Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (February 3, 2023)

February 03, 2023

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

February 3, 2023

This week CEOs and financial markets received mixed news about the US economy.

Last week’s jobs report showed that the US labor market remains on solid footing, with a whopping 517,000 jobs added in January 2023, after an increase of 260,000 jobs (an upward revision) in December 2022. Labor shortages are still severe and layoffs across the US labor market continue to be low. Voluntary quits and job openings are elevated and—after declining from their highest point a year ago—have not changed much since last Summer. Wage growth is also still strong and, although it has come down from its peak in early 2022, wages continue to be growing at well above their prepandemic rate. Altogether, the data underscore that the labor market is still very strong.

The Federal Reserve increased interest rates 0.25 percent, the latest in a series of eight hikes but slower than the increases of a half point in December and 0.75 points in November for a total of 4.5 points over the last year. In his news conference following the decision, Powell stated “we’re talking about a couple of more rate hikes” while noting that “the full effects of our rapid tightening are so far yet to be felt.” In Powell’s view, progress is being made on inflation but that work remains. He reiterated that he does not expect the Fed to cut rates in 2023.

On Wednesday, the President and Speaker Kevin McCarthy (R-CA) met at the White House for over an hour to discuss the debt ceiling. Afterwards, McCarthy said that “[w]e both laid out some of our vision of where we want to get to. I can see where we can find common ground” and that he and the President had agreed to address the issue in a “responsible” way. However, the meeting is only the start of a series of negotiations that will likely continue for some time.

The Employment Cost Index report shows that wages and benefits continued to grow in Q4 2022. Compensation for private industry workers grew by 5.1 percent from the year prior, continuing to decelerate from Q2 and Q3.

For more information on these and other events, please see below:

1. 2023 STARTS WITH STRONG JOB GAINS

2. PRESIDENT, SPEAKER MEET ON DEBT CEILING

3. FED RAISES RATES 25 BASIS POINTS, EXPECTS “A COUPLE” MORE INCREASES

4. THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX DECLINES IN JANUARY

5. MANUFACTURING SURVEYS DECLINE FOR THIRD MONTH

6. Q4 2022 EMPLOYMENT COST INDEX SHOWS ELEVATED BUT COOLING WAGE GROWTH

7. INITIAL UNEMPLOYMENT CLAIMS DECLINE SLIGHTLY

8. JOB OPENINGS RISE DESPITE LAYOFFS IN KEY SECTORS

9. COVID-19 PUBLIC HEALTH EMERGENCY AND NATIONAL EMERGENCY TO END MAY 11

10. DEPARTMENT OF TRANSPORTATION AWARDS $1.2 BILLION TO NINE MEGAPROJECTS

11. NEW OIL DRILLING IN ALASKA

12. COLORADO RIVER WATER SHORTAGE

13. MONKEYPOX UPDATES

1. 2023 STARTS WITH STRONG JOB GAINS

Last week’s jobs report showed that the US labor market remains on solid footing, with a whopping 517,000 jobs added in January 2023, after an increase of 260,000 jobs (an upward revision) in December 2022. Labor shortages are still severe and layoffs across the US labor market continue to be low. Voluntary quits and job openings are elevated and—after declining from their highest point a year ago—have not changed much since last Summer. Wage growth is also still strong (4.4 percent growth over the past year) and, although it has come down from its peak in early 2022 (5.9 percent growth), wages continue to be growing at well above their prepandemic rate (2-3 percent growth). Altogether, the data underscore that the labor market is still very strong. This jobs report supports our expectation that the Federal Reserve may raise interest rates two more times by 25 basis points each over the coming months. For a more detailed assessment of the moves, see the ESF Center’s analysis.

2. PRESIDENT, SPEAKER MEET ON DEBT CEILING

On Wednesday, the President and Speaker Kevin McCarthy (R-CA) met at the White House for over an hour to discuss the debt ceiling. Afterwards, McCarthy said that “[w]e both laid out some of our vision of where we want to get to. I can see where we can find common ground” and that he and the President had agreed to address the issue in a “responsible” way. However, the meeting is only the start of a series of negotiations that will likely continue for some time, particularly with McCarthy’s very narrow House majority, some of whose members favor aggressive spending cuts beyond what the Senate is likely to accept. McCarthy had earlier said that he wants “to find a reasonable and responsible way that we can lift the debt ceiling but take control of this runaway spending,” while noting that Social Security and Medicare cuts are “off the table.” Republicans have not yet outlines specific spending cuts as part of “structural” fiscal reform; the President said he would release his budget March 9 and asked that McCarthy do the same. Also on Wednesday, Federal Reserve Chair Jerome Powell endorsed Congressional action on the debt ceiling: “There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due. And any deviations from that path would be highly risky,” adding that “no one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner."

