Recently, there have been multiple signs that America’s economic expansion is slowing considerably. Specifically, layoffs have been increasing at a relatively rapid pace and the number of full-time jobs dropped in February, while the Federal Reserve has significantly lowered its gross domestic product growth estimate for the fourth quarter.
However, this slowdown should ultimately lead to a stock market boom because it will justify the Fed cutting interest rates later this year. Indeed, the U.S. economy now appears to be heading for the “soft landing” scenario, accompanied by easing inflation and interest rate cuts that most institutional investors have long been hoping for. On the other hand, it will be important for retail shareholders to keep a close eye on macroeconomic developments in order to ensure the soft landing does not change into a rocky landing that could cause many companies’ profits to decline sharply.
Layoffs Are Rising Sharply and the Fed Has Slashed Its GDP Outlook
More than 84,000 layoffs were announced in February in the U.S., representing the highest level of such announcements since 2009, Challenger, Gray & Christmas reported on March 7, according to CNBC. Moreover, the number of “planned cuts” rose 3% versus January and increased a rather high 9% compared with the same period a year earlier.
On a positive note, the number of forecasted layoffs in the first two months of 2024 actually dropped 7.6% versus the same period a year earlier. Also noteworthy is that over 28,000 of the over 84,000 layoffs announced last month were in the tech sector. In my view, most tech firms are not cutting jobs because they have to because of major financial problems.
Rather, these firms are eliminating positions to boost their stocks and lower interest costs — and because cutting jobs has become trendy in the tech sector. Given the general great strength of the tech space, I’m confident that the vast majority of those laid off will find new jobs rather quickly.
Indeed, CNBC contended the relatively low number of weekly jobless claims is indicating that “unemployment is short-lived and workers are able to find new positions.”
In two other indications that the economic expansion is markedly slowing, the number of full-time jobs sank by 187,000 in February, while the Fed’s estimate for first-quarter annualized seasonally adjusted GDP growth has sunk from slightly above 4% at the end of January to 2.5% as of March 10.
The Street Will Get Its Rate Cuts
The economic slowdown will enable the Fed to provide the significant rate cuts that the Street is craving. Indeed, Fed Chair Jerome Powell said on March 7 that the central bank is “not far” from cutting rates. He added that the central bank requires “just a bit more evidence” that inflation is dropping before it embarks on rate reductions.
Moreover, Bloomberg suggested that, when Fed members release their economic projections later this month, they will forecast an average of 0.75% of cuts this year. And if that’s the case, the central bank could start lowering at its June meeting.
I think, given the recent indications that the economy is meaningfully slowing and Powell’s dovish statement in March, the Fed could very well pencil in four or five rate cuts of 0.25% each. Based on Bloomberg’s assessment, such a forecast would mean the central bank would likely start cutting at its May meeting.
In light of the market’s strong enthusiasm for rate cuts, the market would likely rally sharply if the latter scenario unfolds.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
