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Economic Research US Weekly Prospects January 27, 2023 US Weekly Prospects * Contents * Analysts * Print * PDF US Weekly Prospects US WEEKLY PROSPECTS * United States * Focus: Revisiting the labor market and inflation * US: Don’t look up: A debt ceiling primer * Global Data Watch: Now is the winter of our disconnect * US Indicator forecasts * J.P. Morgan US forecast * US Economic Calendar This document is being provided for the exclusive use of qaphela.mashalaba@rmb.co.za. US WEEKLY PROSPECTS Read full disclosures UNITED STATES * Real GDP increased a solid 2.9% in 4Q, but with disappointing details * Initial claims signal labor market strength * We forecast January job gain of 175k with u-rate at 3.5% * We expect 25bp hike from FOMC next week The BEA reported that real GDP increased 2.9% saar in 4Q, a solid quarterly outturn that was modestly above expectations. And while the real economy grew at about a 3% annualized rate throughout the second half of last year, this came after real activity contracted in 1H22 and growth last year overall was pretty modest at 1.0%. Additionally, the details underlying the 4Q GDP print disappointed expectations and there are other signs that the economy weakened late last year. Overall we remain comfortable with our view that the economy is losing some steam and that the pace of growth is softening early this year. We continue to forecast 1.0% real GDP growth in 1Q and look for additional weakening in subsequent quarters. We didn’t get a lot of news of the labor market this past week but the initial claims data beat expectations and looked very favorable. We believe that the pace of job growth should be moderating over time but we see signs of continued strength and tightness to date. We forecast that next week’s January jobs report will show that 175,000 jobs were added during the month while the unemployment rate held at 3.5%. Policymakers will need to weigh the different crosscurrents facing the economy when the FOMC meets next week. While the Committee likely will feel like progress has been made in bringing inflation down to target we also think it will believe that there is more tightening to do, particularly in light of recent signs of labor market strength. We look for a 25bp hike at the upcoming meeting. The FOMC could signal that the Committee is getting closer to pausing the hiking cycle, but we expect Chair Powell to be hawkish in the press conference in an effort to push back against any further easing in financial conditions. A STRONGER HEADLINE, SOFTER DETAILS The 2.9% real GDP growth reported for 4Q was above expectations, but trade and inventories accounted for more than two-thirds of the headline growth reading, a much larger combined contribution from these categories than we were anticipating. While a drop in imports and a buildup of inventories in 4Q mathematically helped support GDP growth, these are not signs of domestic demand strength. And away from trade and inventories, real domestic final sales disappointed, rising only 0.8% saar in 4Q. Furthermore, apart from an upside surprise in government spending, real final sales to private domestic purchasers edged up only 0.2% saar in 4Q, the weakest quarterly print for this aggregate since the recovery began. While GDP prints have been swinging around in recent quarters, private domestic final sales have been less volatile and show a decelerating trend lately (Figure 1)—this suggests that underlying demand in the economy is softening. Monthly reports on economic activity also show that the economy weakened late last year (despite solid GDP growth on average in 4Q). Real consumer spending declined a larger-than-anticipated 0.3% in December after moving down 0.2% in November. The durable goods report also showed that core capital goods shipments fell 0.4% in December after a 0.2% November decline, and that related orders slipped 0.2% in December after being unchanged in November (Figure 2). Earlier reports also showed related recent weakening in retail sales and industrial production late in 2022. One or two weaker months do not necessarily make a trend, and December data could have been hindered by severe weather during the month. We think bad weather weighed on auto sales in December and expect automakers to report a large jump in sales in January next week. Apart from weather-related noise, the cost of living adjustment should be significantly supporting incomes early this year, which likely will boost consumer spending. With all this in mind we expect some firming in consumer spending (and overall domestic final sales) early this year, but we don’t forecast particularly strong growth in the aggregate. We forecast 1.0% real GDP for 1Q, and see some downside risk around this estimate very early in the tracking cycle. INITIAL CLAIMS STILL VERY LOW While the cost of living adjustment will be an important influence on household incomes and consumer spending, the labor market also will remain a key factor in terms of consumer strength and the condition of the overall economy. The latest weekly initial jobless claims print beat expectations, with a decline to 186,000 reported during the week ending January 21 after seasonal adjustment. The claims data can be noisy and the pandemic may have complicated the seasonal adjustment process, but the recent trend in the data clearly is sending an upbeat signal about labor market conditions (Figure 3). Continuing claims also have been coming in at low levels by broad historical standards in recent weeks, but the news here has been somewhat less favorable. To be sure, the labor market may be losing momentum even if claims filings remain low, and job growth decelerated into December. But the jobless claims data are a signal that demand for labor still remains strong and that layoffs remain limited in the overall job market (despite seemingly frequent headlines about layoffs at specific companies). LESS PAIN FOR HOUSING Real residential investment tumbled about 20% over the course of last year, subtracting about a full percentage point off of GDP growth in 2022. But while there were nearly universal large declines in related indicators across much of 2022, the data have turned more mixed lately and the decline in mortgage rates from the past few months may be supporting activity in the housing market to some degree. This week we saw that new home sales increased in three straight months into December (although the December report also contained downward revisions to earlier figures) and pending home sales increased 2.5% in December, undoing a small portion of the earlier drop for the index (Figure 4). Levels of housing activity still look very low in most measures, but the recent tone of the news has turned less glum. EXPECT A 25BP HIKE At the conclusion of next week’s FOMC meeting we expect that the Committee will raise the target range for the funds rate by 25bp to 4.5%-4.75%. In the post-meeting statement we believe the description of economic developments will be little changed. We think there’s a good chance the forward guidance about “ongoing increases” could get toned down a little. However, we expect Chair Powell’s tone will be hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming. We also look for the chair to continue to push back against market pricing of rate cuts later this year. The most interesting question for next week is what it does with “The Committee anticipates that ongoing increases in the target range will be appropriate….” Since all but two