Economic Updates for February 2023


There has been a flurry of data updates and changes in January that are very much in contrast with the trajectory we have been on for the few months prior. We are seeing a bounce in most of the economic data, bond yields and most surely in equity prices. While this may all seem like good news, perhaps the apt metaphor to describe this could be the following:

All these could be chalked up to the January effect - the optimism for the new year rises equity prices in January. But, it seems more than that. The jobs market has confounded the consensus estimate and printed 500k+ payroll in January, more than double of the consensus estimate.

What is certain is that inflation is behaving as usual. It does not go down in a straight line. The print was 0.8% for January, highest in the past few months. We only hope that it adheres to the declining trend in the coming months and does not provoke an aggressive FED. We prefer a soft or no landing to a hard landing.

Looking at a glass half empty, FED's actions are effective with long and variable lags. By the time the results of their actions are finally here, I hope the current optimism does not push them to act so hawkishly that we end up in a deep recession. The story from the rest of world confirms softening macroeconomic data as Lakshman Achuthan from ECRI points out in his recent macrovoices podcast interview.

Broad Indicators

Atlanta GDP NowCast

GDP is currently projected to be 2+% for Q1 2023. The positive GDP number is primarily due to the consumer still being strong as seen in retail sales number and an even healthier employment figure.

US Dollar Index

Since the last Fed press conference and especially after the very good payroll numbers at the start of February, the Dollar index has started to climb again. The CPI number has come in hot, further increasing the chances for rate hikes to continue.


Commodities have generally been easing over the last few months. The rise in Dollar is a negative for commodities. Also, if there is demand destruction due to an impending recession, it does not bode well for continued demand for commodities.


Gold's positive momentum has faded as the dollar has started to climb.


BitCoin has diverged from other macro assets such as gold and the dollar this month. In spite of the climb in the dollar, BitCoin has held up and even seen rising!


CPI Month over Month

In the month of January, inflation climbed by 0.8%. That is the largest climb since last June. Blame it on the seasonality or January effect. This certainly gets FED's attention to keep things tighter for longer.

PPI Month over Month

The pop in CPI is also reflected in a pop in the PPI and the expected change for the month of January is around 0.9%.

NYFed Global Supply Chain Pressure Index

If you believe the rise in inflation was transitory, here is a comforting chart. Many believe the cause of inflation was due to supply side constraints caused by COVID shutdowns across the world. This chart tracks the pressure on global supply chain. Clearly, according to this data, the pressures have been coming down and are now close to 1
see wikipediastandard deviation
of the normal pressure.

This chart has not meaningfully deviated in the light of the higher inflation in the month of January. Perhaps there are other reasons for inflation - such as de-globalization, runaway growth in the US economy due to the fiscal stimulas in 2020. The exact reason will be very clear in hindsight.

Reported Year over Year Inflation Rate

This is the headline inflation number that everyone talks about. Currently, for January 2023 we are at 6.4%. Inflation is known to be sticky. The current trajectory is still promising and there is no need to give up hope yet.

Inflation NowCast

Inflation Nowcast is built using other economic indicators besides the Inflation report to come up with the latest CPI number. Thus, it gives a more up-to-date picture on what the CPI is at any given time. Per the Nowcast, it is interesting to see that headline CPI has gone below core CPI indicating the cooling in gas and food prices while the core part of the inflation has remained fairly sticky.

CPI Components

CPI Components Last Month
CPI Components This Month
Food inflation has markedly come down this month compared to the last, while energy has marginally gone up. (Please note that the y-axis in both the graphs have different scales).

One Year Inflation Expectations

This survey data shows that inflation one year from now is expected to be 4.2%.

5 Year, 5 Year forward Inflation Expectations

This is a market based indicator showing the inflation in 5 year forward interest rate, 5 years, is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
. This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

10 Year breakeven Inflation Expectations

This is another market based indicator showing the inflation 10 years from now is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
. This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

Real Yield - 10 year Treasuries

It is great to see real yields in the positive territory after a long period of being on the negative side. This indicates the optimism in bonds where you can make some positive
carryYield on the investment.


Consumer Sentiments

The survey indicator for consumer sentiments continues to leap upwards in January! While this is a good sign, it could also be due to the holiday effect. Also, we would like it come above 80 to confirm everything is great in consumer land.

