Recent data suggests that, while the U.S. economic expansion could slow significantly in the near-to-medium term, we are unlikely to enter a recession anytime soon. This will have important implications for understanding if a bull run is likely moving forward.
However, given the mixed nature of recent reports, investors need to keep an eye on data releases going forward. But it does appear for now that the most likely outcome is a Goldilocks scenario in which growth, employment trends, and inflation all slow significantly but not tremendously, enabling the Federal Reserve to cut rates and this could start a bull run.
Mixed Economic Data Suggests a Slowdown Could Have Begun
The employment data for December was quite diverse. Specifically, the employment portion of the services purchasing managers’ index sank to 43.3, indicating that hiring slowed tremendously, while the U.S. added a net total of 216,000 nonfarm jobs last month. On the other hand, excluding hiring by governments, only 164,000 net jobs were added, and Washington revised the number of jobs added in October and November by a total of 71,000.
“We can say for now that monthly jobs creation averaged 225,000 in 2023 and a more modest 193,000 over the previous six months,” Seeking Alpha quoted Mark Hamrick, one of Bankrate’s senior economists, as saying.
Additionally, “the three-month moving average of the national unemployment rate” rose by 0.3 in November and 0.23 in December. According to the Sahm Rule, which has proven to be largely accurate in the past, an increase of 0.5 suggests that a recession has begun. While we are not very close to reaching the 0.5 level, we aren’t very far away from doing so either.
On the other hand, the moving average rose by 0.2 in October 1998 and 0.47 in July 2003 and in August 2003 and no recessions occurred for many months after those readings. Further, the Fed is predicting that the economy expanded at a robust seasonally adjusted annualized rate of 2.5% above inflation last quarter. The latter forecast suggests that a recession will not occur anytime soon.
The PMI employment index may have been distorted by seasonal factors, and the three-month moving average of the unemployment rate is elevated but well below the 0.5 threshold. Still, I think it’s likely that economic growth is slowing at this point.
A Slowdown Gives the Fed Cover to Cut Rates
For investors, one positive consequence of the likely slowdown is that it will enable the Fed to reduce rates this year.
Indicating that the central bank is indeed intent to exploit this opportunity, Richmond Fed President Thomas Barkin on Jan. 5 said that he would not “have any objection conceptually to toggling rates back toward normal levels as you build increasing conviction and confidence that inflation is on a convincing path back to your target.” This is some key evidence to suggest that a bull run make take place.
Inflation has already been slowing significantly in recent months, but that trend should continue due to multiple factors. Among these factors are the resumption of student loan payments, continued supply-chain improvements, reduced savings as we get further away from the stimulus payments that occurred from the pandemic, and the continued proliferation of AI and automation which tend to reduce labor costs.
Moreover, auto prices were generally flat in 2023, while, as I pointed out in previous columns, I expect home prices to also start falling in the not-too-distant future.
Nothing seems to please the Street as much as the idea of a “soft landing” accompanied by Fed rate cuts, and we seem to be heading exactly in that direction. Therefore, I remain bullish about U.S. stocks at this point.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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