The Astor Economic Index® declined further in the month of November to a level typically associated with a weak economic state. The economy is in an interesting position, with the labor market humming along, but some soft data point to substantial weakness in manufacturing.
The latest non-farm payroll was interesting, and it’s worth going beyond the headline figures. The U.S. economy added 263,000 jobs in November, well above the consensus of 193,000. In aggregate, the figure suggests the labor market remains robust despite headline news around tech sector firings. The Fed will see little to like in the report, with average hourly earnings up 7.8% in annual terms (5.2% 6m change), a rate which is inconsistent with the Fed’s inflation target. Previous months’ wage growth estimates were also revised upwards. The Fed would like to see a looser labor market before they are convinced that they have made substantial progress towards cooling the economy, and this report is a long way from that mark.
However, there were some anomalies that bear consideration. The survey response rate for non-farm payrolls has fallen below 50% (i.e. less companies are responding to the survey), a thirty-year low. Low response rates have historically been associated with downward revisions in future months, which lends a note of caution when interpreting the latest number. Job openings, which measure the number of open positions at companies, have begun to fall from a very high level, a trend typically indicative of more cautious hiring.
Purchasing manager indices also suggest a diverging economy. Manufacturing PMIs have tumbled steadily throughout the year and are now at a level that coincides with contraction within the sector. Services PMI, meanwhile, has cooled but remains solid and ended November at 56.5. Respondents noted higher employment and still strong prices paid.
In sum, the data allow the Fed to move to a slower, more cautious pace for rate hikes, with 50bps of hikes expected at the December meeting. The Fed Funds futures market is currently pricing at a terminal rate of about 5% in June 2023, with rates falling to around 4.5% by the end of next year. Should the labor market and wage gains continue apace, that estimate may prove wishful thinking.
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The Astor Economic Index® (AEI): The AEI is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points. The AEI is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The AEI is not an investable product and it should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. All conclusions are those of Astor and are subject to change. Astor Economic Index® is a registered trademark of Astor Investment Management LLC.