FORECASTS & TRENDS E-LETTER
by Henry Rohlfs
January 16, 2024

IN THIS ISSUE:

1. Consumer Price Index Rising

2. Unemployment Steady, Wages Strong

3. Jobless Claims Still Dropping

4. Real GDP Continues Upward

5. What the FOMC Might Actually Do

6. Winter Has Definitely Arrived in Texas

Wall Street is clearly eager for interest rate cuts. Since the Federal Reserve released the minutes of their latest policy meeting earlier this month, the conversation on the street isn’t IF rates will be cut in 2024, but WHEN. Here are a few of the latest headlines I’ve seen:

Three Stocks to Buy Before the Fed Cuts Interest Rates in 2024

Investors Expect Fed to Cut Rates Soon

The Fed Will Cut Interest Rates Six Times in 2024

These headlines and plenty others reflecting the same line of thought are overly hopeful and misguided. As Fed Chair Jerome Powell likes to say, let’s take a look at the data to get a hint of what the FOMC is thinking, and why I believe interest rate cuts won’t happen until the second half of 2024.

Consumer Price Index Rising

The CPI rose by 0.3 percent in December totaling 3.4 percent over the last twelve months, and the core CPI also rose by 0.3 percent in December to 3.9% annually. Falling gasoline prices had helped to keep CPI down in early Q4, although this drag was absent from the December data. Core goods prices remained under downward pressure in December, with higher vehicle prices mitigating the impact on the overall core goods price index. Shelter and healthcare costs continue to boost the CPI services component.

I do not think December CPI data will spur sooner-than-later rate cuts. New York Fed President John C. Williams gave the best summary of the overall view of the FOMC last week when he noted that while the Fed funds rate is high enough to accomplish the Committee’s inflation objectives, the inflation data suggest it is too soon yet for Fed funds rate cuts.

Unemployment Steady, Wages Strong

Last month the unemployment rate remained historically low at 3.7 percent, up only slightly (0.2 points) from December 2022. Prior estimates of job growth in October and November were revised down by a net 71,000 jobs for the two-month period, with the net gain in private sector payrolls revised down by 55,000 jobs. Real hourly wages of private-sector workers rose slightly last month (up 0.1 percent), were up 0.8 percent over the past year, and have accelerated in recent months, up 2.5 percent annualized over the past three months.

Jobless Claims Still Dropping

Initial jobless claims continue to fall with numbers dropping by 1000 to 202,000 in the week ended January 6. This is the lowest level since mid-October. Economists polled by the Wall Street Journal had estimated new claims would rise to 210,000.

The labor market is still healthy. Stuart Hoffman, senior economic advisor at PNC Financial Services Group, believes the data suggest “businesses are not laying off workers but are cutting back on hiring. This is consistent with slower but still positive employment growth as seen in the monthly jobs numbers and the hiring data.”

The labor market remains healthy. This does not signal to the Fed that rate cuts are needed to stimulate job growth.

I must add an interesting note though on the BLS surveys used to produce statistics on employment, including Job Openings and Labor Turnover Survey (JOLTS) that will be released January 30 with December 2023 numbers. BLS reports that only 49.4 percent of surveyed establishments responded, the lowest response rate since January 1991. This impacts the reliability of initial estimates on job growth, average hourly earnings, average weekly hours, and others. Initial estimates will surely be revised, often downward.

Real GDP Continues Upward

Real Gross Domestic Product (GDP) increased at an annual rate of 4.9 percent in the third quarter of 2023, according to the “third” estimate. In the second quarter, real GDP increased 2.1 percent. The increase in the third quarter primarily reflected increases in consumer spending and inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

Since nearly 70 percent of total GDP is reliant on consumer spending, this continued upward climb in Real GDP indicates households are still buying. Consumer spending growth was revised to a modest but still respectable 3.1%, with the downgrade reflecting weaker growth in services spending. The strong spending growth recorded in Q3 is unlikely to be sustained into 2024, but consumers still appear willing to spend, albeit at a slower pace.

Preliminary economic data for Q4 suggests the economic engine is still running, albeit at a slower pace with growth around 2% annualized. Cost fatigue, rising debt servicing burdens and tighter credit could weigh on spending in the first half of 2024, but that remains to be seen. Once again, no need for economic stimulus through rate cuts.

What the FOMC Might Actually Do

I recently heard from Nate Garrison, Chief Investment Officer of Pensionmark Financial Group, with his forecasts for 2024, and he showed this analysis of FOMC rate predictions over the next few years.

If we take the 5.375% midpoint of the current Fed rate range of 5.25% - 5.50%, the above only projects a roughly 0.75 percent drop in rates by December 2024. I see a very cautious FOMC moving forward in 2024, partly because it has learned from its past. In 1967, after the economy saw strong GDP growth and high inflation after interest rate cuts, the Federal Reserve kept rates steady at 4%. Within a year, the economy was overheating with inflation surging over 6% by 1969. Recession set in late that year.

It's ridiculous to think the Fed will lower rates six times this year! The more likely scenario is the FOMC cutting rates three times by 0.25 percent each. It’s hard to say when they will start, but I don’t see it happening before their July 31 meeting.

Winter Has Definitely Arrived in Texas

I know many of our clients and readers have been impacted by this week’s Arctic blast. Nearly 80% of Americans will experience below-freezing temperatures this week. Here in Texas we’re seeing cold records set. I’ve heard from friends in northern states who are seeing lows well below zero degrees.

I was amazed at the videos of dedicated Buffalo Bills fans who braved the elements to cheer their team to victory. My friend David will simply tell me that lake effect snow is just par for the course in Western New York, but seeing fans dig out their stadium seats from two feet of snow was simply incredible.

Stay warm, drive easy, be safe.

All the best,

Henry

 

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