Government spending provides boost to the economy, but this will not persist, and other indicators signal a slowdown. Market is now expecting the first cuts to come in the second half of 2024.

The fragility of the US economy makes the current level of rates appropriate, and this will be maintained until the second half of 2024. Growth is being supported by government spending and job creation. Spending has reached a historic high, but we do not expect it to be maintained going forwards. Overall, we expect that at the next meeting on December 13, 2023, the Federal Reserve will keep rates at their current level and keep them for a longer period than generally expected.

Job openings are declining and rate of hirings are falling. We expect more layoffs in the coming months and overall, an increase in the unemployment rate. Wage inflation in private sector remains high at 4% year-on-year – something the Fed must keep an eye on.

In November, nonfarm employment surged by 199k, surpassing expectations and marking 35 consecutive months of job creation in the US. The uptick primarily occurred in the health and government sectors, which means future increases in public spending. Furthermore, the unemployment rate dipped to 3.7 per cent, maintaining its 22-month streak below 4 per cent. This decline in unemployment was attributed to the conclusion of strikes in the US, leading to a 47,000-worker increase, coupled with the onset of the Christmas campaign. Moreover, wages in the private nonfarm sector rose by 12 cents, a 0.4 per cent increase in November, and a 4 per cent rise year-over-year.

However, October witnessed a staggering drop in job openings to 8.7 million, falling well below market expectations and hitting the lowest level since March 2021. Consequently, the number of job openings barely exceeded the number of unemployed workers by 2.2 million, marking the lowest margin since July 2021. Additionally, the rate of job resignations decreased marginally, and the hiring rate fell to 3.7 per cent, below the 10-year average of 3.9 per cent, despite previously peaking above 6 per cent. Layoffs surged by 32,000 in October, signalling a simultaneous decline in job openings, a rapid slowdown in hiring, and an increase in layoffs.

While the number of individuals receiving benefits after the initial week dropped by 64k to 1.861 million in the last week, continued claims have shown an increasing trend since mid-September.

Despite this mixed data, the labour market is showing weakness, and the government is boosting public spending due to job creation. Looking ahead, however, an expected increase in layoffs in the new year could raise the unemployment rate, which could reduce consumer spending at a time when the economy is weak.

Consumer sentiment improves as the Christmas season approaches but still below pre-Covid levels.

The University of Michigan's consumer confidence index increased 13 per cent, rising to 69.4 in the first weeks of December. This indicator is around 39 per cent above its lowest measurement recorded in June 2022 but is still below pre-pandemic levels. This growth offsets the falls of previous months. Consumers are more optimistic about inflation, and this is reflected in inflation expectations for the next 12 months falling to 3.1 per cent from 4.5 per cent in November.

We believe that the labour market will worsen, and the indicator could have contractions in the next readings.

Manufacturing sector remains stable, and the service PMI improved somewhat in October. The trade balance continues to be negative and growing larger despite a reduction in the negative balance with China.

In October, the manufacturing sector saw no change, while the services PMI showed a slight improvement. This enhancement in the services sector boosted business activity, production, and employment. However, orders remained stagnant from the previous month, while company inventories grew. Moreover, there was a noticeable relief in price pressures. Although the services PMI is on an upward trajectory, the challenge lies in tackling inflation, especially in services, which tends to be the stubbornest. Achieving the 2 per cent objective might prove to be quite challenging if this trend continues and traditionally the last leg to get inflation to target is the most difficult to achieve.

The PMI trend is supporting, among others, the negative trade balance. The United States faced another setback with a $64.3 billion deficit in October, a 5.1 per cent increase from September. This imbalance resulted from a decline in exports in contrast with a surge in imports. The trade balance with China displayed a deficit of $23.9 billion, a marginal improvement compared to September.

The foreseeable future might witness some improvement, but there's a looming concern about foreign trade, particularly a potential drop in exports due to the weakness of some markets.