participants expected at least another two 25bp hikes after next week’s expected move, the use of the plural “increases” shouldn’t be a big problem. So, the easiest thing would be to leave this phrase unchanged. However, there is also a good case to be made to qualify this phrase. Last year’s guidance was unusually unambiguous. Historically Fed guidance gives more space to uncertainty, e.g., “a pace that is likely to be measured.” We think odds are a little better than even that as we get closer to terminal next week the Committee similarly modifies ongoing increases as being likely to be appropriate. The biggest risk from changing the guidance is that the market jumps on it and eases financial conditions further. This is yet another reason to expect Powell to be quite hawkish in the press conference. We look for him to stress two themes: (i) slowing is not stopping, and (ii) don’t expect rate cuts in ’23. To underscore the idea that further hikes are likely, we think he could point back to the December dots as being still relevant (like he did in the July press conference). Finally, we think Powell will point to the historical lessons about the costs of easing too soon. FOCUS: REVISITING THE LABOR MARKET AND INFLATION Our research from earlier in the month analyzed the relationship between the labor market and the three broad buckets of core inflation currently being discussed by various Fed officials and many market participants. We now examine a higher level of detail in the CPI data and a broader set of labor market indicators as potential explanatory variables. While this gives us additional insight into how the labor market impacts consumer price inflation, the main findings of our earlier note still hold—labor market conditions tend to be most influential on core services, with prices generally more responsive to changes in the ECI than some other labor market variables. Here we examine eight different labor market variables: the employment cost index, average hourly earnings (for production and nonsupervisory workers), the unemployment rate, initial claims, continuing claims, job openings, quits, and hires. We run univariate linear regressions with %oya changes in 20 CPI components (as well as broader related aggregates) being explained by the individual labor market variables (either as levels or %oya changes) and a constant. We then compare the adjusted r-squareds for these regressions to gauge how much explanatory power we get from the different combinations of labor market variables and CPI measures. In our results (Table 1) the adjusted r-squareds tend to be higher for the models that incorporate the employment cost index as the explanatory variable, and also for the models that have core services components as the dependent variables. These findings support the conclusions of our earlier note, but of course there are some variations around these generalities. For example, the unemployment rate, hires, and quits all act as decent explanatory variables with respect to core services inflation, although the model fits for these individual regressions are lower than that of the model based on the ECI. Nonfuel transportation goods prices also seem fairly responsive to labor market conditions. As an additional test, we use all eight explanatory variables together in an attempt to explain changes in the different CPI measures. The adjusted r-squareds for these regressions (Table 1) generally support our conclusions based on the univariate regressions—core services categories are generally the most responsive to changes in labor market conditions. Table 1: Labor market variables and CPI measures Values in table are model adjusted r-squareds %oya variables level variables Component (2022 relative importance) AHE ECI U-rate Init. claims Cont. claims Job openings Hires Quits all factors Headline CPI (100.0) 0.05 0.23 0.04 0.01 0.08 -0.01 0.06 0.05 0.49 Food (13.4) 0.06 0.06 -0.01 0.04 -0.01 0.06 0.00 0.00 0.40 Energy (7.3) 0.00 0.07 0.00 0.01 0.01 -0.01 0.00 -0.01 0.35 Energy commodities (4.0) -0.01 0.04 -0.01 0.01 0.00 0.00 -0.01 -0.01 0.32 Energy services (3.3) 0.05 0.11 0.05 -0.01 0.02 -0.01 0.05 0.03 0.36 Core CPI (79.3) 0.07 0.22 0.05 0.00 0.08 0.10 0.26 0.30 0.44 Core goods (21.7) -0.01 0.00 0.15 0.06 0.02 0.02 0.12 0.11 0.59 Household Furnishings and supplies (3.9) 0.07 0.06 -0.03 -0.03 -0.03 0.01 0.00 0.00 0.44 Apparel (2.5) 0.11 0.13 0.23 0.02 0.02 -0.01 0.11 0.11 0.37 Transportation commodities less motor fuel (8.8) 0.01 0.06 0.44 0.43 0.45 0.26 0.30 0.30 0.73 Medical care commodities (1.5) 0.00 0.05 0.03 0.07 0.03 0.13 0.05 0.06 0.17 Recreation commodities (1.9) -0.01 -0.02 0.05 0.06 0.05 0.02 0.01 0.01 0.30 Education and communication commodities (0.9) 0.14 0.00 0.05 0.04 0.04 0.04 0.08 0.07 0.11 Alcoholic beverages (0.9) 0.27 0.19 0.00 0.15 0.04 0.17 0.01 0.00 0.65 Miscellaneous goods (1.4) -0.03 -0.01 -0.02 -0.03 -0.03 -0.03 -0.02 -0.03 0.19 Core services (57.6) 0.13 0.48 0.26 0.04 0.18 0.07 0.36 0.38 0.78 Shelter (32.9) 0.14 0.30 0.61 0.30 0.48 0.33 0.59 0.61 0.78 Water and sewer and trash collection services (1.1) 0.08 0.15 0.39 0.26 0.33 0.30 0.32 0.35 0.38 Household operations (0.8) 0.37 0.30 0.54 0.13 0.28 0.23 0.43 0.49 0.71 Medical care services (7.0) -0.01 0.30 0.00 0.05 0.00 0.14 -0.01 -0.01 0.61 Transportation services (5.6) 0.01 -0.01 0.05 0.07 0.05 0.04 0.06 0.03 0.17 Recreation services (3.2) -0.02 -0.02 0.08 0.08 0.07 0.04 0.04 0.05 0.43 Education and communication services (5.6) 0.01 0.18 0.27 0.27 0.25 0.22 0.23 0.23 0.39 Personal care (0.5) 0.45 0.39 0.42 0.05 0.17 0.05 0.29 0.32 0.70 Misc. personal services (0.8) 0.07 0.35 0.04 -0.01 0.04 -0.01 0.05 0.06 0.52 Note: The table shows the adjusted r-squared values obtained when the %oya rate of each component (independent variable) in the 'Components' column is linearly regressed with %oya rate or index levels of specified labor market variable. The last column (all factors) presents the adjusted r-squared value when all the labor market variables in their respective forms (%oya or level) here are used together as dependent features in a linear regression model. Models estimated over quarterly sample, beginning with latter of 1Q92 and earliest available date and ending in 4Q19. Source: J.P. Morgan US: DON’T LOOK UP: A DEBT CEILING PRIMER * Absent Congressional action, the US Treasury will default on its obligations later this year * A default would hit confidence and financial conditions, likely resulting in a sharp recession * Unlike federal government shutdowns, which occur frequently, a default would do long-lasting harm * The path to political agreement is narrow, and it’s doubtful whether executive actions are legal or feasible The debt ceiling could be the most important issue facing the US economy in 2023. A failure to raise the ceiling in a timely manner would entail the US Treasury missing timely payment of its obligations. While there have been dozens of federal government shutdowns—usually with no effect on the economy—a default on the federal debt is something that has never happened in the history of the republic. The implication of such an event for confidence, financial markets, and the overall economy are hard to quantify, but could plausibly result in a severe recession. That would be the worst-case outcome, of course, but even the best case will probably see the sort of brinksmanship that occurred in the 2011 debt ceiling crisis. That episode shook markets and generated uncertainty that held back the pace of the recovery. This note discusses the legal, political, and