It was 60 degrees in Acton yesterday, as our normally frigid Massachusetts winter continued to be a no-show. Not that I have any problem with this, since running, rather than skiing, is my exercise of choice. But this weirdly mild season is leaving nature very confused with streams gurgling, buds swelling and birds twittering loudly, presumably about their nest-building plans.

Of course, we don’t have the full weather data for February yet. However, last month was the warmest January in Massachusetts since at least 1895 with a mean temperature 11.2 degrees Fahrenheit above average. Some of this anomaly very likely reflects the impact of global warming and is telling us something important about the future. However, most of it, as is always the case, is just normal weather volatility, and there is no particular reason why a warm winter should be followed by a warm spring.

A similar statement could be made about recent economic data.

A January Effect For Jobs
The blockbuster 517,000 payroll employment gain for January was assisted, to some extent by warm winter weather with fewer-than-normal workers reporting that they either couldn’t work at all or could only work part-time due to bad weather. However, an even more important factor may have been the normal seasonal pattern of hiring and firing in an extra-tight labor market. 

Barring some cyclical collapse, January is always the weakest month of the year for employment. Indeed, in the five years before the pandemic, not-seasonally adjusted payroll employment fell by an average of 2.9 million jobs, or 2.0%, between December and January. This January, the decline was just 2.5 million jobs or 1.6%, which resulted in the much stronger-than-expected seasonally adjusted gain of 517,000 positions.

Some of this probably does reflect genuine continued labor market momentum. However, there could well be some seasonal distortions also.

First, it may be that the pandemic permanently changed some seasonal hiring and firing. For example, while overall employment grew strongly late last year, seasonally adjusted retail employment fell in September, October and November and barely grew in December, before surging in January.

Second, a normally weak January could be very significant in the context of an economy with a still enormous 11 million job openings as of the end of December. It could be that companies who had been trying to hire all year finally had more success in a month where workers were naturally getting laid off from other jobs. Or it could be that companies were particularly reluctant to engage in seasonal layoffs for fear that they would not be able to find employees when seasonal demand returned.

Consequently, it is quite possible that the January payroll survey substantially overstated real momentum in the labor market and that job growth will fall sharply in the normally strong hiring months of the spring.

Seasonal Supports For Economic Growth
Seasonal and weather effects may also have boosted GDP components in January. Warmer-than-normal weather likely helped January retail sales with no major snowstorms in the Northeast, which typically disrupt traffic at restaurants, auto dealers and malls. In addition, it may be that changing seasonal patterns, possibly accelerated over the pandemic, made December look weaker and January look stronger. In particular, the very strong 3% gain in seasonally adjusted retail sales in January 2023 reflects a 16.2% decline in not-seasonally-adjusted sales compared to an average 20.2% decline in January sales relative to December in the five years before the pandemic.

Strong retail sales for January should lead to a surge in consumer spending in this Friday’s personal income and outlays report. However, it could also push the personal saving rate below 3% again, compared to an average of 7.7% before the pandemic, underscoring the degree to which consumer spending is being supported by borrowed money and suggesting a slowdown in the months to come.

There was also likely a weather effect in single-family housing starts which, in January, came in far above single-family building permits for a third consecutive month. Unseasonably good weather often causes starts to exceed permits as builders are able to lay foundations for new houses. However, this masks the freefall in permits which points to a very difficult spring for the building industry.

All of this suggests that, while weather and seasonal effects could lead to real GDP growth of between 1% and 3% for the first quarter, there could well be payback in the second quarter and beyond in the form of lower or negative GDP growth readings.

Inflation: A Slower Slide But Still On A Downward Track
Finally, revised seasonal factors have caused some to doubt the recent improvement in inflation. In particular, the latest CPI release showed headline inflation of 0.5%, 0.2% and 0.1% over the last three months of 2022 compared to a previous measurement of 0.4%, 0.1% and -0.1%. In addition, while the January reading of 0.5% was largely expected, updated weighting within the CPI now assigns a 34.4% weight to the troublesome “shelter” category compared to 32.9% previously. While we still expect year-over-year headline CPI inflation to fall to roughly 3% by June, this extra weight on shelter, which is particularly sticky, could prevent any further measured decline in inflation in 2023.

That being said, industry data show newly negotiated rents falling for four months in a row in January and this trend should allow year-over-year measured inflation to resume its downward trend in 2024. Whether the economy ends up in recession or not, inflation is likely to gradually return to the Fed’s 2% target. The question is whether the Fed has the patience to allow this to happen naturally or, by forcing the issue, puts the economy into an unnecessary recession.

The release of all these data has measurably added to forecasts of short-term interest rates. At the start of the year, markets were pricing in only two 25-basis point rate hikes in 2023—one in February and one in March. Now the futures market has added two more hikes to the forecast with the federal funds rate topping out in a range of 5.25% to 5.50%.

It may well be that the Federal Reserve follows this path. However, if they do, they will probably have to cut more later. The reality is that seasonal and weather effects are flattering measures of economic momentum in early 2023 and the picture will likely look a lot more rocky by the middle of the year. The risk for the economy overall is that monetary and fiscal tightening, combined with the effects of a high dollar and slow demographics, will push the economy into recession. The opportunity for investors is that, if this transpires, the Federal Reserve will have to reverse course and set the stage for a new multi-year period of low long-term interest rates supporting both fixed income and equity markets.

David Kelly is chief global strategist at JPMorgan Asset Management.