Are Equity Markets Anticipating a Macroeconomic Regime Change?

The U.S. economic numbers released last week preceded a slide in equities, prompting keen interest in what the data may have been signaling to markets.

While the data are noisy, and it’s risky to draw conclusions from one set of reports, we believe they may reflect some trends ­­worth watching – chief among them rising capacity constraints and growing inflationary pressures.


  • Real productivity growth was surprisingly weak in the fourth quarter (down 0.1% from the prior quarter on a seasonally adjusted annual rate basis), and unit labor costs accelerated to 2.0% despite some moderation in real compensation growth.
  • The headline ISM Manufacturing Index moderated less than expected due to slowing supplier deliveries, while the production, new orders and employment indexes each declined. Meanwhile, the prices paid index increased to the highest level since 2011.
  • Labor market aggregate hours, which correlate with real economic output, declined 0.42% month-over-month in January, while average hourly earnings gained 0.3% month-over-month and rose 2.9% year-over-year – the highest rate since 2009.

Teasing out the data

These data come at a time when unemployment is below various estimates of the non-accelerating inflation rate of unemployment (NAIRU), broader measures of labor market underutilization are close to pre-crisis levels and payroll growth appears to have peaked for this cycle and is decelerating. More broadly, over the past 30 years, we’ve observed just one period when decelerating payroll growth coincided with accelerating real GDP growth: during the late-1990s productivity boom.

What is the takeaway from all of this? The U.S. is starting to look more like an economy that is in the later stages of its business cycle. Absent a pickup in productivity growth, slowing payroll growth and rising economic capacity constraints should coincide with a gradual deceleration in real economic activity and building inflationary pressures. Along these lines, the weak labor productivity report released last week may raise questions about whether and to what extent productivity will rise over the coming year in response to fiscal expansion.