HIGHLIGHTS:
- A strong labor market, expanding service sector, and consumers still purchasing may all actually be bad news in the eyes of the Fed.
- US services grew for another month, defying expectations, with the ISM Non-Manufacturing PMI reaching 56.5 in November.
- Jobs numbers unexpectedly increased compared to October, and average earnings increased 5.1 percent annually.
- When the Fed's rate plan finally concludes, Wall Street and Main Street can rejoin each other in how they react to economic news.
When is good news bad news? Traditionally positive headlines touting a strong labor market, expanding service sector activity, and a consumer willing to spend are all bad news in the Federal Reserve’s fight against rising prices. With inflation running at multi-decade highs, the US economy continues to put up stubbornly good numbers, despite the Fed’s wishes and intentions.
The Institute for Supply Management released November service sector data on Monday. Non-manufacturing PMI came in at 56.5, rising from October’s 54.4 and beating expectations for a decline to 53.5—a reading above 50 reflects service growth. But despite this stronger-than-expected headline number, the Fed may feel better about some of the internal data points. Measurements of new orders, prices paid, and supplier deliveries all showed signs of slowing.
These numbers came on the heels of another data set that shows the domestic economy continues to expand. Last Friday’s November payrolls release showed 263,000 jobs were created, much better than the 200,000 jobs the market was looking for. Workers continued to see wage gains as well, with hourly average earnings increasing by 0.6 percent for the month and 5.1 percent annually. These numbers were also better than the market anticipated.
Pivoting to forward-looking numbers, Federal Reserve Chair Jerome Powell signaled a potential shift in the FOMC’s inflation-fighting rate hikes. Last week, Powell said the size of rate hikes could be lowered to 50 basis points per meeting, down from the recent 75-point hikes. While markets applauded this as a potential sign the Fed may be nearing a pause, follow-up comments quickly pointed out that this may only be a way to delay the eventual terminal rate needed to stem inflation.
When the inflationary pressures the economy is facing are layered over the metrics of a continuing expansion, we are left with this “good news is bad news” market. The good news workers and many employers are experiencing is also the source of bad news for capital markets grappling with the inflation it creates. When the Fed feels it has brought inflation under control, Wall Street and Main Street can realign in how they react to economic numbers.
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