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Weekly Update March 10, 2023: U.S. Economy Created 311,000 Jobs in February; Labor Force Participation Increases & Wage Growth Rises at a Slower Pace

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Domestic Economic News

Vacancies at US employers retreated at the start of the year but remained historically elevated, highlighting a persistent imbalance between labor demand and supply that supports a higher level of interest rates from the Federal Reserve. The number of available positions decreased to 10.8 million in January from an upwardly revised 11.2 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Wednesday. The median estimate in a Bloomberg survey of economists called for 10.5 million openings. The JOLTS release included the agency’s annual revision of monthly data back to January 2018. Almost every reading of job openings in the past year was revised higher, including a new record of 12 million in March 2022. Despite the drop, the report highlights robust demand for workers that’s far in excess of supply, which has put upward pressure on wages and therefore inflation.

Fed Chair Jerome Powell spoke to the imbalance in testimony before the Senate on Tuesday, saying that the central bank could raise rates higher and potentially faster than previously thought should economic data continue to come in strong. Job openings decreased in construction, accommodation and food services as well as finance and insurance. Meantime, vacancies rose in transportation, warehousing and utilities; and nondurable goods manufacturing jobs like chemicals, clothing and food processing.

The economy proved resilient to start the new year, marked by steady consumer spending and stabilizing manufacturing activity, contacts surveyed in the Federal Reserve’s latest Beige Book said. “Overall economic activity increased slightly in early 2023,” the Fed said Wednesday in the report, published two weeks before each meeting of the policy-setting Federal Open Market Committee. However, the outlook going forward is less optimistic. “Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead,” the report said. The report was based on anecdotal information collected by the Fed’s 12 regional banks through Feb. 27 and compiled by the New York Fed. The report came at the conclusion of Chair Jerome Powell’s two-day testimony before Congress, in which he opened the door to the possibility of accelerating the pace of interest-rate hikes should economic data continue to come in strong while stressing that no decision on the March meeting has been made yet. Policymakers have raised rates aggressively in the past year in an effort to curb inflation that stood at a 40-year high. They slowed down the pace of rate hikes to a quarter point increase at their last meeting, bringing interest rates to a range of 4.5% to 4.75%.

Applications for US unemployment benefits last week rose to the highest since December, driven by spikes in California and New York and suggesting some softening in what’s still a tight labor market. Initial unemployment claims increased by 21,000 to 211,000 in the week ended March 4, Labor Department data showed Thursday. The figure surpassed all economists’ forecasts. The median estimate was for 195,000 applications. Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their job, surged 69,000 to 1.72 million in the week ended Feb. 25, the biggest jump since November 2021. The claims data can be choppy from week-to-week and especially around holidays, and the figures came near Presidents’ Day. The four-week moving average in initial claims, which smooths out some of the volatility, edged up to 197,000, the highest since January. On an unadjusted basis, claims jumped by more than 35,000 to 237,513. California and New York accounted for three quarters of the increase.

US payrolls rose in February by more than expected while a broad measure of monthly wage growth slowed, offering a mixed picture as the Federal Reserve considers whether to step up the pace of interest-rate hikes. Nonfarm payrolls increased 311,000 after a 504,000 advance in January, a Bureau of Labor Statistics report showed Friday. The unemployment rate ticked up to 3.6% as the labor force grew, and monthly wages rose at the slowest pace in a year. The payrolls figure topped all but one estimate in a Bloomberg survey of economists, which called for a 225,000 increase and for wages to rise 0.3% from the prior month. US payroll growth has exceeded expectations for 11 straight months, extending the longest streak in data compiled by Bloomberg back to 1998. Average hourly earnings climbed 0.2% from a month earlier and 4.6% from a year ago. That said, wages for production and nonsupervisory workers — which make up the majority of US workers and aren’t in management positions — advanced 0.5%, the biggest gain in three months. Stock futures rose, Treasuries rallied and the dollar fell as investors judged the report would push Fed policymakers toward a quarter-point hike at the next meeting later this month, rather than the half-point move that Chair Jerome Powell put on the table in congressional testimony this week.

