We're in the salad days of the New Year — that period where many feel refreshed and motivated and perhaps even optimistic about the year to come. There's a certain clarity that comes during this time in January.
That said, the big question weighing on everyone's mind is whether or not the United States will enter a recession this year. And there are three big "ifs" that will determine the health of the economy: The strength of the labor market, the American consumer and the Federal Reserve.
Will the labor market cool off? Jobs has been the word of the week as investors eye a slew of data highlighting a strong labor market that is confoundingly resistant to the Fed's attempts to cool the economy.
The US labor market is historically tight, with the unemployment rate, as of November, at just 3.7% and about 1.7 available jobs for every job seeker. If job numbers come in as expected on Friday, 2022 will be the second-best year on record for job growth.
This is all happening as the Fed tries to actively cool the labor market. Policymakers fear that persistent wage growth in a tight labor market will keep already sky-high inflation levels elevated.
For the Fed to reach its desired target of 2% inflation, jobs will have to take a hit, with unemployment rising to about 4.6% this year, according to the central bank's projections released in December. The central bank will likely continue to put pressure on the economy by instituting painful rate hikes until we get there.
In an interview with the Financial Times this week, Gita Gopinath, second in command at the International Monetary Fund, urged the Fed to continue with rate increases this year, citing the labor market's resilience.
Will wages moderate this year? Analysts at Goldman Sachs predict that they will. They believe that unemployment will grow and wage growth will slow from above 5% in 2022 to about 4% by the end of this year.
"This would still be a bit too hot, but any sizable drop would provide Fed officials with a proof of concept for the idea that gradual labor market rebalancing can dampen wage and eventually price pressures without a recession," they write.
If 2022 taught investors anything, it's that you can't beat the Fed. So expect more good-is-bad economic news, since a strong monthly jobs report will likely continue to correlate to a weak stock market.
Will Americans continue to spend? American consumers carried the weight of the economy on their backs last year. Even as interest rates rose and growth weakened, they kept on shopping.
Bank of America CEO Brian Moynihan even told CNN around the holidays that the continued strength of the US consumer is nearly single-handedly staving off recession.
But weaker-than-expected retail sales in November pummeled market sentiment last month and raised the odds that the Fed's punishing interest rate hikes would push the economy into recession.
US retail sales fell 0.6% in November, the weakest performance in nearly a year. Weak sales are likely to continue, say analysts, and if they do, retailers' earnings will suffer.
Disposable income fell from the spring of 2021 through the summer of 2022 as inflation outran wage growth and pandemic savings dried up. While American bank accounts are still fairly robust, consumers are borrowing more. In the third quarter of 2022, credit card balances jumped 15% year over year. That's the largest annual jump since the New York Fed began tracking the data in 2004.
Will the Fed pivot? This is the main question on every investor's mind — and the answer will not only help determine what happens to markets this year, but also whether the economy will fall into recession.
In the minutes from the December Fed meeting, central bank officials spelled it out for interested parties: No policy makers anticipated that rate cuts would be appropriate in 2023. The minutes warned that "an unwarranted easing in financial conditions ... would complicate the Committee's effort to restore price stability."
And while officials welcomed softer inflation reports in recent months, they stressed that "substantially more evidence of progress" was required and said that inflation was still "unacceptably high."
So while rate cuts may be off the table this year, the Fed could opt for more modest increases, or even none at all as the year progresses. That would be welcome relief to investors after four hikes of three-quarters of a point last year.
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