Key takeaways from conflicting U.S. economic data releases

Executive summary:

  • U.S. manufacturing survey points to contraction
  • January jobs growth crushes expectations in U.S.
  • U.S. Q4 earnings season shaping up to be a disappointment

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Research Analyst Laura Bardewyck discussed recent U.S. economic data releases and provided an update on U.S. fourth-quarter earnings season.

U.S. manufacturing slumps while labor market stays robust. What gives?

Bardewyck and Eitelman opened the conversation by examining the latest U.S. macroeconomic data points, which Eitelman noted have been all over the place in the past few weeks. “Some indicators have been very strong, and others have been very weak, leaving the current state of the economy somewhat open to interpretation,” he remarked.

For instance, Eitelman said that one of his favorite leading indicators for the business cycle—the Institute for Supply Management (ISM)’s new orders index for the manufacturing sector—sank to a level of 42.5 during January. “This is a very low reading by historical standards,” Eitelman noted, adding that outside of economic recessions, the index hasn’t dipped to such a low level since the 1950s. Similarly, the U.S. Federal Reserve (Fed)’s newly released loan officer survey showed a marked tightening in lending standards and a pretty big step down in demand for loans, he added. “Both of these surveys are red flags for the business cycle,” Eitelman stated.

On the other hand, however, some U.S. economic indicators have come in really strong, he said, including the January employment report. The report, released Feb. 3 by the Labor Department, showed that the American economy added 517,000 nonfarm payrolls last month while the unemployment rate fell to a 53-year low of just 3.4%, Eitelman remarked.

So, what to make of the conflicting data points? Eitelman said there are probably two key takeaways, the first being that there’s a tremendous amount of macroeconomic uncertainty at the moment in the U.S. The second takeaway is that the nation’s labor market is probably too strong right now, he stated, noting that cooling down jobs growth has become a key focus for the Fed in its ongoing quest to tame inflation.

Together, both factors have led to a fair amount of volatility in financial markets, Eitelman said, particularly in fixed income markets. The strength in the labor market has led to a rise in yields, he noted, explaining that investors are pricing in the possibility that the Fed might continue hiking rates—not only at its next meeting in March, but potentially in May and perhaps a bit beyond that as well.

Q4 earnings season: A disappointment?

Turning to U.S. fourth-quarter earnings season, Eitelman said roughly two-thirds of S&P 500 companies have reported results so far. “Frankly, it’s been a pretty disappointing earnings season,” he stated, noting that U.S. earnings are on track to contract by 4% to 5% on a year-over-year basis. Eitelman said that this expected decline matches what consensus expectations were heading into the season—which is actually unusual. “Typically, what tends to happen is that companies will set a low bar for earnings going into the reporting season—and then they’ll beat that bar and deliver positive earnings surprises,” he explained.

The fact that this isn’t happening—that instead, companies are failing to exceed their low expectations—is actually pretty bad news, Eitelman said. In addition, forward earnings estimates for 2023 as a whole have been getting downgraded pretty aggressively, he noted.

“Overall, corporate fundamentals are weakening a little bit at the margin. Companies are seeing pricing pressures come down, but their costs are still sticky—and this is challenging profit margins,” he explained. Given this, Eitelman said he sees the earnings outlook as probably still skewing a bit more to the negative side of the ledger due to the impacts of slowing growth.

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