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U.S. Economics: Macro Commentary & Insight

Unemployment Lowest Since 1969
February 3, 2023

  • Nonfarm payrolls surprise; came in substantially higher than anticipated at 517K
  • Unemployment unexpectedly dropped to 3.4%, lowest since 1969
  • Unit labor costs fell in Q4 2022 to 1.1%, down from 2% in Q3 2022
  • FOMC downshifts to 25 basis points after just one 50 basis point increase in December
The market shifted its focus from last week’s GDP and inflation prints toward Wednesday’s FOMC meeting as it prepared for the Federal Reserve’s interest rate decision and any tiny morsel regarding the central bank’s path ahead. Despite some contradictory economic indicators since the last meeting, the downshift towards 25 bps in February was widely anticipated and priced into the market. And like a broken record, the market continued to ignore the Fed’s intent to keep rates higher for longer in pursuit of their 2% inflation mandate, with the futures only giving a 95% probability of a 25 basis point hike at the next meeting. While the Fed has likely entered restrictive territory recently, the favored Fed gauge of Core PCE continues to increase month-to-month, leaving the Fed in a critical phase of this process, where they are likely to continue hiking amidst a slowing economic backdrop. We have a long way to go to get to the FOMC’s 2% target rate, and the descent towards that target isn’t without potential hazards. Berkadia’s base case of reaching a terminal rate of 5.25% in the second quarter appears in order.

Wage inflation remained heightened in 2024, albeit with slower momentum, which indicates some relief of pressures. Private sector wages moved forward by only 1% quarter-over-quarter (QoQ) and represent the smallest gain in over a year. Despite the softening, headline ECI compensation increased to 5.1%, the quickest pace since Q3 1990. On the bright side, private sector wage growth softened to 5.1%, which is only a 0.1 ppt downward move from the previous quarter. Although wage growth remains elevated, the softening seen in the ECI coincides with the moderation in the average hourly earnings from the monthly jobs print.

With wages still in the crosshairs, the Fed closely monitors the ECI report. One concern for inflation, which Fed Chair Powell has beat the drums over for many months, is a wage-price spiral. In short, this is not the case at the moment. But one of the reasons behind the above-pre-pandemic average wage growth rates we see now is because of increases in unit labor costs.

Drivers of Unit Labor Costs

Drivers of Unit Labor Costs
Source: U.S. Bureau of Labor Statistics, Berkadia

The Productivity and Costs report shows key indicators moving in the right direction. The nonfarm business sector saw unit labor costs increase 1.1% in Q4 2022, which illustrates moderation from the previous period and a 3.0% increase in productivity. But the print also reflects a 4.1% increase in hourly compensation from the previous period, which continues an upward trend and a 3.0% increase from a year ago. Furthermore, unit labor costs have increased 4.5% over the last four quarters. In order to return to the Fed’s 2% target, unit labor costs must come down significantly. While the increase in productivity will help close the spread between productivity and compensation (the drivers of unit labor costs), this in turn would moderate the growth in unit labor costs. But productivity has more ground to cover, as does the Fed.

The Fed had not only a good amount of high-impact, last-minute data to consider this week prior to the FOMC meeting on Wednesday but also insightful data points to consider during the ensuing days. Some reports supporting the idea of a downshift were:

  • Consumer Confidence Index fell to 107.1
  • ISM Manufacturing Index fell to a low 47.4, the lowest since May 2020, and third consecutive contraction
  • Q4 2022 productivity increased towards 3.0%, quickest pace in 2022

Yet, some of the reports continue to underline the risk of easing too soon:

  • Nonfarm payrolls came in substantially higher than anticipated at 517K
  • Unemployment unexpectedly dropped to 3.4%, lowest since 1969
  • Job openings were unexpectedly hotter than anticipated at 11 million
  • Quits in December 2022, 4.1 million, remained essentially unchanged from the previous period
  • Initial jobless claims fell substantially short of expectations by 12K
  • Continuing jobless claims came in at 1.66 million, less than the previous period
  • Employment Cost Index (ECI) came in better-than-expected at 1.0% for Q4 2022, but despite the softening, headline compensation rose to 5.1% as wage inflation remains elevated

Fed Funds Rate Projections

Fed Funds Rate Projections
Source: Board of Governors of the Federal Reserve System, Bloomberg, Berkadia

Via the details of the Fed’s December policy meeting and numerous speeches thereafter, policymakers have telegraphed the central bank’s move to increase rates by 25 bps and land on a terminal rate just north of 5% for the current tightening cycle before holding it there for the remainder of the year. With the FOMC meeting adjourned on Wednesday, the former was confirmed, and the latter discounted. Despite this uniform and consistent messaging from the Fed officials, the market continues to completely reject fully pricing in the Fed’s policy guidance.