economic dimensions of the debt ceiling—an issue which, for better or worse, will dominate the economic policy discussion this year. THIS IS WHY WE CAN’T HAVE NICE THINGS The debt ceiling is a peculiarly American construct. The Constitution gives Congress the power to borrow on the full faith and credit of the United States. Beginning in 1917, and refined further in the 1930s, this meant Congress specifies an aggregate debt limit that applies to all federal debt: both debt held by the public and debt that is held in the government’s own accounts, such as for civil service retirement accounts. Congress can also temporarily suspend the application of the debt limit, as it did several times between 2014 and 2021. Congress also has the power to tax and spend; tax shortfalls lead to the deficits that increase the debt. So, when the debt ceiling is increased Congress authorizes the government to borrow to pay for the spending that Congress has previously authorized. This peculiar nature of the ceiling may explain why few other countries have such a law. (Denmark is the sole developed economy exception, though their current debt ceiling is almost double the amount of Danish government debt.) The current debt ceiling of $31.4 trillion was effectively reached last week (Figure 1). That moment was uneventful because Treasury still has two temporary means to fund federal outlays: the cash that is has in its account at the Fed (currently around $455 billion) and a few legal accounting gimmicks known as “extraordinary measures.” Most of these measures apply to federal retirement accounts, which invest in special-issue Treasury securities subject to the debt ceiling. By halting investment in these securities, or suspending reinvestment of these securities, the Treasury can free up room under the ceiling to continue funding the government. These extraordinary measures might be able to fund around $500 billion of federal spending in coming months. The day on which these two means of funding government outlays is exhausted is sometimes called the X date, or the drop-dead date. Estimates of this date are uncertain because the amount of future tax revenue and, to a lesser extent, future spending are uncertain. Our current best guess is sometime between September and November. If Congress has not raised the debt ceiling by the X date, then the Treasury will not be able to meet all its obligations. As we’ll discuss shortly, the financially and economically most significant obligation is principal and interest on its debt. But first, we’ll look at three proposals about what the administration could do to avoid such a default. * Prioritization. The Treasury normally pays all obligations as they come due. One proposed way to avoid a default is to prioritize debt payments over other government outlays. The current and prior administrations have argued that Treasury’s payment systems aren’t equipped for this change in policy. The FOMC minutes from 2011, however, indicate that Treasury has done contingency planning for prioritizing principal and interest payments. Yet by its nature prioritization picks winners and losers, so it’s not clear that it would be politically advantageous for the White House to take the blame for paying owners of Treasury debt (many of whom are foreign) while not fully paying Social Security recipients. * Invoke the 14th amendment. The Public Debt Clause of the 14th amendment to the Constitution states that “The validity of the public debt of the United States… shall not be questioned.” One possible interpretation of this clause is that Treasury simply must continue paying its debt – failure to do so would be unconstitutional. Legal scholars are divided on this interpretation, in part because the Supreme Court has rarely offered an opinion on this clause. So far, Treasury Secretary Yellen has insisted there is no plan to invoke the 14th amendment. * Platinum coin. The oddest proposal to avoid default is for the Treasury to mint a trillion-dollar (or other high denomination) platinum coin. By a quirk of the law, the face value of platinum coins minted by the Treasury is not limited. The idea here is to mint the trillion-dollar coin, deposit it at the Fed, and exchange it for funds in the Treasury’s general account at the Fed. Here again, Secretary Yellen has voiced opposition. Moreover, it would require the cooperation of the Fed, which is not a given. Finally, such an action might shake investor confidence in the rule of law in the United States—and preserving that confidence is one of the goals of avoiding a default. While some of these executive actions may avoid a default, the one sure-fire way is for Congress to raise the debt ceiling, though that is easier said than done. UNSTABLE EQUILIBRIUM The Republican Party won a slim four-vote majority in the House of Representatives. Kevin McCarthy was subsequently elected speaker of the House on the 15th ballot—an indication of the fractious state of his caucus. To gain the support of the more conservative members of his party, McCarthy reportedly promised to fight for large cuts to federal spending, and the debt ceiling is one way the House can exert influence on the President. McCarthy has his own reasons for going along with his party’s conservatives: he is aligned with former President Trump, who has called for hard bargaining on the debt ceiling. For what it’s worth, it appears that the Senate will be merely along for the ride in this show, which will really be about negotiations between the Republican House majority and the administration. The President and House Democrats are, not surprisingly, opposed to big cuts in federal spending, particularly to Social Security and Medicare. This setup—a Republican House pushing for spending cuts and a Democratic President opposing such cuts—is not unprecedented. The obvious resolution is a deal with reduced spending and an increase in the debt limit. This time, however, even if such a deal is reached the House leadership may have a tough time securing the support of its rank and file. Both parties’ bases would probably view it as a failure if their leaders found agreement early on, and so this debate looks likely to drag on quite close to the X date. There are also those in both parties who would view any compromise as worse than a default—with the hope the other party takes more of the blame for the fallout of a default. At the same time, a large majority of the House might prefer not playing any games at all with the debt ceiling. However, given the nature of the House rules, the majority party leadership (and committees) set the agenda. One proposed end run around these rules is the use of a discharge petition. This is a parliamentary mechanism whereby 218 House members—a simple majority—can bring a bill to the House floor for a vote, even if it lacks support of the leadership and hasn’t cleared committees. There could easily be 218 members who would like to see the debt ceiling raised. It’s less clear that on the Republican side these moderates would defy their leadership, unless perhaps things are looking dicey in the 11th hour. The discharge petition, however, is poorly suited to use at the 11th hour: the discharge rule is time-consuming, involves multiple steps, and would need 218 signatories well over a month before the X date, something we view as unlikely. In game theory, the repeated game of chicken has an equilibrium in which both sides always play cautiously. But this only holds under certain conditions—common information, a high valuation of future outcomes, etc.