The odds of the economy slowing while inflation stays fast — stagflation — may be increasing as a new survey showed that U.S. employers drastically curtailed their hiring last month to the slowest pace since July.
Other recent data have pointed toward a weakening labor market, including unemployment claims and the ISM manufacturing survey — which also showed a big jump in prices paid. January CPI came in hot. And the Atlanta fed is now projecting a 2.8% contraction in the U.S. economy this quarter.
While the Federal Reserve would normally cut interest rates to help buoy growth, that option may not be available if inflation remains high, creating a dilemma for policymakers. Additionally, the Fed can’t use a rate hike to counteract the price shock from the sudden jump in tariffs.
“The Fed won’t make the mistake” of racing in to save the day with a rate cut, Explosive Options’ founder Bob Lang said last week. “Inflation is still way too sticky. The bond market is telling you that there isn’t room to cut. The specter of deflation is back.”
Job creation
Today’s ADP Research (ADP) report showed that private-sector firms took on 77,000 workers in February, down from 186,000 in January and just above half the level that economists had estimated, according to a FactSet (FDS) survey. The tech, education and health services, and trade and transportation sectors lost jobs.
This data is likely to be followed by a weak official jobs report on Friday, Chris Grisanti, chief market strategist at MAI Capital Management, told Quartz yesterday. While the consensus estimate calls for a bigger rise in payrolls last month than the 143,000 in January, Grisanti expects about 110,000, possibly even below 100,000.
Investors often treat bad news as good news because it increases the odds that the Fed will cut rates, but this changes if they feel the economy is actually slowing, Grisanti said. Yesterday’s trading pattern, where banks and industrials fell while tech bounced, reflected real concern about U.S. growth.
Bad news is bad news
“Sometimes bad news is bad news,” Grisanti said. “Tariffs could be hastening the inevitable decline you get at the top of markets as the economy is beginning to slow. [Donald] Trump just had the bad luck to be elected president at the top of the business cycle.”
Not all the data is down-arrow: The ISM Services index for February came in higher than expected today at 53.5, comfortably in expansionary territory. Stocks rose, with Dow Jones Industrial average up 177 points, and the S&P 500 and Nasdaq $NDAQ Composite both showing modest gains.