Last year witnessed robust economic growth in the U.S., fueled by job gains and wage increases. However, recent revelations raise concerns about the sustainability of these gains, questioning whether they were merely a mirage.
The third quarter saw a significant annualized jump of 4.9% in Gross Domestic Product (GDP), and economists project an initial reading of 1% growth for the final quarter of 2023. Despite these positive figures, the Labor Department has been revising its monthly employment data, indicating fewer new jobs added each month than initially reported. Between September and November, employers added 145,000 fewer jobs than initially stated. For the entire year of 2023, the revised figures suggest an overestimation of about 13%, translating to approximately 400,000 fewer jobs than initially reported. This casts doubt on the optimism that prevailed on Wall Street last year.
While periodic revisions to government statistics are not uncommon, the pronounced changes to last year’s job gains undermine one of Wall Street’s key arguments for anticipating GDP growth of up to 2% and ongoing stock gains in the current year. Jeff Schulze, head of economic and market strategy at ClearBridge Investments, noted that negative labor revisions historically signal an imminent economic downturn.
A resilient labor market has been pivotal in driving strong consumer spending, which, in turn, supported economic growth in the face of high inflation. However, concentrated job growth in specific industries, with 60% of December gains concentrated in government positions, hospitality, and healthcare, raises concerns. A weakening employment market poses a threat to sustained consumer spending, potentially jeopardizing corporate profit recovery and casting uncertainty on growth prospects for major indexes like the S&P 500.
Analysts are forecasting growth rates of 5% in the first quarter and nearly 10% in the second quarter for companies in the S&P 500 index. Wall Street anticipates 8% and 20% growth in the third and fourth quarters, respectively. However, warnings about weaker consumer spending and lower corporate profits are causing growing caution among analysts, challenging the outlook for continued stock market gains.
Scott Wren, senior global markets strategist at Wells Fargo Investment Institute, highlighted the increased likelihood of an earnings stumble due in part to reduced consumer spending growth. While solid earnings growth has supported stock gains, concerns are mounting about the potential impact of weaker economic indicators on the broader stock market, prompting a more cautious stance from Wall Street.
