More signs of a soft landing

By Joe Higgins, Quest 4 Quality

  • Some 275,000 new jobs were added in February and the unemployment rate rose to 3.9%.
  • Wall Street’s consensus estimate was 198,000 new jobs and unemployment at 3.7%.
  • Wages rose 0.1% in February, giving the Fed another reason to cut interest rates. 
  • Stock indices have reached record highs

It’s been an interesting three years for America. We made it through COVID, the economy stayed out of recession, interest rates rose to 5.25% and inflation peaked at 9.1%. The worst of the recent past is behind us and Americans can look to better days ahead.

I have been surprised by the onslaught of recent economic reports that have come in hotter than expected. After 24 months of some of the highest interest rate increases in the last 20 years, the Federal Reserve has still not systematically slowed down the economy.

The Fed said early on that one of the tools it has to reduce inflation is to raise interest rates high enough to increase unemployment to 4.5%. The Fed has failed, as job creation has been at historic levels for three years.

In a “normal” economy, creating 100,000 jobs a month is enough to manage the standard increase in the population. Adding 150,000 jobs is considered a good performance, and if you had 275,000 in a month, that is extraordinary. 

Last month the U.S. economy added 275,000 jobs while the unemployment rate increased from 3.7% to 3.9%. Economists thought we had been returning to a more normal job market for the past three months. However, the February jobs report ended that speculation. At the same time, wages only increased by 0.1% from January and were up 4.4% from a year ago.

Jobs were added in the usual areas: health care added 90,000 new jobs, probably due to aging boomers; government jobs were solid at 52,000; and the leisure and hospitality sector added 58,000. For the retail trade, the addition was an extremely healthy 18,700, indicating that consumers are still active in the marketplace.

One of the questions I get asked is why the unemployment rate increases when job creation is so high. The simple answer is that more people who may have been discouraged workers entered the workforce, and some did not find jobs. After suffering a massive worker shortage a few years back, more people are seeking jobs, which is a positive development for our dealers.

While February came in hot, January was revised downward to new 230,000 jobs, and December was moved down to 290,000 from the initially reported 335,000 jobs.

A big takeaway was that paltry 0.1% increase in wages, which made the Fed happy. Declining wages and deceleration vs. last year means a lower threshold for an interest rate cut before June.

There wasn’t a big reaction to this report from Wall Street, considering it could signal a rate cut earlier than Q3. But there was a significant story as the markets moved into record territory over the past three months. The Dow Jones Industrial Average closed at over 37,000 on Dec. 14, 2023, its highest finish ever. It followed that performance by closing at 38,000 on Jan. 22, 2024, and then broke the 39,000 mark on Feb. 22, 2024, but closed just under that number.

The S&P 500 and the Nasdaq Composite also sit at record-high levels and are being driven by the rise of artificial intelligence stocks (Nvidia in particular). The stock market rallies, together with the February jobs report, provide further evidence that we are not near a recession this year, and the next nine months should see solid business growth.

The Bottom Line

I will close with words of Fed Chair Jerome Powell at his appearance before the House’s Financial Services Committee last week: “If the economy evolves broadly, the central bank can be expected to cut its policy rate this year,” he said. And while “continued progress against inflation was not assured,” he said “The Fed is on a good path toward achieving a soft landing and avoiding a recession.”

The bottom line is simple: no recession, record stock prices, full employment and an excellent chance of a rate cut as early as June — which will help lower mortgage rates and lift both the housing market … and home goods sales.

Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.

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