A Bullish Case for the U.S. Economy

November employment was stronger than expected, with employment growth exceeding expectations and the unemployment rate unexpectedly dropping two-tenths to 3.7 percent. Add an increase in hours worked and a bigger-than-expected increase in average hourly earnings, and we have upside surprises across the board. 

Non-farm payrolls rose 199,000 in November, while October was unrevised at 150,000. September was revised down 35,000 to 262,000, leaving the three-month average payroll increase at a respectable 204,000.

The employment report that suggests emerging weakness, apparent in October, was primarily a reflection of strike activity, mainly stemming from the United Auto Workers’ selected walkouts rather than a sudden economic chill. 

Bear in mind that October’s exaggerated weakness is likely mirrored by an equal and opposite temporary strength reflecting the post-strike bounce. Nevertheless, the three-month average payroll rise was respectable. That it was confirmed by a better-than-expected household survey is just icing on the cake. 

The dash from cash into fixed income, in all its forms, has been quite dramatic. That included everything from government sovereign debt and government agencies to investment-grade corporate, non-investment-grade corporate, municipals, preferred bonds, and CDs. All have been met with a huge appetite from both institutional and retail investors. 

An Unexpected Rally

The rally in the U.S. 10-year Treasury, triggered by the tame consumer-price and producer-price indices, caught much of the investing world flat-footed, as they were still entrenched in the Fed’s “higher for longer” narrative. That included the added fear that another rate hike might be necessary to “finish the job.” 

Instead, the market decided that not only was the Fed done raising rates, but two or even three quarter-point rate cuts might be a likely scenario during 2024. By historical measures, the recent drop in yields was radically sudden, almost an overnight reset of expectations brought about by a change in narrative and growth projections that point to a marked slowdown for the current quarter. 

The Atlanta Fed’s GDPNowshows Q4 growing at a 2.1 percent rate—neither too hot nor too cold, and just what the bond market wanted to see. Under the assumption that inflation reaches its 2 percent target rate, it stands to reason that the Fed will not raise rates further, avoiding paying a steeper price on federal debt. 

Tracking the Consumer

We all want to see how healthy the consumer seems in early 2024, after this year’s holiday shopping season. So far, the consumer has been surprised by the upside.

Chairman Jerome Powell’s final appearances in early December (the last before the pre-FOMC silent period) cemented expectations that the Fed would leave rates unchanged for the month. His insistence that it is premature to rule out future rate hikes fell on deaf ears. 

Markets have moved on from the possibility of another rate hike and are continuing to price in more aggressive 2024 rate cuts with each week that shows cooling economic activity. 

Against this wait-and-see backdrop by the Fed, it is my view that the base case for the U.S. averting a recession in 2024 is more credible now than a month ago.