The discussion of a soft landing in the U.S. has become obsolete, and the "no landing" argument is now more popular, citing an overall improvement in U.S. economic data in January.
U.S. retail sales rose 3% in January from a year earlier, beating market expectations of 2% and the largest increase since March 2021.
Employment data exceeded expectations, with hiring surging in January and non-farm payrolls adding 517,000 jobs, the largest increase since July 2022; the unemployment rate fell back to 3.4%, the lowest in 53 years; and initial jobless claims fell by 1,000 to 194,000 last week, continuing at an all-time low.
Inflation also broke away from the previous trend of continuous weakness in the chain, with the Consumer Price Index (CPI) up 0.5% and the Producer Price Index (PPI) up 0.7% in January, both higher than the previous values.
In addition to the trifecta of consumer, employment and inflation data, the ISM services PMI rebounded strongly above the Rongguan line in January, and new orders soared. Even the long-dormant real estate also showed signs of improvement, with new home sales rising for the third consecutive month.
The economic data exceeded expectations, prompting U.S. bond rates and the dollar to move significantly higher, with the dollar index having rebounded nearly 3% since February; the 10-year U.S. bond yield also rose back to a level slightly above 3.8% at the end of last year.
After the Federal Reserve opened the most aggressive tightening policy since the 1980s last March, the U.S. economy is actually not only not in recession but also recovering.
II. Real wages are recovering
High inflation has been weakening the purchasing power of U.S. consumers, but the U.S. CPI growth rate has fallen for the seventh consecutive month, the same period of relatively small decline in wage growth, making the inflation-adjusted U.S. real income, from -3.7% in June last year to -2% in January.
The improvement in real income boosted U.S. consumer confidence, with the Michigan Consumer Confidence Index exceeding expectations in February to 66.4 after bottoming out in June last year, and consumer confidence in all income groups improving since November.
Notably, the defining force of inflation has switched from goods to rents and now to services, which are highly correlated with labor costs, while the latest productivity data show that business labor costs are actually not as high as wage growth suggests.
In the fourth quarter of 2022, U.S. nonfarm business unit labor costs (the wages firms pay to produce a given output of goods) increased by just 1.1%, a significant retreat from the more than 8% growth rate in the first quarter of 2022 and the lowest rate in seven quarters, largely due to strong productivity growth of 3%, which offset a 4.1% rate of hourly wage growth.
If the slowing trend in inflation continues and wage growth remains strong against a backdrop of still-resilient demand for services and improving productivity, this implies that wage growth is expected to outpace inflation after lagging for several months, further boosting Americans' real purchasing power.
III. No pay raise? Social Security to make up for it
As the U.S. baby boomers shift to retirement, the ranks of retirees continue to grow. This sizeable group of retirees is not eligible for raises, and retirement accounts such as 401(k)s have been hit hard as the stock and bond markets have retreated, but they have Social Security payments.
U.S. Social Security benefits include and inflation-linked provisions (Cost-of-living Adjustment, or COLA), in the context of soaring inflation after the epidemic, the U.S. Social Security Administration will increase the cost-of-living adjustment for Social Security benefits in 2023 from 5.9% in 2022 to 8.7%, a forty-year high growth rate, about 70 million retirees benefit, representing about 21 percent of the total U.S. population of 330 million.
The average retiree's monthly Social Security benefit increases by $146 to $1,827, which will bolster the purchasing power of retirees given that COLAs have already beaten inflation this year.
IV. General tax cuts across states
Another source of support for American families is tax cuts.
It is becoming popular for U.S. states to attract an influx of people by cutting taxes. According to the Tax Foundation, 43 of the 50 U.S. states have adopted tax cuts in 2021 or 2022, with 21 states reducing their state income tax rates, as shown in the chart below, with the median state top individual income tax rate falling to 5.0 percent in 2022; lawmakers in another 12 states are considering Further cuts to personal income taxes.
State tax cuts hedge against the harm of high inflation on residents' incomes, and because the individual income tax is cumulative, the tax burden on residents increases as their nominal income rises due to inflation. For example, if both society-wide commodity prices and residents' incomes rise tenfold, the real purchasing power decreases instead at this time due to the increase in income tax rates to which residents adapt, but at this time, if the tax rate also decreases, residents' spending power will be supported.
V. Financial conditions relaxed
The U.S. economic recovery has also benefited from the significant turnaround in financial conditions since the end of last year.
Since November last year, despite the frequent low Fed, the emergence of inflation inflection point and the Fed slowed the pace of interest rate hikes, both make the market optimistic early trading up interest rate cuts, financial conditions have turned sharply loose, the dollar and U.S. bond yields also continued to fall, driving those areas more sensitive to high interest rates bottomed out.
The most obvious is real estate, the U.S. 30-year mortgage rate, from a peak of more than 7% in November last year to a minimum of 6.09% on February 2 before the Federal Reserve FOMC, overlaid with the spring and summer is the traditional peak season of the U.S. housing market sales, new home sales began to pick up.
Auto sales also moved sharply higher, with U.S. auto and parts sales jumping 5.9% in January from a year earlier, the highest since April 21 years.
VI. Goodbye recession?
It is still too early to judge that the United States has completely out of recession.
On the one hand, after the economic data greatly exceeded expectations, the market has strengthened its vigilance against monetary tightening. CME interest rate futures show that the end point of market bets on interest rate hikes has been raised to 5.25% to 5.5% from 4.75~5% at the end of January, and 25bp hikes in March, May and June respectively, and demand for real estate and automobiles, which are sensitive to financing costs, may cool again.
Second, strong economic data may contain one-off seasonal noise. Take the unusually strong U.S. retail sales data for example, the 3% jump in January retail sales from a year earlier was built on top of the contraction in the previous two months, especially since the December data was low on the combined effect of a higher seasonal factor and the early start of the holiday shopping season, and overall the retail level was actually not much higher than the peak in October last year.
The strong growth in many retail sub-data looks hard to sustain, for example, department store sales surged 17.5% in January from a year earlier and restaurant and bar sales jumped 7.2% from a year earlier, and given the continued climb in U.S. credit card delinquency rates, there is still a risk of a sudden collapse in demand and employment to be watched.