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Sit a Spell

On February 3, 2023, a headline by The Associated Press read, “A surprising burst of US hiring in January: 517,000 jobs.” On February 7, 2023, Business Insider stated, “A wave of layoffs that hit dozens of US companies toward the end of 2022 shows no sign of slowing down into 2023.” What gives? Confusion is evident from news of seemingly contradictory mass layoffs amid a hiring boom. What is the Federal Reserve’s role in all of this?

Relax. The dynamic has little to do with Fed policy. It is mostly COVID-19’s consumer goods boom and services deficit normalizing. Today, the economy remains a bit overheated from pandemic spending but cooling is on the way.

According to an analysis of U.S. Bureau of Labor Statistics, data from June 2022 to October 2022 by outsourcing firm Outsource Accelerator; jobs gained are in the areas where jobs were most lost during COVID-19, i.e., restaurants, nursing homes, child-care centers. Job losses are in areas representing mostly pandemic-related impacts whose surge is reversing, i.e., big tech, biotech and arts, entertainment & recreation. Beyond these, some losses are beginning to show up due to Fed tightening, i.e., construction, professional and business services.

Our estimates are that the large interest rate increases during the summer of 2022 will require an estimated 29 months (late 2024) to reach peak impact and deliver the lowest readings on economic activity (see Robinson Value Management’s Fourth Quarter 2022 “Long and Short of It”). The most visible phase of slowing growth should come before that, roughly late 2023 to early 2024. By mid-2024, the Fed likely will have begun to reverse course and loosen. The early impact of that loosening may already be evident by late 2024.

The future is uncertain, but economic cycles are as certain as taxes. Inflation could remain resilient as China reopens its economy. The Russia/Ukraine war could further add to pricing pressures. However, the Fed will continue to pursue its mandate and eventually win the inflation battle. Uncertain is the timing and the degree of slowing in the real economy (unit volume declines) required to achieve this mandate. While changes to the economy are typically slow and evolving, expectations and asset prices can move rapidly. If a recession transpires, markets may quickly adjust to the data creating volatility, pain, and perhaps, opportunity.