Tons of economic data was released this week. If you take the time to look into it all, recession seems closer rather than further away. Everything has significant implications on what the Fed will do in regards to fighting inflation. Another big milestone was achieved in the debt department.
ADP released is its U.S. private payroll report on Wednesday with a huge miss. ADP for those unfamiliar is a private company that handles nearly all of the payment processing for private businesses throughout the country. This gives them the ability to collect data on private businesses hiring/firing. The report they compile is very accurate in showing what is going on in the private sector economy. For January they reported a 301k loss vs the estimate of a 200k gain. Down from the previous months gain of 776k jobs. That 500k delta is a huge deal!
If this number is any indication of what employers are seeing when it comes to job creation and hiring. We are headed for some serious trouble. Backed up by the numbers that the ISM (The Institute of Supply Management) released for New Orders, PMI and Prices the economy is headed lower. New Orders were down to 57.9 from 61 showing a slowing in manufacturing. The Manufacturing Purchasing Managers Index (PMI), which tracks the needs of production depending on new order demand in the future, was as down to 55.5 from 57.7 showing that demand for future orders is slowing. Manufacturing Prices rose sharply to 76.1 from 68.2, showing that costs are rising amongst businesses.
Bloomberg reported that 50% of U.S. small businesses raised wages in January.
With CPI inflation surging and labor force participation still not back to pre-pandemic levels it is clear higher wages are needed to lure workers back to the workforce. These wage increases are a big deal when looking at the inflationary landscape. There is this theory circulating called the "Wage Spiral". We haven't witnessed wages rise at this rate since the 1980s. Due to prices going up consumers are demanding higher wages to meet those prices. If workers are having to be paid more then the cost of doing business rises for companies. Businesses shrugged off the price pressures in 2021 but in 2022 they are going to be passing those prices onto consumers in the form of higher prices.
For example Amazon and Netflix have already increased their yearly subscription prices by at least 10%.
As the process plays out every time workers demand higher wages businesses follow soon after by raising prices on goods and services to meet their costs of operation. This becomes a spiral that will continue until the amount of "currency" circulating in the economy catches up to the amount of goods and services being created.
Do not be fooled by the notion that because wages are up that means our economy is booming. Or that because businesses are raising prices big corporations are gauging their customers. It is the spiraling effect of the government spending recklessly and the Fed monetizing the spending. The value of goods and services always catches up to the amount of "currency" in the economy.
Knowing all of this lets see why the jobs numbers that were released by the government on Friday were so complexing.
U.S. Nonfarm Payroll numbers were still up in January at 467k. Decembers number was revised upward from 199k to 510k, a big move up. The revisions in these numbers can seem to make or brake how good they look. If we look closer at some individual data points calling this "growth" a big win may not be so. Manufacturing payrolls went down to 13k from 32k, furthering my point that the economy is slowing. Government payrolls were up from 7k to 23k. This increase could help with how the ADP numbers were such a loss. More government employment of people vs less in private sector. Private payrolls did move down to 444k from 503k. Pointing out that overall we are likely seeing a contraction in the real economy despite the big overall jobs number.
Dispite the positive spin on the job numbers from the White House, Q1 GDP forecasts are showing a grimmer picture. The Atlanta Fed revised down it's Q1 GDP growth estimate to only .1% from Q4's estimate of 6.5%. Moving from record setting growth rates to almost a complete stop is something to think about. With that estimate alone being revised down soo much. Is there really any relative data that can point to a strong booming economy?
I don't think so..
All the economic data set aside the real milestone on the week is the 30 Trillion Dollar debt number that was reached.
I cannot point out enough that NOTHING IS FREE! This 30 trillion in debt is going to have to get paid back by someone. The vast majority of it by the poor and middle class given the direction we are on. Government is slowly inflating away the debt with raging inflation. Luckily for us a lot of the working class doesn't like the idea of inflation making it a huge political issue. This issue alone is why I believe there was such a positive spin to the jobs numbers released today. Coupled with continued talks of the six million jobs that were "created" in 2021 and our just "booming" economy. All the this positivity is giving the Fed the signals they need to act on inflationary pressures. They will be raising interest rates in March, either .25 or .50 basis points. QE will end for a hot second as the Fed braces for how the markets might react.
I heard something this week that pointed out when it comes to the overall market reactions to monetary tightening there is also a global picture one should consider. QE provides liquidity to the markets which causes it to go higher. The expansion of the Feds balance sheet vs the S&P performance backs this up. Other central banks around the world are still doing QE, therefore still providing liquidity to the markets in some capacity. Yes the Fed is probably the number one provider of that liquidity but with other central banks still dishing out some of the drug. It may allow for some extra room for the Fed to play with.
Maybe the markets hang in there for a while before they start a complete tantrum. I believe the tantrum is guaranteed once QT begins and the Fed starts reducing the size of its balance sheet. However in the mean time they might be able to sneak in some more rate hikes. A dynamic like this could help give the illusion of fighting inflation without crashing the markets.
Everyone reading knows by now in order to get inflation under control we would need 10% plus interest rates. Everyone knows that is impossible without crashing the economy.
The data is suggesting the economy has already begun to slow down, trending for recession. Tightening monetary policy in the face of this is guaranteed to crash everything! Tightening can only occur in the face of an expansion not a contraction.
February should prove to remain stable, despite the violent swings we've been witnessing in the markets. I believe those swings are continuations of markets reacting to the reality of lift off happening in March. We shall see how long expectations can keep the house of cards standing..
Lastly and most importantly.. HONK FOR FREEDOM !!