Weekly Update 02/07/2025: Earnings Season Continues
- Monthly payrolls below consensus but job market still stable
- Productivity improves
Labor Market
The Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover Survey, known as JOLTS, released Tuesday showed openings were 7.6 million in December, a three month low. That was down from a revised 8.2 million in November. The openings figure was below all but one estimate in a survey of economists by Bloomberg. The job openings-to-unemployed workers ratio remained at 1.1x for a sixth consecutive month. That metric reached a peak of 2.0x in 2022, suggesting that there has been a slowdown in the labor market since then. The so-called quits rate, which measures the percentage of people who voluntarily leave their jobs each month, stayed constant from the previous reading at 2%.
Most of the pullback in openings came from professional and business services. Health care and social assistance and finance and insurance were two other groups that showed large declines. A downward trend in hiring helps contain inflation because it suppresses wage growth. If this trajectory continues in the coming months, it will help the Fed achieve one of its mandates—stable prices. Initial unemployment claims rose 11,000 in the week ended February 1 while continuing claims rose to 1.89 million in the week ended January 25. A separate report from BLS showed that labor productivity rose at a 1.2% annualized pace in the fourth quarter which helps keep labor costs contained due to higher output per employed worker. Productivity improved 2.3% for 2024, the highest level in 14 years, excluding the pandemic period in 2020. Outplacement firm Challenger, Gray & Christmas announced that U.S. firms announced nearly 50,000 job cuts in January, the lowest count for the first month of the year since 2022 though that number may gather steam with major restructurings announced already in the early days of February from large employers such as General Motors and Estee Lauder. Further color on the labor market was given today as the Labor Department’s monthly payroll report and unemployment conditions were released.
In a survey of economists by Bloomberg, the consensus estimate called for monthly job growth of 170,000. The report showed job growth moderated last month to a gain of 143,000. That was below the revised 307,000 gain in December and below the 166,000 monthly average from 2024. The unemployment rate, which is derived from a survey of households versus the payroll survey which comes from businesses, fell to 4.0% in January from 4.1% the month prior. This month’s figures also included annual revisions to the data that date back to early 2023. The changes were not that dramatic and continue to show that the labor market remains healthy. Job growth in January saw the biggest gains in health care, retail establishments and government. In contrast, employment fell in the mining, auto manufacturing and oil & gas extraction industries.
The job gains paint a picture of an economy that is “pretty stable” and without the need for Fed help on the monetary policy front. Also, average hourly earnings rose 0.5% last month, higher than the 0.3% gain in December and the same expectation figure from economists. That means on a year-over-year basis, average hourly earnings are up 4.1% versus the 3.8% expected and pre-revised 3.9% last month (now revised higher to 4.1%). In other words, inflation is alive and well when it comes to wages, and the message sent to the Fed is that their “pause” in rate cuts is likely to be extended further. This is one of those months when the headline figure was below expectations, but the unemployment rate was better than expected. While they both reveal key clues to the path of the economy, historically, the household survey has generally contained the slightly better forecasting ability given the more volatile nature of payrolls. The futures markets are now pricing in, at most, one rate cut for the entire year.
Tariff Talk
There were a number of headlines this week around U.S. tariffs on trading partners Canada, Mexico and China. While the application of any levies was delayed a month for Canada and Mexico, China responded with heightened tariffs of its own on $14 billion worth of American goods once the 10% tariff on Chinese imports took effect after midnight Eastern time on Tuesday. Our take is that the Trump administration has at least achieved its initial goal of bringing these countries to the negotiating table. Even China’s response can be seen as progress because the counter-tariffs could have been much more punitive and covered many more goods considering the U.S. has a $279 billion deficit with China based on 2023 data. Markets—both equities and currencies—immediately reacted to the delays on Mexican and Canadian goods, suggesting that investors are carefully watching the proceedings and knee-jerk responses are likely to become more numerous. With Canada and Mexico representing the largest U.S. trading partners in terms of goods that go back and forth across the borders, there was a lot to lose on all sides. Chinese President Xi Jinping also realizes he has a lot to lose given China’s wabbly economic situation. This is in contrast to the country’s approach during the first Trump administration when China retaliated with tariffs on par with what the U.S. proposed at the time. The Chinese tariffs announced this week will not kick in until February 10, and we envision negotiations going down to the last minute.
The markets are on edge because they do not know what comes next. New tariff implementation could be delayed once again. Or they could be increased! We do not have a crystal ball to determine what the outcome will be. However, we do have thoughts on how the Federal Reserve will react, and that’s the key point because they control the price of money. Across the board tariffs are inflationary, and that is counter to the Fed’s mandate and their goal of reaching 2% inflation. Recent inflation data has clearly shown that goods prices have shown not only disinflation (a reduction in the acceleration of increases) but outright deflation (an out-and-out decline) which has countered the “stickier” services sectors which remain stubbornly more expensive. Reversing this trend contributes to higher prices and likely higher yields. Lower interest rates provide a lift to all long-duration assets including equities and lowers borrowing costs by individuals, companies and governments. Therefore, it is becoming more and more clear that we are looking at a more expensive environment for the businesses in which we own shares whether that be tech companies, consumer staple firms or materials firms. That fact does not make them less important in a well-diversified portfolio, but it could lead to lower returns overall until the confusion surrounding trade are settled. Whether that happens next month or in 2028, nobody knows. The bottom line is our approach to finding, researching and trading stocks which offer the best return-per-unit risk does not change. Obviously, we will incorporate the threat of tariffs into our analysis, and it will be one of a number of inputs to our evaluation. Considering our SGK Core portfolio generates a dividend yield that is about 100 basis points above the market, we are generating real returns for portfolios on a consistent basis regardless of the day-to-day stock gyrations. We will continue to watch the situation carefully and act, as usual, with the best interest of clients at the forefront.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
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