Investor Sentiments

The investors have remained bearish for a while. Investors are getting bullish on the margins with the New Year. S&P is above its 200 day moving average as we write and this may ebb their bullishness.

GDP Factors

Manufacturing PMI

Manufacturing PMI reading indicates a contraction (below 50) which is not great and does not share the Atlanta FED optimism on GDP growth. More so, this may indicate the slowdown in the economy that is yet to come. However, this month, we are seeing a bump to the positive side and we hope it builds up.

Services PMI

Services PMI reading is also in line with the Manufacturing PMI indicating a contraction. However, like the Manufacturing PMI, we see the bump in the positive direction. Many are jumping to the conclusion that this may indicate a soft or no landing scenario, essentially implying that we may avoid a recession.

Industrial Production

Industrial Production is still positive but close to zero. We will take what positive indicators we can get and be happy with it.

Retail Sales

Retail Sales had a marked positive bump this month. Perhaps the after holiday sales is the cause. We hope that this positive attitude continues in the coming months.

Non-farm Payrolls

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month, the jobs number broke the consensus expectation by almost 100%. While there are layoffs taking place in Tech land, the economy quietly has been adding so many jobs! If jobs are plenty and unemployment is record low, there can be no recession. This just makes FED's job so much harder.

Total Vehicle Sales

Total Vehicle sales inched higher this month making a short term trend upwards.

Manheim Used Car Index

The used car prices are starting to inch up again seemingly the demand coming back up.

US New Home Sales

New home sales have followed the rise in mortgage rates and have been slowing considerably. Price corrections are now seen in many key markets. Home buyers who financed at low rates will be reluctant to make any moves as the rates have gone up considerably.

30 Year Fixed Mortgage Rates

The mortgage rates are stabilizing and buyers have been coming back to the market. I hope the market thaws well this spring and into the summer.

Employment Indicators

Historical Unemployment Rate

The unemployment rate has remained low despite the FED's attempt to induce a slowdown. This indicator is a lagging indicator and we do expect to see this number creep up in the months to come.

Unemployed to Job Openings Ratio

There are about 2 job openings for every unemployed person looking for a job.

US Jobless Claims

This chart will be the first indicator of a telltale sign that unemployment is increasing. As you see the continuing jobless claims number rise, it implies the people who lost their jobs are not going back to labor force fast enough and the unemployment rate is starting to creep higher.
Source Continuing Jobless Claims

Indeed Job Postings

Interestingly, the rate of change in job postings is reducing but the total jobs are still rising according to this indicator. While this is consistent with the BLS report on job openings to unemployed, we expect to see some sharp corrections if a recession is imminent.

Wage Growth Tracker

While wage inflation has followed inflation in goods and services, we are glad to see that the inflation has not become endemic in the job market. The wage inflation rate at 6.1% still trails the overall headline inflation rate.

Market Indicators

Yield Curve Inversion

The yield curve remains inverted - the short end of the curve is above the long end of the curve. The inversion is one of the largest in the last 40 years. This follows the FED's aggressive actions to combat the 40 year high inflation rates. From a forward looking perspective, a yield curve inversion is one of the strongest indicator for future recession.
There has been debate on whether the current recession prediction has the most consensus ever seen. If so, the recession may not even come to a pass as everyone is expecting one. The man who invented this indicator, himself, doubts this. Read more.

Yield Curve - then and now

Yield curve - Then
Yield curve - Now
Checkout a video on how the yield curve has shot up over this time Video.

Equity Markets

The markets have done well year to date. The earnings season has not been as dismal as expected. The companies seem to have kick the recession can down the road. The sectors that did badly last year have been outperforming this year.

Market Sectors

Energy sector has been the top performer while the Communications sector has been the worst for most of 2022.

High Yield Index Options-Adjusted Spread

If the economy were to enter a recession, it is likely that some of the companies will struggle to keep up with their debt payments causing their credit spread to widen. This indicator shows how the credit spreads have been behaving so far. The credit spreads have been pretty muted so far suggesting a healthy credit market.

Put Call Ratio

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In February, the activity has quietened down relative to January.

S&P 500 Current Valuations

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $230 which translates to a price to earnings ratio of 18 at the current S&P 500 price level. This is above the 10 year average.
It is likely that as inflation comes down, so will the earnings numbers. This indicates that the future S&P 500 price level could likely come down. Based on the companies that have reported so far (82% of S&P 500 companies), the earnings have declined by -4.7%.


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