—which may have held in the past, but which don’t hold now. WHAT IF… What would be the consequences of a default by the US Treasury? The damage to the economy would operate through several channels. * Further downgrades by the ratings agencies would be forthcoming. This, in turn, would likely entail a meaningful increase in borrowing costs for the Treasury and hence for US taxpayers. For example, a 50 basis point increase in the Treasury’s borrowing rate would lead to an additional $160 billion annual increase in the taxpayers’ interest expense. * A downgrade of the US Treasury’s credit rating could also affect the perceived creditworthiness of those financial institutions that are explicitly or implicitly backstopped by the federal government, including the GSEs and large banking institutions. This could lead to a contraction in the overall supply of credit to the private sector. * Foreign investors hold over $7 trillion of US federal debt. Any reduction in foreign holdings of Treasuries would lower the exchange value of the dollar, thereby adding to inflationary pressures. The reserve currency status of the dollar could also be jeopardized. * A default could lead to a financial crisis in money markets. Safety-conscious investors would flee money funds that invest heavily in Treasury securities. Moreover, flight to the Fed’s repo facility would draw down reserves in the banking system, creating a risk of bank funding turmoil similar to what occurred in the fall of 2019. * Due to their safety and liquidity, Treasury securities are the cornerstone of the repo market. If that perception of safety were to evaporate this market could seize, with an adverse cascading effect on the stability and functioning of other financial markets. For a more detailed discussion of Treasury market functioning risks see here, from our US Rates Strategy team. * Finally, the increase in uncertainty about the institutional stability of policymaking in the US could hamper investment spending. One measure of such uncertainty spiked to a pre-pandemic high during the debt ceiling crisis of 2011 (Figure 2). Stanford professor Nick Bloom and his co-authors have argued this contributed to subsequent lackluster economic performance GLOBAL DATA WATCH: NOW IS THE WINTER OF OUR DISCONNECT * Data point to divergence among three largest economies * US consumer slide looks noisy; capex drop a greater concern * EM central bank easing to come quickly if Fed pauses * Next week: Global PMI, US jobs and car sales up Economic releases are sending a clear message that momentum in the three largest economies is diverging as we begin the new year. We recently became more upbeat on an early China reopening—raising our 1Q23 GDP forecast to 3.7%ar—but still anticipate an additional COVID wave sparked by Lunar New Year (LNY) travel. Data available through January 25 show household spending appears to be getting a larger-than-expected LNY boost, with air travel tracking 70% above year-ago levels and attendance at cinemas moving above 2019 holiday levels. The risks remain for another leg down in both spending and production should infections rebound. However, for now the leading edge of the data point to an earlier bounce in activity. Euro area dynamics are less dramatic than China’s, but the region’s resilience in the face of a large energy shock is impressive. Activity readings through year-end and a recent sharp drop in natural gas prices suggest that it is unlikely to slide into recession. On the heels of upbeat January surveys (flash PMI, Ifo, consumer confidence), risks now tilt to the upside of our forecast for 1%ar GDP growth this quarter (Figure 1). As China’s reopening gathers steam and as Europe skirts recession, US momentum is sliding more sharply than expected. GDP grew a strong 2.8%ar last quarter, but the composition of growth raised concern as fixed investment stalled and exports dropped, promoting a sharper-than-anticipated rise in inventories. Although real consumption grew solidly, households turned cautious at year-end as both November and December spending contracted alongside a 1%-pt rise in the saving rate. More surprising is a reported 3.7%q/q, saar contraction in real equipment spending. While we forecast a downshift to 1%ar GDP growth this quarter, risks now appear skewed to an even weaker outcome. For the global economy, the most important issue is whether the US momentum slide is a prelude to a behavioral break consistent with past recessions. This scenario would require a sharp pullback in US spending and hiring with broad spillovers into global disinflation and reduced risk appetite. A 1H23 US recession would also likely elicit an early and substantial Fed easing. We do not anticipate this outcome and are not particularly concerned about year-end weakness in consumer spending (Figure 2). Transitory factors associated with weather and holiday seasonality likely contributed to the dramatic swing from 0.39% average real consumption gains in the three months through October to a 0.25% average drop in the final two months of the year. With real income gains solid and consumer confidence rising, we look for spending to rebound in the coming months. Auto sales have been particularly volatile over this period; we project a significant rise (to 16.3m saar) in next week’s January report to send an early signal that spending is set to rebound at the start of the year. The bigger concern is that US businesses retrench. Our forecast looks for spending and hiring gains to bend into the new year as firms respond to tighter financial conditions and weaker global demand. It also calls for business to eventually break late this year as margins compress and profits contract and the US slips into a recession. However, last quarter’s investment stall and slowing in hours worked move us closer to an earlier break. These concerns are tempered by continued solid hiring and modest layoffs outside of tech. If we are right, upcoming data will show that the early-year rebound in consumer spending is accompanied by still-solid hiring and rising business sentiment. We look for a 175K gain in US payrolls in next week’s January report. If US behavior does not break this quarter, the contraction now underway in global industry will be short-lived. We expect factory output to contract this quarter as inventories are worked off and final demand growth softens. One benefit of this will be continued slowing in global goods inflation. Beyond the current quarter, a resurgent China and recovering Europe should take the lead in driving a rebound in global industry alongside a reactivation of pent-up demand for services spending. This mid-cycle rebound will be further supported by a Fed pause and a nascent easing cycle taking hold in EM. DM CBS: ONCE MORE, WITH LESS FEELING Next week’s rate decisions are not likely to generate surprises as the Fed is widely expected to step down to a 25bp move, while the ECB and BoE each hike 50bp. This difference reflects the Fed becoming more comfortable that it is near a “sufficiently restrictive” stance, as its stance is relatively tight and US inflation has decelerated more sharply. Guidance on future actions does have the capacity to surprise. This week the Bank of Canada explicitly announced a pause its hiking cycle and pivoted back toward emphasizing its forecasts rather than realized outcomes in setting future policy. It also continued to suggest a bias toward further tightening. Central banks meeting next week maintain a data-dependent approach and it is unlikely that they have seen