3. FED RAISES RATES 25 BASIS POINTS, EXPECTS “A COUPLE” MORE INCREASES

The Federal Reserve Wednesday increased interest rates 0.25 percent, the latest in a series of eight hikes but slower than the increases of a half point in December and 0.75 points in November for a total of 4.5 points over the last year. The Federal Open Market Committee also noted that it would “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.” In his news conference following the decision, Powell stated “we’re talking about a couple of more rate hikes” while noting that “the full effects of our rapid tightening are so far yet to be felt.” In Powell’s view, progress is being made on inflation but that work remains, commenting that inflation in core services ex-housing (or “super core” inflation) remained too high but that the trend in goods inflation was positive and relief in housing inflation was “in the pipeline.” While Powell reiterated that he does not expect the Fed to cut rates in 2023, he found it “very reassuring” that “[t]he fact that people now do generally believe that it will come down, that'll be part of the process of getting it down. And it's a very positive thing.” On the broader economy, Powell said that his “own assessment would be that growth would continue, positive growth will continue, but at a subdued pace as it did last year,” signaling his view that slow growth, rather than a recession, in 2023 is most likely. For a more detailed assessment of the moves, see the ESF Center’s analysis.

4. THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX DECLINES IN JANUARY

The Conference Board Consumer Confidence Index® decreased in January following an upwardly revised increase in December 2022. The Index now stands at 107.1 (1985=100), down from 109.0 in December (an upward revision). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased to 150.9 (1985=100) from 147.4 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell to 77.8 (1985=100) from 83.4 partially reversing its December gain. The Expectations Index is below 80 which often signals a recession within the next year. “Consumer confidence declined in January, but it remains above the level seen last July, lowest in 2022,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Consumer confidence fell the most for households earning less than $15,000 and for households aged under 35.” “Consumers’ assessment of present economic and labor market conditions improved at the start of 2023. However, the Expectations Index retreated in January reflecting their concerns about the economy over the next six months. Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead. Meanwhile, purchasing plans for autos and appliances held steady, but fewer consumers are planning to buy a home—new or existing. Consumers’ expectations for inflation ticked up slightly from 6.6 percent to 6.8 percent over the next 12 months, but inflation expectations are still down from its peak of 7.9 percent last seen in June.”

5.  MANUFACTURING SURVEYS DECLINE FOR THIRD MONTH

Two separate US manufacturing surveys, one by the Institute for Supply Management (ISM) and one by S&P Global, both showed a decline for January, the third consecutive month of decline after a long 28-month expansion. In the ISM data, most components measured were in contraction and the overall index read 47.4, below the neutral mark of 50 and the previous month’s 48.4. This was the lowest mark since May 2020, which had an index of 43.5. The decline was led by new orders, a leading indicator, which were well into contraction territory at 42.5. The production index and prices index were also in decline territory but employment remained in slight expansion. The S&P Global data, with an overall reading of 46.9, also recorded its lowest reading since May 2020. New orders, down for the eighth straight month, led the decline, with production following. S&P Global also showed very slightly increasing employment. However, unlike ISM, S&P Global showed slightly positive price pressures.

6. Q4 2022 EMPLOYMENT COST INDEX SHOWS ELEVATED BUT COOLING WAGE GROWTH

The Employment Cost Index report shows that wages and benefits continued to grow in Q4 2022. Compensation for private industry workers grew by 5.1 percent from the year prior, continuing to decelerate from 5.5 percent and 5.2 percent in Q2 and Q3. Growth in the cost of employee benefits also slowed to 4.8 percent. Wages rose fastest for occupations facing the greatest labor shortages: in-person service workers (including food services, cleaning, and personal care) grew by 7.0 percent over the last year while wages for transportation and production workers grew by 5.3 percent. The report indicates that the economy has passed peak wage growth, with forecasts from The Conference Board projecting an imminent recession in early 2023 that will lower labor demand. However, continued labor shortages are expected to persist into 2023. Nearly 85 percent of CEOs expect to increase wages by 3 percent or more over the next year according to The Conference Board CEO Confidence Survey, suggesting that wage growth will continue to be stronger than the last decade when it hovered between 2 to 3 percent.

7. INITIAL UNEMPLOYMENT CLAIMS DECLINE SLIGHTLY

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 183,000 for the week ending January 28, a decrease of 3,000 from the previous week’s unrevised level of 186,000. The 4-week moving average was 191,750, its lowest mark since May 2022. This level of claims is low by historical standards and well below the highs of 261,000 in July, reflecting continued labor market strength even as some leading economic indicators tip into negative territory. The latest economic forecast from The Conference Board shows the unemployment rate rising to 4.5 percent, well above its current level of 3.5 percent, by the fourth quarter of 2023.

8. JOB OPENINGS RISE DESPITE LAYOFFS IN KEY SECTORS

The Bureau of Labor Statistics reported that job openings in the US rose to 11 million in December, rising from 10.4 million following downward revisions of roughly 100,000. Industries seeing large increases in job openings were accommodation and food services (+409,000), retail trade (+134,000), and construction (+82,000), which a significant decline in information (-107,000). However, job openings remain roughly 850,000 below the peak reached in March 2022. Signaling the job market remained strong to close the year, total layoffs remained flat in December at nearly 1.5 million. Layoffs ticked up in several specific sectors indicating some softening of conditions. Layoffs for workers in construction and in professional and business services, which includes the bellwether of temp agency workers, each touched their highest levels since December 2020. Meanwhile, worker quits declined marginally in December to 4.1 million, remaining well below the 2022 high of 4.4 million in March.

