The surge in banking stress is too recent for us to see any trace of it in the labor market report.
Since the fall of Silicon Valley Bank on March 10, the Fed’s attention has shifted from economic data (employment, prices, wages) to banking stress indicators. Liquidity fears can only push banks to be stricter in granting credit, raising the threat of a credit crunch. As a precaution, the Fed raised its rates by 25 basis points in March and did not take a clear decision on what to do next. Inflation nevertheless remains persistent enough for the Fed to stay the course of tightening. In recent days, the markets have given signs of calm, giving importance to macro developments. The labor market report is, along with inflation data, one of the main inputs for analyzing the cycle. No high-frequency indicator portends a trend break in March. The labor market still looks solid. Households do not report a scarcity of available jobs. Participation is improving little by little and, although the panorama has been more uncertain since the SVB episode, unemployment claims are not taking off. After an exceptional surge in January (probably with a favorable weather effect), the pace of job creations is bound to slow down, but it remains far above normal. Wage gains have also started to slow but, again, they are between 4.5% and 5%, a level too high to be considered compatible with the inflation target of 2%. The surge in banking stress is too recent for us to see any trace of it in the labor market report. Unemployment claims remain very low. Announcements of workforce reductions are largely confined to the tech sector. The labor market is still strong.
According to the Fed’s Beige Book, businesses are signaling that labor shortages are starting to ease.
A few months ago, Jerome Powell and other members of the Fed considered that a decline in job openings would be a good signal that tensions in the labor market were easing. At this stage, the decline is very modest. However, according to the Fed’s Beige Book, companies are signaling that labor shortages are starting to ease.
Clues that contradict each other
In industrials, there is a gap in March between the regional Fed surveys (down) and the Markit purchasing managers’ index (up). The PMI could remain close to its current level, indicating near-normal growth in services activities. In March, most of the regional industrial confidence indices were down, sometimes sharply. In contrast, Markit’s PMI-manufacturing rebounded sharply, gaining 2pts to 49.3. Since November 2022, the ISM index has fallen into the contraction zone, coming out at 47.7pts in February, and should remain there again in March. Automobile sales have recovered somewhat in recent months but remain well below the usual pre-pandemic levels (nearly 17 million in 2019). While component shortages are easing on the supply side, tighter financial conditions are likely to weigh on demand.
The construction sector remains under pressure in the United States. After a very sharp correction in 2022, spending in the residential sector could start to stabilize but the tightening of financial conditions caused by the recent banking stress does not bode well for the non-residential part. Spending stagnation is expected in February.