enough progress to warrant a pause (Figure 3). There’s a good chance the FOMC statement forward guidance about “ongoing increases” could get toned down. With US labor markets still tight, core inflation elevated, and financial conditions easing, Chair Powell’s tone will be hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming. We also look for him to continue to push back against market pricing of rate cuts later this year. Only following further news of cooling inflation and labor markets, and one additional hike, do we expect the FOMC to be in a position to consider a pause. The ECB will see the 4Q22 flash GDP report and flash January inflation release before it meets. We expect a modest GDP slide and a cooling in headline in the Euro area inflation rate to 8.6%oya—with core inflation remaining firm at 5.0%oya —should reinforce the case for further hikes. We look for hawkish rhetoric from President Lagarde consistent with expectations of a further 50bp hike at the subsequent meeting. With several UK inflation persistence measures remaining red hot, and a large upgrade to the BoE’s GDP profile likely, it is clear that the MPC will indicate more tightening is to follow next week’s meeting. We think it is likely to tone down its description of upcoming rate hikes as “forceful” however, hinting that it is prepared to shift down to 25bp increments if it gains confidence that wage growth is moderating. EM CBS STEP DOWN FASTER AND SOONER EM tightening cycles are stepping down as disinflation gains pace and policymakers take comfort from easing financial conditions as the Fed approaches a pause. EM assets are also benefiting from a boost in sentiment and capital inflows on the back of China’s reopening, as well as the sharp decline in natural gas prices that has lifted CE-4 growth prospects. In economies where tightening cycles have been more aggressive and currencies have rebounded, central banks are likely to start easing in coming months; we look for rate cuts by April in Hungary, Chile, and Russia, followed by Peru in June and Czechia in 3Q23. In EM Asia—where both the 2022 inflation surge and the associated monetary tightening were more modest than elsewhere in EM—an added factor has been the return of CNY strength as the region’s FX anchor. We expect central banks there to remain on an extended pause through 1H23, after firm core inflation prompts the RBI and BoT to deliver final 25bp rate hikes next month. The SARB also stepped down to a 25bp pace this week as we expected (from 75bp in December), and with rates now in restrictive territory we anticipate that the next move will be a cut. We look for the SARB, RBI, and BCB to begin easing before year-end. That said, market pressure to ease is intensifying in several economies (Figure 4). While central banks are likely to resist, as evidenced in the recent CE-4 central bank policy statements, the risk is that deeper EM disinflation, a weaker dollar, and a general risk-on environment if fears of a near-term US recession recede, could tempt EM CBs to ease sooner and to cut more deeply than appropriate. In economies where domestic savings are inadequate or policy rates not sufficiently high to compensate macro risks, a premature shift to easing could pose challenges should the global environment turn more adverse, as underscored in our 2023 year-ahead publication. NO SIGN OF CHINA-BOUNCE ELSEWHERE IN ASIA In marked contrast to the reported data showing an early bounce materializing in China, readings from the Asian bellwethers paint a much more cautious picture. This week, Japan’s 10-day export data for January slid 17%oya, while Korea’s 20-day exports fell an estimated 4.7%m/m with a 10.5%m/m drop in shipments to China. There were somewhat more upbeat signals from Japan’s January flash PMI—forward-looking output and orders indicators turned up. But the data here look consistent with the manufacturing sector stabilizing at low levels of output rather than a convincing rebound. Korea’s 4Q22 real GDP contracted 1.5%q/q, saar, dragged down by sharp declines in real exports and manufacturing production, confirming the sectoral weakness that we had seen in the monthly data. We look for production and exports to turn up through the quarter, lifted by a smart recovery in China demand. But it is probably too early to see evidence of this lift in next week’s December IP data, where we expect declines of 0.5%m/m, sa in Korea and 1.1%m/m, sa in Japan. POLICY IN INDIA TO FAVOR STABILITY OVER GROWTH India’s fiscal and monetary policymakers face a dilemma: the gap between current activity and its pre-pandemic potential path is about 7% and expected to widen, whereas sticky imbalances—both external (current account deficit) and domestic (core inflation)—need to be corrected. We see policymakers prioritizing the latter macro-stability issues over the former growth concerns for now. In that vein, next week’s annual budget is likely to target a central fiscal deficit of 5.9% of GDP for FY24, a 0.5%-pt consolidation from FY23. The need to consolidate in part reflects a very elevated broader public sector borrowing requirement, upwards of 9% of GDP. But the path should be straightforward and allow policy to push ahead with much-needed public investment. That said, more optimistic growth estimates, likely to be reflected in next week’s budget, also underpin these priorities. Our out-of-consensus growth estimates are around 1 to 1.5%-pts below those of policymakers and markets. FAR FROM A SUR THING A potential roadmap for a common currency zone sponsored by Brazil and Argentina (to be denominated SUR) has been in the news recently. But the lack of even minimal convergence of key macroeconomic factors—for example, the inflation differential is around 90%—precludes any serious medium-term discussion. For now, policymakers are aiming for a common unit of account to settle inter-country trade and limit distortions from USD-invoicing. A currency repo could play that role, but such an arrangement would be extremely costly with the interest rate differential above 93%. Note that Argentina runs a US$3.1bn trade deficit with Brazil and has extremely low genuine international reserves, so any agreement would amount to an implicit subsidy to Argentina from Brazil. At this stage, we see no implications for our main economic or financial forecasts for either economy. US INDICATOR FORECASTS J.P. Morgan Research versus the consensus Release date/ J.P. Morgan Consensus Consensus Indicator forecast median range Tue, Jan 31 Employment cost index (4Q) 1.1% 1.1% 0.9% to 1.5% Consumer confidence (Jan) 111.0 109.0 107.0 to 112.5 Wed, Feb 01 Manufacturing PMI (Jan final) 46.8 46.8 46.8 to 47.0 ISM manufacturing (Jan) 48.5 48.0 46.3 to 50.0 Construction spending (Dec) 0.1% 0.0% -0.7% to 0.4% Light vehicle sales (Jan) 16.3 mn 14.4 mn 13.7 mn to 16.3 mn Thu, Feb 02 Jobless claims (w/e Jan 28) 200k 200k 183k to 220k Productivity (4Q pre) 3.4% 2.5% 1.0% to 3.5% Unit labor costs 0.5% 1.5% 0.5% to 2.2% Fri, Feb 03 Employment (Jan) 175k 190k 150k to 300k Unemployment rate 3.5% 3.6% 3.4% to 3.6% Average hourly earnings 0.3% 0.3% 0.1% to 0.5% Average weekly hours 34.3 34.3 34.2 to 34.4 Services PMI (Jan final) 46.7 N/A N/A ISM services (Jan) 49.5 50.5 49.0 to 52.6 Source: J.P. Morgan, consensus forecasts reported by Bloomberg Finance, L.P. EMPLOYMENT COST INDEX (4Q) RELEASED ON TUE, JAN 31, AT 8:30AM We forecast that the employment cost index rose 1.1% saqr in 4Q. Alternative measures of employment costs related to average hourly earnings and the Atlanta Fed’s wage