The labor force participation rate — the share of the population that is working or looking for work — rose to 62.5%, the highest since March 2020. For those ages 25 to 54, the rate jumped to the highest since before the pandemic. This is a real positive – we want to see more participants enter the workforce. The report points to a still-tight job market, where hiring needs exceed the number of available workers. However, if sustained, improved labor supply and easing wage growth in some sectors should help the Fed in its goal to curb inflation. Employers are also reticent to dismiss the staff they’ve struggled to attract and retain, helping to keep unemployment near historically low levels and giving many Americans the wherewithal to keep spending. Fed Chair Jerome Powell has said a move to a faster pace would be based on the “totality of the data,” which also includes next week’s inflation reports. The mixed news from the jobs report will likely put even more emphasis on the consumer price index out Tuesday ahead of the Fed’s March 21-22 meeting. Furthermore, policymakers will need to weigh the implications of its aggressive tightening on a financial system that’s showing signs of stress — evidenced by growing concerns about the stability of Silicon Valley Bank.

The job gains were led by leisure and hospitality, retail trade, government and health care. Employers shed jobs in information — which includes many tech jobs — as well as transportation and warehousing. While job cuts at big-name companies like Amazon.com Inc. and Citigroup Inc. have made headlines, they’ve largely been contained to technology, finance and housing. That said, there are early signs that layoffs may be beginning to spread. Data from Challenger, Gray & Christmas Inc. showed February job-cut announcements were five times the number in the same month last year. Another potential sign of softening in the labor market is the step down in the average workweek. Employers tend to cut hours before staff when demand wanes.

There’s no sign of a slowdown on American building sites. Construction employment — which often provides an early sign of economic trouble to come when it slows down — kept powering ahead last month. Builders added 24,000 jobs in February, broadly in line with the average monthly growth over the prior 6 months — even amid a cooling housing market. The residential category, which is the largest driver of overall construction employment, also came in strong with contractors adding 11,200 jobs. Economists tend to keep a close eye on construction employment because it’s often a canary-in-the-coal-mine indicator, one that starts to decline ahead of a recession. There were signs that could happen earlier this week, when the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed that the number of available construction jobs had slumped by half. New housing permits have been declining from a peak in April last year, as the Federal Reserve’s campaign of interest-rate hikes made mortgages more expensive and dampened demand. That typically feeds through into the jobs market in time. But there are some potentially offsetting reasons for contractors to retain or even add staff. The difficulty of obtaining building materials amid supply-chain disruption, coupled with scarce labor, means it’s taking longer to build homes. And there are other kinds of construction under way, including big projects backed by the government, like infrastructure or semiconductor investment, that are propping up demand in the industry.

Interest Rate Insight and the Fed

Global supply chains have returned to normal, the Federal Reserve Bank of New York said, almost three years after Covid-19 was declared a pandemic. Actually, supply pressures around the world fell below normal. The February reading in the NY Fed’s Global Supply Chain Pressure Index was -0.26, reaching negative territory for the first time since August 2019. Zero marks the historical average, and changes in either direction mark standard deviations from that trend. Maximum disruptions pushed the gauge to a peak of 4.31 in December 2021. Less shipping congestion, an easing of parts shortages and weaker consumer demand have pulled the indicator lower in seven of the past 10 months, and the latest figure reflected more improvement. “There were significant downward contributions by the majority of the factors, with the largest negative contribution from European area delivery times,” the NY Fed said. The gauge brings together 27 variables that take the temperature of everything from cross-border transportation costs to country-level manufacturing data in the euro area, China, Japan, South Korea, Taiwan, the UK and the US.

Chair Jerome Powell said the Federal Reserve is likely to lift interest rates higher and potentially faster than previously anticipated with inflation persisting, an unexpectedly aggressive posture following last month’s step down in the pace of hikes. The remarks, coming in testimony before Congress on Tuesday, opened the door to officials lifting the Fed’s benchmark lending rate by a half percentage point at the next meeting if upcoming reports on jobs and prices show rate hikes have done little to cool the economy. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Near-term bond yields jumped, stocks fell and the dollar extended gains. Traders bet the Fed is likely to raise rates by a half point at the next meeting later this month, instead of continuing the quarter-point pace from the prior gathering. They now see rates peaking close to 5.6% this year, up from about 5.5% yesterday.

