A New Administration Gets Down to Business

 

January Recap and February Outlook

 

January seemed to go on forever, as the country faced extreme weather and devasting wildfires. The  new administration got underway with a lot of sound and fury, particularly around tariffs, which had been a highlight – or a wild card – of the campaign promises. This temporarily caused some market turmoil, but a reversal in short order seemed to validate the market’s perception that this business-oriented administration may have a bark that is worse than its bite.

At its late January meeting, the Federal Reserve paused as anticipated, but the accompanying statement was perceived as hawkish, leading to the belief that despite the new administration’s preference for lower-and-sooner rates, the status quo of higher-for-longer will likely remain in effect.

 

Let’s get into the data:

 

·       Inflation, as measured by CPI, bumped up slightly.  CPI rose 2.9% for the 12 months ended in December. This was in line with Dow Jones economists’ forecasts.

·       Non-farm payrolls for January came in at 143,000. The U.S. Bureau of Labor Statistics reported fewer than the 170,000 jobs that were expected, but the unemployment rate fell to 4%.

·       Consumer confidence declined. The Conference Board Consumer Confidence Index® declined by 5.4 points in January, following a decline in December.  

·       The Fed held rates steady. The key short-term rate remained in a range between 4.25%-4.5%.

 

What Does the Data Add Up To?

 

The new administration inherited a strong economy, if measured by data around GDP, labor markets and lower inflation. The Federal Reserve has room to assess future moves, even with a slightly weaker labor market reading in January.

Consumers, tired of the lingering effects of sky-high inflation that are continuing to be felt at the grocery store, and everywhere else, had a different read on the economy. This doesn’t appear to have lifted yet, as consumer confidence continues to decline. It’s important to note that The Conference Board reports that “Consumer confidence has been moving sideways in a relatively stable, narrow range since 2022.” January’s number was at the low end of that range, but it doesn’t mark a significant downward departure.

The first ten or so days of the new administration have been non-stop action, not always necessarily forward. That’s not bad news. The Trump administration is taking a bold approach to policy and setting some big stakes in the ground, but the end result doesn’t appear to be much different than expectations. Tariff announcements on Mexico and Canada were met with cooperation in this round and are on hold for now. This is largely what the market expected. Even if some form of tariffs is eventually enacted, the threat of higher inflation and a cratering stock market has receded for now.

 

There was some good news in the CPI data, as shelter costs, which have been slow to come down and make up a big component of CPI, experienced the smallest one-year gain since January 2022.

The Fed was mostly concerned about inflation at the January meeting and removed the language that inflation “has made progress” toward 2% that was present in the December statement. Instead, labor market conditions were referred to as “solid,” while inflation is “somewhat elevated.” The non-farm payroll data, even with lower unemployment, doesn’t shake the solid foundation of labor where the economy is concerned. It may not be the “weakness in the labor market” that Powell referenced would be necessary before resuming rate cuts.

 

 

Chart of the Month: A January Slowdown, But A Solid Labor Market Overall

 

U.S. Non-Farm Payrolls

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