While this FOMC meeting and statement were comprised of the usual reiteration that the Fed remains “strongly committed” to bringing inflation down in line with its 2% target, the market received insightful guidance. The Fed indicated that it sees further “ongoing rate increase(s)” as necessary. This indicates that there are at least two more consecutive rate increases if we are correctly reading the tea leaves, and the “pace” of rate increases has now become the “extent” of rate increases (an indication that we are approaching the terminal rate but still have a little runway remaining). Ongoing rate increases are also to reach “sufficiently restrictive” levels in which the Fed already sees us as in restrictive territory, but now the emphasis is on how much restriction.

Previously, the Fed wanted to see substantially more evidence that inflation is coming down on a sustained basis. While our thought of “once an accident, twice a coincidence, three times a pattern” still holds true, the Fed has indicated that despite multiple downward inflation prints, they need “substantially more” evidence. There is a lot of gray in the “substantially more” verbiage as it is vague and leaves the Fed with the option to call it quits at whatever point they deem necessary.

The Fed also mentioned that it will weigh incoming economic data as well as the lag effects of its policy decisions when determining the next steps—as if it were not already weighing incoming economic data previously. If the downshift to 25 bps didn’t indicate it, the Fed surely did by highlighting that policy tightening is having an effect as inflation “eased somewhat.”

Regarding the labor market, it remains strong. While an important jobs report was recently released, we also saw a downward surprise in the unemployment rate towards a 53-year low, shocking surge in hiring in Nonfarm payrolls, and increase in average hourly wage prints released today, which will keep pressure on the Fed to further increase rates. The Fed would like to see new job growth moderate enough to trim the spread between labor supply and demand so wages do not contribute to inflationary pressure. The JOLTS report illustrates the continued imbalance, as the number of job openings was unexpectedly hotter than anticipated at 11 million, which now equates to nearly two job openings for every individual searching for a job. The result of this imbalanced market can lead to higher wages.

Despite these prints, we believe the inflation aspect remains in the driver’s seat. Should inflation accelerate or remain “sticky” over the upcoming months, then the “soft landing” narrative will continue to look more fanciful. But if inflation continues to decelerate, the market may ultimately be correct, and we may see the completion of the tightening cycle a little bit sooner.


This commentary and any statements, information, data and content contained therein, and any materials, information, images, links, sounds, graphics or video provided in conjunction with this document (collectively “Materials”) has been prepared for informational purposes or general guidance on matters of interest only, and does not constitute professional advice, advertising or a solicitation. The Materials are of a general nature and not intended to address the circumstances of any particular individual or entity. You should not act upon the information contained in the Materials without obtaining specific professional advice. As such, nothing herein constitutes legal, financial, business, investment or tax advice and you should consult your own legal, financial, tax, investment or other professional advisor(s) before engaging in any activity in connection herewith. The information in the Materials is not a substitute for a thorough due diligence investigation. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the Materials, and, to the extent permitted by law, Berkadia Commercial Mortgage LLC ( together with its affiliates, the “Company”) neither accept nor assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the Materials or for any decision based on them. No part of the Materials is to be copied, reproduced, distributed or disseminated in any way without the prior written consent of the Company.

Questions? Contact us.

Brandon Hardin

Josh Bodin
SVP – Securities Trading

us economic outlook forecast report

2023 U.S. Economic Outlook

The fundamental themes of 2022, namely the Fed, elevated inflation, potential economic recession, and geopolitical conflict are anticipated to continue to be with us throughout 2023. Last year, it was the introduction of those elements that took center stage, while in 2023 emphasis will be placed on the evolution of those elements. Read more in Berkadia’s 2023 U.S. Economic Outlook.

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