US Economy February 2023

The year got off to a solid start in the markets, with all three indexes finishing in the green and the NASDAQ having the best January since 2001. Investors were cheered by inflation cooling and signs that labor costs were easing and the Fed would slow down interest rate increases.
 
Consumer Spending Falls 0.2%
Consumer spending fell 0.2% in December and spending for November was revised down from a gain of 0.1% to a decline of 0.1%. Weakening spending may give the Fed a reason to pause or raise rates less aggressively. Spending on services rose 0.5% while spending on durable goods fell. Core consumer spending fell 0.3% in December, the biggest decline in a year, after decreasing 0.2% in November. With personal income rising 0.2%, the smallest gain since April, the outlook for spending is uncertain. Wages rose 0.3%, matching November's increase. The biggest cost of living adjustment since 1981 for more than 65 million Social Security beneficiaries took effect in January. Analysts think that may help limit the potential decline in consumer spending.
 
Consumer Prices Fall 0.1%
The Consumer Price Index (CPI) fell 0.1% in December after rising 0.1% in November and was up 6.5% year over year, down from 7.1% in November. It was the first decline in month-over-month prices since the onset of the pandemic and the seventh consecutive month that inflation fell year over year. Core inflation, which excludes the volatile food and energy categories, rose 0.3% in December after rising 0.2% in November and was up 5.7% year over year after being up 6.0% in November.

Consumer Confidence Falls to 107.1

• The New York-based Conference Board’s Consumer Confidence Index slipped to 107.1 in January after rising to 108.3 in December.*
• The Present Situation Index rose to 150.9 in January after rising to 147.2 in December. It was the highest reading for the PSI in nine months.
• The Expectations Index, based on short-term outlooks for income, business and labor market conditions, fell to 77.8 in January after rising to 82.4 in December. A level around 80 indicates consumers expect a recession.
• In May 2020 Consumer Confidence was 120.0 but fell to 86.9 at the onset of the pandemic in March 2020.

*A level of 90 indicates that the economy is on solid footing; a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
 
Unemployment Falls to 3.4% 

• The unemployment rate fell to 4.3% in January after falling to 3.5% in December. Unemployment was 3.5% at the beginning of the pandemic in March 2020.
  
• The economy added 517,000 new jobs*, more than twice what economists expected. The extremely hot labor market makes it tougher for inflation to continue to drop as expected.
  
• Wage growth was mostly in line with expectations, with average hourly earnings up by 10 cents, or 0.3%, on a monthly basis, and 4.4% on an annual basis. Economists had estimated wage growth of 4.3%.
  
• Job openings, a measure of labor demand, unexpectedly increased 572,000 to 11.0 million on the last day of December, according to the most recent monthly Job Openings and Labor Turnover Survey, or JOLTS report. Economists polled by Reuters had forecast 10.250 million job openings.

 
Chicago PMI Falls to 44.3
The Chicago PMI fell to 44.3 in January after rising more than seven points to 44.9 in December. The decline left the index further below 50, the level that signifies expansion. Economists had expected the PMI to rise into the 45+ range. A PMI number above 50 signifies expanded activity over the previous month; readings below 50 signify contraction. Looking back to when the series began in 1967, the PMI has ranged from 20.7 in June 1980 to 81.0 in November 1973.      
 
Wholesale Prices Fall 0.5%
The Producer Price Index (PPI) fell 0.5% in December after rising 0.3% in November and was up 7.3% year over year. Falling food and gas prices led the decline. Stripping out volatile food and energy prices, core PPI rose just 0.1% in December and 5.5% year over year, down from 7.4% year over year in November. The PPI peaked at a whopping 11.7% year-over-year increase in March 2022.
 
Q4 GDP Rises 2.9%
Q4 GDP rose 2.9%, well ahead of expectations, according to the first reading from the Commerce Department. GDP rose 3.2% in the third quarter; economists had expected GDP to rise 2.3% in the fourth quarter before slowing this year. The economy got a boost last quarter from a 2.1% increase in consumer spending and the restocking of supplies by businesses. For all of 2022, GDP expanded 2.1% after growing 5.9% in 2021. The Fed's preferred gauge of inflation, the core PCE price index, eased to a 3.85% annual rate in Q4.
 
Fed Raises Rates 0.25%
The Fed raised interest rates by 0.25% February 1 to a range of 4.50% to 4.75%, the highest level since 2007. The decision followed six consecutive rate hikes of at least .50%. Comments by Fed Chair Jerome Powell noted that while inflation is falling as intended there is still a long way to go to get back into the Fed’s preferred rate of “around 2%.” Powell also indicated that the Fed has no plans to cut rates this year. The Fed’s biggest concern is a surge in wages due to the tight labor market. 

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