US macro scorecard - January

US macro scorecard

Source: Bloomberg, Emirates NBD Research

The US economy continues to defy the gravitational force of the cumulative 450 bps of interest rate hikes already implemented by the FOMC. Our macro scorecard for January is almost universally green, thereby indicating that the most-followed indicators came in stronger than the previous month or beat expectations, or, in most cases, both. These stronger data points have chimed with the narrative that the global outlook is not so bad as initially feared this year, with China’s reopening and a milder Eurozone winter also raising expectations and contributing to an upwards revision by the IMF to its global growth forecast. On the other hand, however, the strong data, alongside stickier-than-hoped-for inflation has prompted continual pushback from Fed Chair Jerome Powell and other officials around the prospect a pivot anytime soon, a message that has finally started appearing to sink in as the S&P 500 had its worst week of the year last week, dropping 2.9%.

Looking first at the labour market side of the Fed’s dual mandate, this is clearly still not the facet of its job that requires the most attention as there was a net gain of 517,000 jobs in January according to the NFP report. While there are some question marks around the figures given the magnitude of the upside surprise (consensus projections had been for a net gain of 189,000 jobs) and there were issues around benchmarking and population controls, even if that figure was halved it would still represent a labour market exhibiting serious signs of strength in the circumstances. The headline unemployment rate fell back from 3.5% in December to a 53-year low of 3.4% even as the participation rate rose from 62.3% to 62.4%. Other labour market data have also remained robust, with the initial jobless claims for the week to February 18 dropping to a four-week low, despite headline-generating layoffs in the prominent tech and finance sectors.

On the other hand, inflation has been more persistent than expected, and while the headline y/y CPI figure did slow in January, at 6.4% it was down only marginally from the 6.5% recorded in December and was stronger than the predicted 6.2%. Jerome Powell cautioned an audience in Washington this month that it was goods disinflation that has led the slowdown, while the more pernicious and potentially stickier services inflation was not slowing to the same degree, and indeed, core inflation has also remained high. It was at 5.6% in January, from 5.7% the previous month, a similar story to what was seen in the PCE core inflation data which accelerated to 4.6%, from 4.3% in December. Meanwhile, PPI inflation came in well above expectations in January at 6.0%, suggesting that there remain potential pipeline pressures yet to feed through to the consumer.

Even with inflation still comparatively high, expectations that it will continue to slow from the peaks seen last year have boosted consumer sentiment. On its second reading, the University of Michigan consumer sentiment index for February rose to 67.0, its highest level since January last year. This confidence has been backed up by spending, with retail sales surprising to the upside in January as they rose 3.0% m/m, compared with expectations of a 2.0% gain. A downwards revision to personal consumption growth from 2.1% to 1.4% for the Q4 2022 GDP data contributed to the headline annualised growth figure dropping from 2.9% to 2.7%, but by the looks of the data so far, the US consumer is in good shape to start the year. Even new home sales, which have been under particular pressure from rising interest rates, surprised to the upside in January.

One of the red spots on the scorecard last month was durable goods orders, which saw a bigger-than-expected m/m contraction on the headline reading in January. However, stripping out the volatile transportation sector, orders were actually up 0.7% m/m, beating predictions of 0.1%. There was also a gain in the shipment of core capital goods, showing that firms continue to invest despite higher borrowing costs.