Initial January economic reports, including impressive job growth and improving consumer and business sentiment readings, are all consistent with healthy economic growth.

Highlights for this week include:

  • Initial January economic reports, including impressive job growth and improving consumer and business sentiment readings, are all consistent with healthy economic growth.
  • Better-than-expected economic growth in the fourth quarter of last year is supporting better-than-expected profits, with earnings growth now coming in at 8.4% after starting earnings season with expectations much closer to just 4.0% growth.
  • The early first quarter of 2024 positive economic readings suggest the pattern of exceeding earnings expectations can continue. This would provide further support for stocks.

A Strong Labor Market Report Bodes Well for Economic Growth

Nonfarm payrolls expanded an impressive 353,000 in January, nearly double the consensus of 185,000, with the prior two months revised up by 126,000. The unemployment rate remained at 3.7%. Job creation at the start of the year was widespread across industries, an encouraging signal for future economic growth.

Average hourly earnings (AHE) rose 4.5% on a y/y basis, a four-month high. But the average workweek dropped 0.2 hours to 34.1 hours, the shortest it has been since June 2010, excluding the pandemic shutdown. Part of it was likely due to inclement weather across most of the country. As a result, aggregate weekly payrolls, which combine payrolls, hours, and earnings, grew at a slower 4.7% y/y rate, basically in line with the pre-pandemic pace. This suggests continued personal income and spending growth, but likely at a slower pace than last year.

Consumer Sentiment Improvement Continues

The University of Michigan Consumer Sentiment Survey saw its biggest monthly jump since December 2005, and to the highest level since July 2021. Both current conditions and expectations improved, with broad-based gains across age, income, education, region, and political affiliation. Sentiment is up 21.7% from a year ago, consistent with continued economic expansion.

January Business Surveys Also Support the Healthy Economic Outlook Narrative

Both the ISM Services and Manufacturing PMIs (timely business surveys) showed improvement in January. The ISM Services PMI rebounded to a five-month high, with all PMI components in expansion territory last month. The increase was led by a rebound in the employment index while new orders also picked up. Supplier deliveries slowed and business activity grew at a steady pace. The ISM estimates that the latest Services PMI corresponds with 1.5% annualized economic growth. The ISM Manufacturing PMI rose to the highest level since 2022, suggesting further stabilization in factory activity. The increase in the PMI was led by a jump in new orders, which moved into expansion territory for the first time since August 2022. It was the biggest monthly increase since October 2020.

International business surveys also showed improvement, with the global composite (services and manufacturing) PMI rising for a third straight month in January to an eight-month high. Leading indicators within the report were constructive. The new orders index showed its strongest expansion in seven months. The future output index also jumped to its best level since June, led by both the manufacturing and services sectors. Improvements in the business surveys which suggest better economic momentum, have historically been positive for stocks.

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