tracker show firmness continuing late last year, but some degree of moderation in the trend. We think the ECI data will behave similarly, with the 4Q reading the most modest quarterly gain in a year. That said, we do expect some firming in the ECI’s year-ago rate (from 5.0% in 3Q to 5.2% in 4Q) as the the 4Q21 change (which was the softest reading in five quarters) drops out of this calculation. Employment cost index Employment cost index %q/q, sa 1Q22 2Q22 3Q22 4Q22 %oya, nsa 1Q22 2Q22 3Q22 4Q22 Compensation costs 1.4 1.3 1.2 1.1 Compensation costs 4.5 5.1 5.0 5.2 Private 1.4 1.5 1.1 Private 4.8 5.5 5.2 Wages and salaries (70) 1.2 1.4 1.3 1.1 Wages and salaries (70) 4.7 5.3 5.1 5.1 Private 1.3 1.6 1.2 Private 5.0 5.7 5.2 Benefits (30) 1.8 1.2 1.0 1.0 Benefits (30) 4.1 4.8 4.9 5.1 Private 1.9 1.3 0.8 Private 4.1 5.3 5.0 Source: Bureau of Labor Statistics, J.P. Morgan forecasts CONSUMER CONFIDENCE (JAN) RELEASED ON TUE, JAN 31, AT 10:00AM We estimate that the Conference Board consumer confidence index rose 2.7pts to 111.0 in January. The University of Michigan consumer survey already showed a solid jump in sentiment in January and we think the Conference Board data also will show improvement in consumer attitudes during the month. The Conference Board (1985=100) Index, seasonally adjusted May 22 Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23 Consumer confidence 103.2 98.4 95.3 103.6 107.8 102.2 101.4 108.3 111.0 Present situation (40%)1 147.4 147.2 139.7 145.3 150.2 138.7 138.3 147.2 Jobs plentiful 51.9 51.5 49.2 47.6 49.2 44.8 45.2 47.8 Jobs hard to get 12.4 11.6 12.4 11.6 11.1 13.0 13.7 12.0 Plentiful less hard to get 39.5 39.9 36.8 36.0 38.1 31.8 31.5 35.8 Expectations (60%) 73.7 65.8 65.6 75.8 79.5 77.9 76.7 82.4 Source: The Conference Board, J.P. Morgan forecasts 1. Weights in parentheses. ADP EMPLOYMENT (JAN) RELEASED ON WED, FEB 01, AT 8:15AM The ADP report has produced mixed results in the five monthly releases since it started being released using a new methodology. In last month’s reports, the ADP report showed that the private sector added 235,000 jobs in December, which was pretty close to the 220,000 private sector jobs added according to the BLS data for the month. The first prints of the October data on private payroll growth also were pretty similar (deviating by only 6,000), but in the other three months of data, the first prints deviated by an average magnitude of about 117,000. It therefore remains hard to know if the ADP report will give a reliable signal about the BLS report at this point. MANUFACTURING PMI (JAN FINAL) RELEASED ON WED, FEB 01, AT 9:45AM We think the headline composite for the manufacturing PMI will be unrevised at 46.8 between the flash and final January reports, continuing to show a 0.6pt increase over the final December print. We have seen mixed January changes in the different manufacturing surveys that have released data so far but weakness overall. We don’t see a reason to expect a particularly large revision in the upcoming PMI release relative to the flash January data. Manufacturing PMI Flash Final Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23 Jan 23 Composite1 52.7 52.2 51.5 52.0 50.4 47.7 46.2 46.8 46.8 New orders (30%) 48.7 48.6 48.8 51.1 47.6 45.2 42.7 43.9 Output (25%) 50.2 49.5 49.2 50.6 50.7 47.4 46.2 46.7 Employment (20%) 52.9 51.5 51.1 53.8 51.4 51.1 50.6 49.7 Supplier del. times (15%, inverted) 33.6 33.7 38.9 43.1 44.3 50.5 49.9 49.3 Stocks of purchases (10%) 50.2 50.5 51.4 47.6 47.8 46.5 42.1 44.1 New export orders 48.6 46.3 47.2 47.6 44.9 45.7 46.7 48.1 Backlogs of work 50.2 51.6 51.0 51.9 46.8 45.3 44.4 45.3 Output prices 71.1 66.7 62.9 64.1 61.1 61.2 56.5 56.8 Input prices 79.5 76.4 68.1 65.2 64.7 63.4 55.6 57.7 Stocks of finished goods 49.2 50.1 49.6 51.1 49.2 52.3 49.9 47.0 Quantity of purchases 49.9 51.1 49.9 47.9 43.7 40.6 38.7 37.9 ISM-weighted composite2 53.7 53.3 52.3 52.0 50.7 47.9 46.4 47.0 1. Component weights in parentheses. 2. Attributes ISM-composite weights (equal weights) to corresponding PMI series Source: S&P Global, J.P. Morgan forecast ISM MANUFACTURING (JAN) RELEASED ON WED, FEB 01, AT 10:00AM We forecast that the ISM manufacturing survey’s headline composite edged up from 48.4 in December to 48.5 in January. We see mixed changes across the different surveys that already have reported January data, but weak levels overall. And we therefore think that the ISM survey data will remain weak in January, with little change relative to the December print. ISM mfg composite index May 22 Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23 Composite 56.1 53.1 52.7 52.9 51.0 50.0 49.0 48.4 48.5 New orders (20%)1 54.9 50.0 48.6 50.4 47.3 48.2 46.8 45.1 Production (20%) 54.7 54.4 53.3 51.1 51.0 51.9 50.9 48.6 Employment (20%) 50.2 48.1 49.8 54.2 49.3 49.9 48.9 50.8 Supplier deliveries (20%) 65.7 57.3 55.2 55.1 52.4 46.8 47.2 45.1 Inventories (20%) 55.9 56.0 57.3 53.1 55.5 52.5 50.9 51.8 Customer inventories 32.7 35.2 39.5 38.9 41.6 41.6 48.7 48.2 Backlog of orders 58.7 53.2 51.3 53.0 50.9 45.3 40.0 41.4 New export orders 52.9 50.7 52.6 49.4 47.8 46.5 48.4 46.2 Imports 48.7 50.7 54.4 52.5 52.6 50.8 46.6 45.1 Prices 82.2 78.5 60.0 52.5 51.7 46.6 43.0 39.4 Source: Institute for Supply Management, J.P. Morgan forecasts. 1. Weights in parentheses. CONSTRUCTION SPENDING (DEC) RELEASED ON WED, FEB 01, AT 10:00AM We estimate that nominal construction spending edged up 0.1% in December. Like we have seen in recent months, we expect little change in the headline aggregate but with larger mixed changes across some of the main details of the report. We think that private residential construction spending will keep trending lower, with a 0.7% drop in December. We also think that the recent upward trend for private nonresidential spending will continue into December, with a 1.6% gain. Public spending jumped for several months before edging down 0.1% in November and we expect some additional moderation in December with a 0.3% decline. Construction spending %m/m, sa Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Total construction 0.6 0.8 -1.1 0.5 -0.2 0.2 0.1 Private (79%) 0.4 0.2 -1.8 0.3 -0.7 0.3 0.2 Residential (48%) -0.8 -1.1 -3.4 -1.8 -0.8 -0.5 -0.7 New residential -1.8 -4.0 -2.6 -1.9 -1.8 -1.8 -1.3 Single-family -2.4 -4.7 -3.3 -3.2 -2.9 -2.9 Multifamily 0.8 -0.3 0.4 3.7 2.4 2.4 Home improvements 0.8 3.4 -4.6 -1.7 0.6 1.3 Nonresidential (31%) 2.6 2.5 1.0 3.7 -0.6 1.7 1.6 Public (21%) 1.2 3.3 1.7 1.6 1.6 -0.1 -0.3 Source: US Department of Commerce, Census Bureau, J.P. Morgan forecasts. Weights in parentheses. LIGHT VEHICLE SALES (JAN) RELEASED ON WED, FEB 01 We look for light vehicle sales of 16.3mn saar in January. This would represent a 22% jump over the December sales reading and the strongest month for sales in almost two years. We think improved supply chains should be allowing sales to firm and we think that sales also may be due to bounce in January after severe weather disrupted activity in December. Motor vehicle unit sales Saar, mn May 22 Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23 Total 12.6 13.0 13.3 13.2 13.6 15.2 14.2 13.3 16.3 Domestic 10.1 10.5 10.8 10.4 10.8 12.2 11.4 10.5 #N/A Autos 1.9 2.1 2.0 2.0 2.2 2.5 2.4 2.0 #N/A Light trucks 8.2 8.4 8.8 8.4 8.7 9.7 9.0 8.5 #N/A Imports 2.5 2.6 2.5 2.8 2.8 3.0 2.9 2.8 #N/A Source: Bureau of Economic Analysis, J.P. Morgan forecast INITIAL CLAIMS (W/E JAN 28) RELEASED ON THU, FEB 02, AT 8:30AM We forecast that initial jobless claims increased 14,000 to 200,000 during the week ending January 28 after seasonal adjustment. We think some of the recent drop in filings could represent noise in the data and we expect a partial reversal in the upcoming report. But overall we think that filings will continue to come in at low levels. Jobless claims (regular state programs, seasonally adjusted) Dec 10 Dec 17¹ Dec 24 Dec 31 Jan 7 Jan 14¹ Jan 21 Jan 28 Initial claims (000s) 212 216 223 206 206 192 186 200 Weekly change -19 4 7 -17 0 -14 -6 14 4-week moving average 228 221 221 214 213 207 198 196 Weekly change -3 -6 -1 -6 -2 -6 -9 -2 Continuing claims (000s) 1669 1718 1697 1630 1655 1675 Weekly change 0 49 -21 -67 25 20 4-week moving average 1654 1682 1688 1679 1675 1664 Weekly change 30 27 7 -10 -4 -11 Insured unemployment rate (%) 1.2 1.2 1.2 1.1 1.1 1.2 Source: US Department of Labor, J.P. Morgan forecasts. 