9. COVID-19 PUBLIC HEALTH EMERGENCY AND NATIONAL EMERGENCY TO END MAY 11

On Monday, the Administration informed Congress of its intention to end the pair of national emergencies related to COVID-19 on May 11. According to the Administration’s plan, the national emergency and the public health emergency (PHE), which are set to expire on March 1 and April 11, respectively, will be extended briefly to end simultaneously in May. The plan aligns to the commitment to provide at least 60 days’ notice prior to termination and avoid what the Administration calls “wide-ranging chaos and uncertainty throughout the health care system.” During the height of the pandemic, hundreds of rules were suspended under the Medicare and Medicaid programs, with the changes generally followed by private insurers. Under the PHE, special Medicaid rules provided extra funding to states to expand coverage, while hospitals and nursing homes relied on temporary flexibilities. Congress in December detached those programs from the PHE, extending some flexibilities for two years while requiring the orderly wind-down of Medicaid rules scheduled for May 1. Other regulatory flexibilities under the two emergencies will end at that time unless otherwise extended by Congress or administrative rulemaking. House Republicans pushed for a vote on Tuesday on a bill that would have terminated the public health emergency immediately. That vote failed, breaking along party lines.

The May termination date also provides additional time to address border security plans. Title 42 authority, which allows the expulsion of migrants because of health concerns, will also conclude at the termination of the PHE despite currently remaining in force under a December Supreme Court ruling. While the Administration claims that the “number of migrants crossing the border has been cut in half” since new parole rules were instituted in early January, it also has repeatedly asked for more preparation time under the expectation that lifting Title 42 authorities will “result in a substantial additional inflow of migrants at the Southwest border.”

10. DEPARTMENT OF TRANSPORTATION AWARDS $1.2 BILLION TO NINE MEGAPROJECTS

The Department of Transportation Tuesday announced $1.2 billion in awards under a new competitive grant program under the Infrastructure Investment and Jobs Act for large projects. The program, National Infrastructure Project Assistance, but colloquially known as “Mega,” focuses on projects that are “so large and complex that they defy traditional funding systems,” according to Transportation Secretary Pete Buttigieg. The largest award was $292 million for concrete casing at Hudson Yards in New York City, effectively a prerequisite to a long-anticipated Hudson River tunnel known as the Gateway Project, with the President adding saying “I promise you we’re going to get it done.” The Brent Spence Bridge, a key freight infrastructure corridor between Ohio and Kentucky, will receive $250 million, complementing $1.3 billion already received through a competitive grant program for large bridges.

11. NEW OIL DRILLING IN ALASKA

The Washington Post reported that the Administration is considering partial approval for a major oil project on the North Slope of Alaska. ConocoPhillips proposed the $8-$10 billion Willow project, which would be on Federal territory, with five well pads. The final decision could recommend between one and three pads; the company has said that three, matching a preliminary proposal from last summer, is the minimum needed to make the investment economic, generating up to 629,000,000 barrels of oil over 30 years. A decision is expected before the end of February, as a positive decision would require the company to begin construction of ice roads almost immediately or wait until next winter. Alaska’s Congressional delegation supports the project, while several environmental groups oppose it.

12. COLORADO RIVER WATER SHORTAGE

States in the Colorado River basin were unable to reach agreement to restrict water usage, raising the chance that the Federal government will impose mandatory cuts later this year to address serious declines in the level of the river and Lakes Mead and Powell. Six states (Arizona, Colorado, Nevada, New Mexico, Utah, and Wyoming) agreed on a proposal; California, the largest user of Colorado River water, did not. The Interior Department had urged voluntarily plans to reduce water usage by 2,000,000-4,000,000 acre feet, a significant portion of the average annual flow. (An acre foot is 326,000 gallons of water.) The six states endorsed about 2,000,000 acre feet of reduction; California offered to cut 400,000 acre feet instead of a proportionate 1,000,000 acre feet reduction. An important issue is the question of how to balance reductions between agricultural use (which generally has priority and senior rights to water use) and urban uses; agriculture uses about 80 percent of the river’s flow.

13. MONKEYPOX UPDATES

As of February 1, the US has confirmed a total of 30,123 cases of mpox, formerly known as monkeypox. States with the highest case numbers include California (5,725), New York (4,222), Texas (2,901), Florida (2,865) and Georgia (1,988). Globally, as of February 1, 85,531 cases have been confirmed, with 84,238 cases confirmed in locations that have not historically reported mpox. The countries with the highest case numbers include the US (30,120), Brazil (10,745), Spain (7,528), France (4,128), and Colombia (4,072). A total of 77 deaths have been reported in locations that have not historically reported mpox.

Mpox Public Health Emergency Ends:  The Administration ended the public health emergency (PHE) for mpox, formerly known as monkeypox, on January 31, after saying it did not expect to renew the PHE “given the low number of cases today,” a much lower rate than during the summer peak. For the past month, average daily cases reported to CDC hovered in the single digits, down from an August 1 peak of 624 daily cases. As of February 1, CDC will no longer provide weekly data on mpox cases.