The Big Idea

It’s déjà vu all over again

| February 9, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Yogi Berra offered up this nugget to signify, as only he could, the feeling that we have seen this before. I am getting that sensation as I scan the economic landscape. The similarities between early 2023 and the beginning of this year have been uncanny. This is no guarantee that the story of the full year will end up in the same place, but the parallels offer interesting food for thought.

Growth outlook

A year ago, the majority of economists were calling for a recession by the spring.  That forecast proved drastically wrong.  In fact, as the data currently stand, all four quarters of 2023 posted real GDP growth of over 2% annualized—above where most would peg the long-term trend.

While economists have plus signs in front of their forecasts for the first half of 2024, the theme is similar.  After stellar advances in the second half of last year, averaging over 4% annualized in real terms, the median estimate according to Bloomberg’s monthly survey of economists in January had real growth in the first quarter at 1% and the second quarter at only 0.5%.  So, for the second time in a row, most forecasters are calling for a sharp and abrupt slowing in the economy to begin the year.

While I am currently far less optimistic about growth for the year ahead than I was 12 months ago, I came into January anticipating that the economy would retain solid momentum in the first half of the year before cooling in the summer and fall.

So far, the economic data, several examples of which I will explore below, appear to support a relatively upbeat view, at least for now, and point to the consensus proving too pessimistic for a second year in a row.


Perhaps the most dramatic example of strong data in early 2024 has been payroll employment.  Last month’s surge in jobs was a repeat January performance.

A year ago, payrolls had been rising substantially in late 2022.  Going into the January 2023 employment report, payrolls had exceeded the consensus forecast for nine months in a row. But economists were still calling for deterioration from a 223,000 payroll gain in December to a 190,000 gain in January.  Beyond that, forecasters were exceedingly gloomy. The January 2023 monthly Bloomberg survey showed a median projection for payroll employment gains of 100,000 a month for the first quarter and losses of 45,000 a month for the second quarter.

In contrast, I called for a 300,000 jump in payrolls for January 2023, based in large part on the idea that in periods that typically have seasonal layoffs, the job cuts would be smaller than usual, leading to big seasonally adjusted advances.

In the end, payroll jobs surged by 517,000 in January 2023, blowing those recessionary projections for early 2023 out of the water.  While this reading was undoubtedly boosted by the seasonality phenomenon, employment continue to grow faster than generally expected through most of last year, driving the consumer and, in turn, the broader economy forward.

The same sequence played out this year.  As with GDP, the forecasts of a slowdown were somewhat less dramatic than a year ago but still striking.  The latest Bloomberg monthly survey medians had payroll gains averaging 110,000 in the first quarter and 68,000 in the second. For the month of January, the median forecast was a gain of 185,000.   January’s report blew expectations out of the water, with payrolls increasing by 353,000 on top of a massive upward revision to the December tally.

Note that if we add the revisions to the November and December gains to the January rise in jobs, the “all-in” gain was 479,000, only about 50,000 short of the combined job growth that the Bloomberg monthly survey called for in the entire first half of the year.

To be sure, I believe that the labor market is moderating on an underlying basis and that job gains will slow as the year progresses, especially relative to the January explosion.  Nevertheless, as was the case a year ago, those with views at or below the consensus already need to substantially boost their projections for 2024.

ISM non-manufacturing report

In the first week of 2023, at a time when, as noted above, economists were convinced that a recession was imminent, the ISM non-manufacturing survey composite index for December delivered what at the time seemed to be a compelling confirmation of an impending downturn.  The gauge, which had been a robust 56.5 in November, plunged below the breakeven mark to 49.6 in December. Recession fears suddenly gripped financial markets, with the Fed’s constant-maturity 10-year Treasury yield and the year-ahead fed funds futures contract both falling by 16 bp on the day.

However, the ISM plunge turned out to be a head fake.  A month later, the ISM non-manufacturing composite measure rebounded to 55.2 and, despite some ups and downs, remained well above 50 throughout 2023.

Yogi’s déjà vu feeling hit hard for me a month ago, when the ISM non-manufacturing composite index for December 2023 slid to 50.6.  Just as had been the case a year before, the January 2024 reading bounced back nicely, rising to 53.4, which matched the best result since August.

Indeed, the tone of anecdotal repprts has been brightening recently.  When Fed Chair Powell was asked at his January FOMC press conference if there was anything noteworthy from the array of news from contacts around the country communicated to the FOMC by bank presidents, he responded that “I think that what you’re hearing now is things are picking up a bit.  Not in every district and not every person that we talk to, but overall, it feels like you’re hearing things picking up at the margin.”  Richmond Fed President Barkin made a similar comment in recent days, noting that business executives are no longer worried about a recession, as they had been for much of 2023.

One point of contrast

There is one key difference between the economic outlook entering 2023 and this year.  At the end of 2022, real consumer spending fell in November and December, and economists believed that the consumer was leading the economy into recession. The third shocking indicator for the real economy in early 2023 came when January consumer spending exploded higher, rising by 1.1% in real terms, more than reversing the weakness seen in late 2022.

A key reason that projections entering 2024 were less negative than a year prior is that consumer spending ended last year on a good footing, advancing by 0.5% in November and in December.  In light of that unsustainably strong performance, I expect a softening in early 2024, in stark contrast to the sharp rebound seen in January 2023.  Though not my baseline expectation, one more shoe that could drop to further shred the relatively gloomy median forecasts entering the year would be a third consecutive robust consumer spending gain in January.  Watch that data due out later this month.

Will inflation also give a repeat performance?

The final piece of the puzzle a year ago that dashed the consensus view was a reacceleration of inflation.  As of early January, the core CPI had slowed dramatically to around a 3% annualized pace in the last three months of 2022.  However, upward adjustments to the November and December readings with the annual revisions released in early February followed by a 0.4% core CPI reading for January 2023 dealt a serious blow to the inflation optimism that had pervaded entering the year.  Things only got worse at the end of February, when the January core PCE deflator posted a 0.6% surge.

As was the case in late 2022, core inflation trended sharply lower in the second half of 2023.  In my view, the progress seen in the headline and core figures in recent months probably overstates the degree of underlying improvement, as I laid out last week. I would not be surprised to see the January inflation figures accelerate again this year, offering another reason to invoke Yogi’s famous quote.

Stephen Stanley
1 (203) 428-2556

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