1. Employment survey week. 200 PRODUCTIVITY AND COSTS (4Q PRE) RELEASED ON THU, FEB 02, AT 8:30AM With solid nonfarm output growth in 4Q and only a marginal gain in hours worked, we estimate that nonfarm productivity increased 3.4% saar in 4Q. Even with this solid quarter forecasted, we still think that the broader trend for productivity will be soft, and we estimate that nonfarm productivity increased 0.7%oya in 4Q. Solid productivity should help limit growth in unit labor costs, and we forecast that unit labor costs rose 0.5% saar in 4Q. We believe that unit labor costs will be up 4.5%oya in 4Q, which would be solid, but the softest year-ago change since 4Q21. Productivity and costs %q/q, saar 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 Pre Nonfarm productivity 3.0 2.7 -2.4 4.4 -5.9 -4.1 0.8 3.4 Output 8.5 8.9 2.7 9.1 -2.5 -1.2 3.3 3.5 Hours 5.3 6.0 5.3 4.5 3.6 2.9 2.5 0.1 Hourly compensation -1.3 7.4 6.7 8.2 2.1 2.3 3.2 3.9 Unit labor costs -4.2 4.5 9.3 3.6 8.5 6.7 2.4 0.5 year over year % change Nonfarm productivity 5.8 2.2 -0.2 1.9 -0.4 -2.1 -1.3 -1.5 Output 2.2 16.3 6.3 7.3 4.5 1.9 2.1 0.7 Hours -3.4 13.8 6.5 5.3 4.8 4.1 3.4 2.3 Hourly compensation 6.4 2.3 5.5 5.2 6.1 4.8 4.0 2.9 Unit labor costs 0.6 0.1 5.7 3.2 6.5 7.0 5.3 4.5 Source: Bureau of Labor Statistics, J.P. Morgan forecasts EMPLOYMENT (JAN) RELEASED ON FRI, FEB 03, AT 8:30AM We forecast that nonfarm employment increased 175,000 in January while the unemployment rate held at 3.5%. A variety of related indicators point to continued strength/tightness in the labor market, including initial claims coming in at very low levels in recent weeks and the more lagging data on job openings remaining high, and we think this will be reflected in the upcoming employment report. But there are also signs that the pace of job growth is cooling and we think that this also will be evident in the upcoming report. For one, we already see moderation in the pace of job growth reported through December. We also have seen the workweek move down lately, which suggests cooling demand for labor, and temp help employment—a leading indicator of broader labor market developments—also has weakened lately. We therefore think that job growth remained strong in January, but that the monthly job gain was the weakest monthly change in about two years. For the main details of the jobs report, we think that the goods sector added only 5,000 jobs in January, while the private service sector added 155,000. Both of these January changes are projected to be weaker than the recent respective trends for these groupings. The government has been adding jobs in recent months and we think that continued into January, with an increase in related employment of 15,000. We also think that the wage data will behave similarly to the job growth data, with solid results anticipated for January but with moderation in the broader trend. We think that average hourly earnings rose 0.3% in January, with this measure up 4.3%oya. We also look for the average workweek to hold at 34.3 hours in January, with aggregate hours worked up 0.1% based on our estimates for job growth and the workweek. For the household survey, we don’t expect major changes across the main details and we forecast that the main ratios/percentages will be unchanged between December and January after rounding. We look for the unemployment rate to hold at 3.5%, the participation rate to stay at 62.3%, and the employment-population ratio to remain at 60.1%. The January employment report also will contain the annual benchmark revision to the establishment survey which should boost the March 2022 level of employment by 462,000 (0.3%) according to the preliminary announcement. The establishment survey’s seasonal factors also will be updated. The household survey will incorporate updated population controls, making its data starting in January 2023 not directly comparable with earlier periods. Labor market report Aug Sep Oct Nov Dec Jan Total employment (ch, 000s, samr) 292 269 263 256 223 175 Private payrolls 233 255 219 202 220 160 Goods-producing 43 43 49 27 40 5 Construction 9 23 13 15 28 5 Manufacturing 36 17 34 8 8 0 Service-providing inc. govt. 249 226 214 229 183 170 Private service-providing 190 212 170 175 180 155 Transportation/warehousing -2 -18 -8 -22 5 Wholesale Trade 15 7 11 -1 12 Retail Trade 29 -30 -2 -17 9 Financial activities 9 3 11 11 5 Professional/business services 29 25 13 -8 -6 Temporary help services -1 -23 -22 -30 -35 Education and health services 82 82 77 90 78 Leisure and hospitality 13 111 50 79 67 All other private services 14 33 18 43 10 Government 59 14 44 54 3 15 Local education 20 -16 21 23 13 Diffusion index, 1-mo (%, sa) 59.8 64.6 62.9 63.9 60.7 Index of hours worked (%ch, m/m, sa) 0.2 0.3 0.2 -0.2 -0.1 0.1 Manufacturing 0.0 0.1 0.3 -0.2 -0.2 Average length of workweek (hours, sa) 34.5 34.5 34.5 34.4 34.3 34.3 Manufacturing 40.3 40.3 40.3 40.2 40.1 Average hourly earnings (%ch, m/m, sa) 0.3 0.4 0.3 0.4 0.3 0.3 %oya 5.2 5.1 4.8 4.8 4.6 4.3 Household survey Unemployment rate (%, sa) 3.7 3.5 3.7 3.6 3.5 3.5 U-6 rate (%, sa) 7.0 6.7 6.7 6.7 6.5 Civilian labor force (ch, 000s, samr) 724 -95 27 -119 439 Civilian employment (ch, 000s, samr) 422 156 -257 -66 717 Civilian unemployment(ch, 000s, samr) 303 -251 283 -53 -278 Participation rate 62.3 62.3 62.2 62.2 62.3 62.3 Employment/population ratio 60.1 60.1 60.0 59.9 60.1 Source: Bureau of Labor Statistics, J.P. Morgan forecasts SERVICES PMI (JAN FINAL) RELEASED ON FRI, FEB 03, AT 9:45AM We look for the headline activity index for the services PMI to be revised up from 46.6 to 46.7 between the flash and final January reports, with this updated figure showing a 2.0pt move up from the final December print. The PMI data have been looking much weaker than some related activity measures in recent months and we think the firming in the January PMI data could be better aligning the signals across the different measures. We look for additional improvement in the final PMI report for January but don’t expect a particularly large revision relative to the flash print. Services PMI Flash Final Oct 22 Nov 22 Dec 22 Jan 23 Jan 23 Business activity 47.8 46.2 44.7 46.6 46.7 Incoming new business 49.4 46.4 45.7 48.6 Employment 50.1 51.2 51.0 50.7 Business expectations 58.6 63.6 62.9 65.4 Input prices 67.5 66.1 58.9 63.7 Prices charged 56.7 54.6 54.5 54.5 Backlogs of work 46.6 45.5 47.5 47.3 Source: S&P Global, J.P. Morgan forecast ISM SERVICES (JAN) RELEASED ON FRI, FEB 03, AT 10:00AM We forecast that the headline composite for the ISM services survey increased 0.3pt to 49.5 in January. With a substantial 6.3pt drop in the headline reported for December, we think we may see some reversal of this abnormally large drop in the upcoming report. But with a variety of business surveys looking downbeat lately, we don’t think there will be a very large amount of improvement in the January ISM report. ISM services survey Sa Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23 Headline composite 56.4 56.1 55.9 54.5 55.5 49.2 49.5 Business activity (25%)1 59.0 59.3 58.3 55.6 61.6 53.5 New orders (25%) 59.1 60.4 59.2 56.8 55.8 45.2 Employment (25%) 49.5 50.2 52.3 49.2 50.6 49.4 Prices 73.2 72.3 69.8 70.9 70.1 68.1 Nsa Backlog of orders 58.3 53.9 52.5 52.2 51.8 51.5 Supplier deliveries (25%) 57.8 54.5 53.9 56.2 53.8 48.5 Inventory change 45.0 46.2 44.1 47.2 47.9 45.1 Inventory sentiment 50.1 47.1 47.2 46.4 44.2 55.9 New export orders 59.5 61.9 65.1 47.7 38.4 47.7 Imports 48.0 48.2 51.3 50.4 59.5 52.7 Source: Institute for Supply Management, J.P. Morgan forecasts. 