Author: Tim Sharp
Researcher: Jack Williams
Published: March 12, 2023
Recent emergence of bearish data on the US economy, alongside the failing of two prominent financial institutions in the states such as Silicon Valley Bank, has prompted investors to reassess both the outlook for the US recession in the coming months, and the Fed’s ability to raise interest rates further.
Construction job openings in the US dropped heavily in January, plunging by more than 240,000, representing a near 50% fall from the prior month’s construction job postings figure.
Construction in the USA is a massive contributor to GDP and while it’s contribution as a percentage of GDP has been gradually falling in recent years, the sector still makes up around 3.90% of the overall GDP figure.
The near 50% fall witnessed in January was the largest ever monthly decline in construction job openings data history which has been running for nearly 20 years. On a wider lens, overall job openings dipped only slightly in January suggesting the wider economic picture is still at somewhat of a strength.
Figure 1 – US 2021 GDP By Sector
This matters as fed members in recent months have renewed their hawkishness and are looking to push ahead with further rate hikes, both of the recent banking collapses and the recent release of construction jobs data, which throws a spanner in the works, further complicating the issue.
Many investors believe the economic impact from the 4.5% worth of interest hikes the Fed has already delivered over the past 12 months have not been felt fully by investors. Economist Milton Friedman wrote in length regarding his view on the lag that monetary policy works with; Friedman claims it can take years for Fed interest rate changes to make their way through to the economy. Although useful to note, most of his monetary policy work was published in the late 60’s and the makeup of economies now are very different from what they were in the period his work was published, the interest rate was still relatively high around the time of his publications 4.6-5.7%.
This theory has already started being priced into markets with fed swaps pricing no additional rate hikes as the most likely scenario, and around an 80% probability being priced for no rate hike on the March 22nd meeting. Vastly different from the probabilities the market was pricing even this time last week.
https://www.statista.com/statistics/248004/percentage-added-to-the-us-gdp-by-industry/
https://www.jstor.org/stable/1828534
https://live.barcap.com/PRC/publication/FC_TEJ-IH4gfiB-IH4g_640f47431055c101cec9f9ee
https://www.axios.com/2023/03/09/construction-softness-underscores-feds-tough-call
https://www.ft.com/content/7e7fdddb-724c-42fd-98ee-5d7248d53334
https://www.ft.com/content/b860ebb6-f202-4ec6-a80c-8b1527c949f4
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