Job gains and free-spending shoppers lifted Wall Street in 2023, but new data tells another story

A hiring sign is displayed at a Chipotle restaurant in Schaumburg, Ill., Jan. 30, 2023. Job gains and raises helped power solid economic growth in the U.S. last year, but what if those gains were a mirage? The Labor Department overestimated job gains last year by about 13%. That suggests some of Wall Street’s optimism last year was built on sand. A weaker employment market means a weaker case for consumer spending to keep propping up the economy. (AP Photo/Nam Y. Huh, file)

Shoppers at a Uniqlo store in New York use self-checkout on Dec. 6, 2023. Job gains and raises helped power solid economic growth in the U.S. last year, but what if those gains were a mirage? The Labor Department overestimated job gains last year by about 13%. That suggests some of Wall Street’s optimism last year was built on sand. A weaker employment market means a weaker case for consumer spending to keep propping up the economy. (AP Photo/Anne D'Innocenzio)

NEW YORK (AP) — Job gains and raises helped power solid economic growth in the U.S. last year, but what if those gains were a mirage?

Gross domestic product jumped 4.9% during the third quarter on an annualized basis and economists expect an initial reading of 1% growth during the final quarter of 2023.

The Labor Department, though, has been noticeably revising its monthly employment data, resulting in fewer new jobs added each month than initially reported. Employers in the U.S. added 145,000 fewer jobs than initially reported between September and November. That figure grows to about 400,000 fewer jobs than initially reported, or an overestimation of about 13%, for almost all of 2023. That suggests some of Wall Street's optimism last year was built on sand.

While it's not unusual for the government's statisticians to go back and revise their data, the changes to last year's job gains was especially pronounced, and undermines one of Wall Street's main cases for GDP growth of up to 2% and continued stock gains this year.

“Historically, labor revisions for the prior year turning negative indicates an economic downturn is on the horizon," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in a note to investors.

A resilient labor market has been the driving force behind strong consumer spending, which essentially propelled economic growth in the face of high inflation. More job openings, low unemployment and higher wages meant more money in consumers' wallets for shopping and travel. That helped pull corporate America out of an earnings recession while also helping the broader economy stave off a real recession.

Other warning signs from the labor market include that fact that the latest bit of job growth was concentrated in a few industries, Roughly 60% of the gains in December were mostly concentrated in government positions and the hospitality and healthcare industries.

A weakening employment market means a weaker case for consumer spending to keep propping up the economy. That could put the recovery for corporate profits in jeopardy and prompt a loss of confidence in Wall Street forecasts for profits this year. It also places a big question mark around growth prospects for the S&P 500 and other major indexes.

Analysts are forecasting growth of 5% during the first quarter and nearly 10% in the second quarter for companies in the S&P 500 index, according to FactSet. Wall Street expects 8% growth and 20% growth in the third and fourth quarters.

“If the economic and employment scenarios unfold as we expect, more unemployed consumers will have less money to spend, creating further speedbumps for positive economic momentum,” said Scott Wren, senior global markets strategist at Wells Fargo Investment Institute, in a note to investors.

Solid earnings growth underpins much of the support for stocks to keep gaining more ground in 2024. The S&P 500 jumped 24% in 2023. It is hovering around its all-time high of 4,796.56 and analysts expect it to surpass 5,000 before 2024 ends. But, Wall Street is also growing more cautious about the risks to those forecasts amid warnings that weaker consumer spending and lower corporate profits will weigh on the broader stock market.

“A closer look under the hood of the latest employment report reflects the increased likelihood that an earnings stumble caused in part by reduced consumer spending growth lies ahead,” Wren said.