Impactful International News

China set a modest economic growth target of around 5% for the year, with the nation’s top leaders avoiding any large stimulus to spur a consumer-driven recovery already underway, suggesting less of a growth boost to an ailing world economy. While Chinese stocks did not fare well overnight this probably helped our markets when Monday trading began because interest rates declined slightly here in the U.S. on that news and domestic stocks are trading on even subtle moves in the Treasury market. Premier Li Keqiang announced the goal for gross domestic product in his final report to the Communist Party-controlled parliament, which kicked off its annual meeting on Sunday. Economists had expected a more ambitious target of above 5% following a rebound in consumer spending and industrial output after the end of coronavirus restrictions. Having missed the GDP goal last year by a wide margin for the first time ever, a more cautious aim this year could restore Beijing’s credibility and give President Xi Jinping and a line-up of new top economic officials more room to focus on long-term policies. Financial markets in China and commodity markets, though, may be disappointed after rallying last week on signs of a stronger-than-expected rebound in the economy. Beijing’s reluctance to juice growth through commodity-intensive sectors like real estate and infrastructure means “the positive spillover effect, compared with China’s rebound cycles in the past, will somewhat decline,” said Jacqueline Rong, deputy chief China economist at BNP Paribas SA. Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., said the GDP goal “should be taken as a floor,” implying actual growth could overshoot the target. “Because the Covid policy has been adjusted, there’s no urgency for them to run another round of big economic stimulus,” he said. This year’s parliament meeting marks the last for Li, who is likely to be replaced by Xi ally Li Qiang, already the ruling party’s No. 2, as part of the biggest reshuffle of China’s economic policy team in a decade. Premier Li bowed deeply to the audience in Beijing’s cavernous Great Hall of the People before reading his report. Li said boosting domestic demand, a reference to consumer spending and business investment, would be the government’s top priority this year, while imports and exports would steadily increase. The government’s higher employment target for this year — of around 12 million new urban jobs — suggests that officials see more labor-intensive consumer sectors driving the economy, while the growth of government-funded infrastructure investment is likely to slow. “A rebound in consumption is most likely to lead growth,” said Bert Hofman, a former China country director at the World Bank. “Business investment may remain on the fence until stronger measures to support the private sector become apparent.”

China’s exports and imports continued to decline in the first two months of the year, clouding the outlook for the economy as it gradually begins recovering from Covid restrictions and infection waves. Exports fell 6.8% in January and February from the same period last year, official data showed Tuesday, improving from December’s drop of 9.9% and a better outcome than the 9% drop predicted by economists. Imports contracted 10.2% in the first two months of 2023 from a year earlier, far higher than the 7.5% decline in December and economists’ forecasts of a 5.5% drop. The trade surplus for the two months of this year was $117 billion. Economists said the sharp decline in imports was largely a result of weaker commodity prices and a stronger dollar, rather than a sign of muted domestic demand. Trade data for the first two months of the year is typically combined to avoid distortions from the Lunar New Year holiday. “China’s trade figures for the first two months of 2023 were mixed while the general trend remains weak,” said Zhou Hao, chief economist for Guotai Junan International Holdings. Chinese stocks extended declines Tuesday afternoon when trading resumed following the release of the customs data. The benchmark CSI 300 Index fell 1.1% as of 2:13 p.m. local time led by Foxconn Industrial Internet Co. — a Shanghai-listed arm of iPhone maker Foxconn Technology Group. Global demand for Chinese goods started falling in late 2022 as soaring inflation in the rest of the world and higher interest rates took a toll on consumer spending. Exports had been a key pillar of China’s economic growth over the last two years, helping to offset a slump in domestic spending as Covid restrictions curbed business and consumer confidence. That trend has now switched. Consumer spending is rebounding after the government abruptly dropped Covid restrictions in December and a post-reopening infection wave eased early this year. A government official said Monday the rebound in consumption has been rapid and the sector will play a bigger role in driving economic growth this year.

The euro-area economy failed to expand at the end of 2022 as worse-than-expected performances in Germany and Ireland helped pull down initial growth readings. Gross domestic product was unchanged from the previous quarter during the final three months of last year — worse than the preliminary estimate for a 0.1% advance — data released Wednesday by Eurostat showed. While household expenditure and investment declined, government spending and trade helped offset the drops. Germany’s economy, the continent’s largest, shrank by 0.4%, while Ireland’s rose by significantly less than initially reported. While gloomier than thought, stagnation means the bloc may still manage to narrowly dodge a recession that was seen as unavoidable after Russia invaded Ukraine. Looking ahead, analysts predict a downturn in the first quarter as the rising cost of living continues to weigh on consumers. Inflation remains a problem. A measure stripping out volatile components such as food and power quickened to a record 5.6% last month even as a retreat in energy costs helped bring the headline number down for a fourth month. The European Central Bank is set to hike borrowing costs by another half-point when it meets next week, adding to the most aggressive tightening push in its history. There’ll probably be more to come in the following months, with the full force of action to date also expected to weigh on output this year.


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