problem until it solves the labor force problem or until the jobs market is more in balance, which, according to the data above, is still not the case.
- Recent Fed speak
- Kashkari explained in a public essay released last week why he believes the Fed got it wrong on inflation, thinking it would be transitory when it became and more persistent issue due to “surge pricing inflation” and explaining why it is important to not get it wrong again right now and why doing more to get inflation down is better off than doing too little. He used these reasons to support why he thinks raising rates to above 5% and staying there through at least 2023 is the best policy path.
- In an interview with CNBC, Kansas City Fed President Ester George reiterated Fed’s message of higher rates for longer with her projections now exceeding 5% and she sees it “staying there for some time” until she is confident inflation is coming down which acknowledging this could risk a recession due to a shock to the economy from higher rates when growth is already at below-trend.
- St Louis Fed President Bullard said interest rates are “not yet in a zone that may be considered sufficiently restrictive” but the Fed will raise rates to those levels and will stay sufficiently restrictive through the year. Inflation expectations, a large part of the equation, have come down but the fact the labor market remains so tight will keep the Fed on its current path.
Did You Know…?
- After a slow start, this year’s The Santa Claus Rally produced positive results, as history shows typically happens. The S&P 500 rose 0.80% over the period (the last five days of the year and the first two days of the new year), versus the historical average gain of 1.4%.
- Following up on holiday shopping numbers, Adobe Analytics said its data shows consumers spent $211.7 billion online this holiday shopping season (November 1 – December 31), which was a 3.5% increase from the same period 2021. The five days between Thanksgiving and Cyber Monday contributed $35.3 billion of that total.
WFG News & Events
- Retirement plan contributions: Did you know 2023 IRS limits have been increased? In addition to tax brackets being updated, the IRS increase the amount individuals can add to retirement plans. If you are in a workplace retirement plan, the annual contribution limit was increased
- 401k/403b/other qualified plans – Increased to $22,500 from $20,500
- IRAs (including Roth IRAs) – Increased to $6,500 from $6,000
- Simple IRAs – Increased to $15,500 from $14,000
- Over the age of 50? Catch up contributions were increased as well. If over the age of 50 you can contribute an additional $7,500 to qualified plans (401k, etc), up from $6,000, an extra $3,500 to Simple IRAs, up from $3,000, however the catch up for IRAs is unchanged at $1,000.
- Haven’t contributed to an IRA for 2022? Remember you have up until the time you file your taxes, or April 18, to make a 2022 IRA contribution.
- Budget: Review 2022’s budget and see how your money has been spent to get a better idea of your spending patterns and create a 2023 budget. This could be an opportunity to find where you could save money to find more options for savings and/or investments. This could also be a chance to review debt to help prioritize working down those balances.
- Review retirement accounts: Look at rebalancing accounts to match the desired asset allocation to your goals, objectives, and risk tolerance, as well as the current environment. Need help reviewing outside accounts or workplace retirement plans (401k’s)? Do not hesitate to reach out and ask for help!
The Week Ahead
Reports pick up this week on both the economic and earnings calendars. Nothing notable is released on the economic calendar until the consumer price index report on Thursday morning. The consensus estimates see 0% growth in the index in the month of December and rising 6.6% from a year earlier (which would be a slowdown from 7.1% in November) with core prices up 5.7%. Also on Thursday is the latest on weekly unemployment claims. Then on Friday we will see import and export prices and the consumer sentiment index where markets will focus on inflation expectations, which actually fell in the latest month (December). There will be additional Fed speak this week, most notably Jerome Powell’s discussion on Central Bank Independence in Sweden. There is expected to be many forecast updates and earnings pre-announcements at several corporate conferences including the biggest conference of the year, the ICR Conference where many consumer companies attend, and the JPMorgan Healthcare Conference. Then the second half of the week fourth quarter earnings season unofficially kicks off with several of the big banks reporting including JPMorgan, Bank of America, Wells Fargo, and Citigroup on Friday morning. Most attention will be on the amount of cash banks set aside for bad loans, credit card delinquencies, and net interest income. Other earnings results will come from Bed Bath & Beyond (who just warned about its ability to survive), KB Homes on Thursday, and United Health and Delta Airlines on Friday. On the political side, President Biden will travel to Mexico Monday to meet with Canadian PM Justin Trudeau and Mexican President Andres Manuel Lopex Obrador to discuss migration and drug smuggling, and will travel to Japan on Friday for his summit with PM Kishida.