1. Nonmanufacturing index weights in parentheses. J.P. MORGAN US FORECAST %q/q, saar %q4/q4 %y/y 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2022 2023 2024 2022 2023 2024 Gross domestic product Real GDP -0.6 3.2 2.9 1.0 0.8 0.5 -0.5 -0.5 1.0 0.4 1.0 2.1 1.3 0.4 Final sales 1.3 4.5 1.4 1.2 0.4 0.6 0.6 0.4 1.3 0.7 0.8 1.4 1.4 0.6 Domestic 0.2 1.5 0.8 1.6 1.5 1.1 0.2 0.0 1.0 1.1 1.5 1.7 1.2 1.0 Consumer spending 2.0 2.3 2.1 2.0 1.8 1.3 0.8 0.4 1.9 1.4 1.5 2.8 1.8 1.2 Business investment 0.1 6.2 0.7 2.1 3.8 3.3 -0.6 -0.6 3.7 2.2 3.6 3.6 2.5 2.2 Equipment -2.0 10.6 -3.7 -1.0 2.0 1.0 -2.0 -2.0 3.8 0.0 2.2 4.3 0.5 0.7 Structures -12.7 -3.6 0.4 0.0 4.0 3.5 -4.0 -4.0 -5.2 0.8 0.9 -7.4 -0.3 -0.3 Intellectual property products 8.9 6.8 5.3 6.0 5.5 5.5 2.0 2.0 7.9 4.7 5.7 8.7 5.7 4.4 Residential investment -17.8 -27.1 -26.7 -10.0 -9.0 -8.0 -5.0 -4.0 -19.3 -8.0 0.5 -10.7 -15.7 -3.1 Government -1.6 3.7 3.7 1.8 0.3 0.1 -0.7 -0.5 0.9 0.4 -0.4 -0.6 1.5 -0.4 Net exports ($bn, chained $2012) -1431 -1269 -1232 -1258 -1319 -1350 -1332 -1312 - - - - - - Exports (goods and services) 13.8 14.6 -1.3 -1.0 -3.3 -3.3 -3.3 -3.0 5.3 -2.7 -2.9 7.2 0.7 -3.0 Imports (goods and services) 2.2 -7.3 -4.6 2.0 4.3 1.0 -4.0 -4.0 1.7 0.8 2.0 8.1 -0.6 0.1 Inventories (ch $bn, chained $2012) 110.2 38.7 129.9 119.1 138.3 135.1 79.4 33.5 - - - - - - Contribution to real GDP growth (% pts): Domestic final sales 0.2 1.5 0.9 1.7 1.6 1.2 0.2 0.0 1.0 1.1 1.5 1.7 1.2 1.0 Net exports 1.2 2.9 0.6 -0.5 -1.2 -0.6 0.4 0.4 0.4 -0.4 -0.7 -0.3 0.2 -0.4 Inventories -1.9 -1.2 1.5 -0.2 0.4 -0.1 -1.1 -0.9 -0.3 -0.3 0.2 0.8 -0.1 -0.2 Income and profits (NIPA basis) Adjusted corp profits 19.7 -0.2 -2.5 -8.0 -12.0 -14.0 -20.0 -20.0 4.0 -13.6 0.4 6.9 -6.8 -9.1 Real disposable personal income -2.3 1.0 3.3 3.4 0.7 -0.2 -0.1 -0.4 -2.3 0.9 1.1 -6.4 1.5 0.3 Nominal disposable personal income 5.0 5.3 6.4 5.3 3.8 2.5 2.0 1.8 3.2 3.4 3.2 -0.2 4.6 2.6 Saving rate1 3.2 2.7 2.9 3.2 3.0 2.6 2.4 2.2 - - - 3.3 2.8 2.0 Prices and labor cost Consumer price index 10.5 5.7 3.1 2.3 3.5 3.2 2.3 2.6 7.1 2.8 2.4 8.0 3.7 2.6 Core 6.6 6.4 4.4 3.6 3.7 3.2 2.5 2.5 6.0 3.2 2.5 6.1 4.2 2.7 PCE deflator 7.3 4.3 3.2 1.9 3.1 2.7 2.1 2.2 5.5 2.4 2.1 6.2 3.1 2.2 Core 4.7 4.7 3.9 3.1 3.1 2.8 2.2 2.2 4.7 2.8 2.1 5.0 3.4 2.3 GDP chain-type price index 9.0 4.4 3.5 2.4 2.3 2.3 2.3 2.3 6.3 2.3 2.3 7.0 3.2 2.3 S&P/C-S house price index (%oya) 19.6 13.1 4.9 2.3 -0.3 -2.6 -5.3 -3.3 4.9 -5.3 2.5 14.1 -1.5 -0.4 Employment Cost Index 5.4 5.1 4.4 4.2 4.0 3.8 3.6 3.2 5.2 3.9 3.3 4.9 4.3 3.4 Productivity -4.1 0.8 3.4 0.5 0.5 1.0 0.5 0.5 -1.5 0.6 1.1 -1.3 0.8 0.8 Other indicators Housing starts (mn units, saar)1 1.647 1.450 1.403 1.390 1.375 1.400 1.410 1.425 - - - 1.555 1.394 1.466 Industrial production, mfg. 2.9 -0.4 -2.5 -0.8 0.5 0.2 -3.0 -3.0 0.9 -0.8 0.5 3.1 -0.6 -0.6 Light vehicle sales (mn units, saar)1 13.3 13.4 14.2 15.8 16.5 17.1 16.8 16.6 - - - 13.8 16.6 17.0 Unemployment rate1 3.6 3.6 3.6 3.5 3.6 3.8 4.1 4.5 - - - 3.6 3.8 4.9 Payroll employment (ch, '000s, samr)1 349 366 247 90 40 -60 -125 -125 - - - 375 -14 0 Nominal GDP 8.5 7.7 6.5 3.4 3.1 2.8 1.8 1.8 7.3 2.8 3.3 9.2 4.6 2.7 Current account balance ($bn)1 -238.7 -217.1 -195.9 -200.6 -205.4 -210.2 -205.2 -210.2 - - - -934.3 -821.4 -916.6 % of GDP -3.8 -3.4 -3.0 -3.0 -3.1 -3.1 -3.1 -3.1 - - - -3.7 -3.1 -3.4 Federal budget balance ($bn)1 - - - - - - - - - - - -1375.0 -1050.0 -1200.0 % of GDP - - - - - - - - - - - -5.4 -3.9 -4.4 1. Entries are average level for the period. Federal balance figures are for fiscal years. Jan 27 1Q23 2Q23 3Q23 4Q23 Interest rate forecast (end of period) Fed funds target (top of range) 4.50 5.00 5.00 5.00 5.00 3-mo LIBOR 4.83 5.10 5.10 5.10 5.10 2-yr Treasury 4.21 4.50 4.30 4.10 3.80 5-yr Treasury 3.62 4.15 4.00 3.80 3.45 10-yr Treasury 3.52 4.00 3.90 3.70 3.40 30-yr Treasury 3.63 4.05 4.00 3.85 3.75 Source: J.P. Morgan US ECONOMIC CALENDAR Monday Tuesday Wednesday Thursday Friday 30 Jan Dallas Fed manufacturing (10:30am) Jan 31 Jan Employment cost index (8:30am) 4Q 1.1% FHFA HPI (9:00am) Nov S&P/Case-Shiller HPI (9:00am) Nov Chicago PMI (9:45am) Jan Consumer confidence (10:00am) Jan 111.0 Housing vacancies (10:00am) 4Q Dallas Fed services (10:30am) Feb FOMC meeting 1 Feb ADP employment (8:15am) Jan Manufacturing PMI (9:45am) Jan final 46.8 Construction spending (10:00am) Dec 0.1% JOLTS (10:00am) Dec ISM manufacturing (10:00am) Jan 48.5 Light vehicle sales Jan 16.3mn Announce 10-year note $35bn Announce 3-year note $40bn Announce 30-year bond $21bn FOMC statement (2:00pm) and press conference (2:30pm) 2 Feb Initial claims (8:30am) w/e Jan 28 200,000 Productivity and costs (8:30am) 4Q pre 3.4% Unit labor costs 0.5% Factory orders (10:00am) Dec 3 Feb Employment (8:30am) Jan 175,000 Unemployment rate 3.5% Average weekly hours 34.3 Services PMI (9:45am) Jan final 46.7 ISM services (10:00am) Jan 49.5 6 Feb Senior loan officer survey (2:00pm) Jan 1Q 7 Feb International trade (8:30am) Dec Consumer credit (3:00pm) Dec Auction 3-year note $40bn Fed Chair Powell speaks (12:00pm) 8 Feb Wholesale trade final (10:00am) Dec Auction 10-year note $35bn New York Fed President Williams speaks (9:15am) 9 Feb Initial claims (8:30am) w/e Feb 4 Auction 30-year bond $21bn Announce 20-year bond $15bn Announce 30-year TIPS $9bn 10 Feb Consumer sentiment (10:00am) Feb preliminary Federal budget (2:00pm) Jan Fed Governor Waller speaks (12:30pm) Philadelphia Fed President Harker speaks (4:00pm) 13 Feb 14 Feb NFIB survey (6:00am) Jan CPI (8:30am) Jan 15 Feb Retail sales (8:30am) Jan Empire State survey (8:30am) Feb Industrial production (9:15am) Jan Business inventories (10:00am) Dec NAHB survey (10:00am) Feb TIC data (4:00pm) Dec Auction 20-year bond $15bn 16 Feb Initial claims (8:30am) w/e Feb 11 PPI (8:30am) Jan Housing starts (8:30am) Jan Philadelphia Fed manufacturing (8:30am) Feb Business leaders survey (8:30am) Feb Auction 30-year TIPS $9bn Announce 2-year FRN (r) $22bn Announce 7-year note $35bn Announce 5-year note $43bn Announce 2-year note $42bn Cleveland Fed President Mester speaks (8:45am) 17 Feb Import prices (8:30am) Jan Leading indicators (10:00am) Jan QSS (10:00am) 4Q advance 20 Feb Presidents' Day, markets closed 21 Feb Philadelphia Fed nonmanufacturing (8:30am) Feb Manufacturing PMI (9:45am) Feb flash Services PMI (9:45am) Feb flash Existing home sales (10:00am) Jan Auction 2-year note $42bn 22 Feb Auction 2-year FRN (r) $22bn Auction 5-year note $43bn FOMC minutes 23 Feb Initial claims (8:30am) w/e Feb 18 Real GDP (8:30am) 4Q second KC Fed survey (11:00am) Feb Auction 7-year note $35bn 24 Feb Personal income (8:30am) Jan Consumer sentiment (10:00am) Feb final New home sales (10:00am) Jan Source: Private and public agencies and J.P. 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