This Week's State Of The Economy - What Is Ahead? - 06 January 2023

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jan 12, 2023

This Week's State Of The Economy - What Is Ahead? - 06 January 2023

The economic data released during the holiday-shortened week are consistent with our view that U.S. economic growth remained firmly in positive territory during the final quarter of 2022. That noted, a modest contraction in growth beginning in mid-2023 remains our base case forecast as the lagged effects of high inflation and monetary tightening take hold.

Ongoing strength in the labor market helps corroborate our view that the economy is on a positive growth path at present. Nonfarm payrolls rose by a solid 223K during December, a slight downshift from the 256K gain posted in November. Despite the slight moderation, the job-gain easily beat market expectations. The nonfarm payroll gain was in line with the ADP employment report for December, which showed a 235K gain. Despite the sturdy pace of hiring during the month, job growth appears to be moderating from the robust rate seen in the first half of 2022.

A decline in the unemployment rate to 3.5% in December from 3.6% the month prior is another reminder that the labor market remains tight. A rise in the labor force participation rate during December is an encouraging sign that labor supply is improving. Alongside the uptick in labor force participation, average hourly earnings moderated to 0.3% during the month, a softer gain than the downwardly revised 0.4% monthly increase in November. The moderation in earnings is at least one sign that wage growth is cooling. Still, average hourly earnings are running at a 4.1% annualized pace over the past three months, which is still well above what the Fed believes would be consistent with sustained 2% inflation. All told, this report does little to alter our view that the FOMC will remain in tightening mode when it concludes its first meeting of 2023 on February 1. As we write in the Interest Rate Watch, the FOMC minutes for December's meeting revealed that a monetary pivot is not likely imminent, as inflation remains hot and employment growth remains strong.

A modest drop in job openings is another sign that, while softening, labor demand remains relatively strong currently. The Job Openings and Labor Turnover Survey (JOLTS) revealed that the count of job vacancies fell to 10.46 million in November from 10.51 million in October, a smaller decline than consensus estimates. Chair Powell has hinted on several occasions that the vacancy-to-unemployed ratio, which remained highly elevated in November, needs to come down in order to ease wage pressures and reduce overall inflation.




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