January 6, 2024 | Jobs Report, JOLTs, Dividends & Buybacks, Federal Debt and Structuring Income for 2024

Smart Investing with Brent & Chase Wilsey

Jobs Report

There was initial concern that the jobs report was too strong and could point to inflationary concerns. After digging into the report, I believe it is still in line with our belief that the economy is in a good enough spot to have a soft landing and avoid further inflationary pressures. The initial concern stemmed from the fact that headline employment grew by 216,000 in the month of December, which easily topped the estimate of 170,000. While this may sound extremely strong, the previous two months were revised lower by a total of 71,000 jobs. Also, Government was a major contributor in the report as the sector added 52,000 jobs in the month of December. With such a large contribution from the public sector, this shows me the private sector is continuing to soften. Areas of the private sector that were strong included health care and social assistance (+58,900), leisure and hospitality (+40,000), and construction (+17,000). Even after many months of positive gains, the leisure and hospitality sector still remains 1% or 163,000 below pre-pandemic levels. Overall, the jobs market softened in 2023 as monthly gains averaged 225,000 for the year compared to 399,000 in 2022. I believe that those monthly gains will soften even further in 2024. The only concern I had about the report was wage inflation as average hourly earnings increased 4.1% compared to December 2022. This was above expectations for 3.9% and last month’s reading of 4%. Ideally, we would like to see this continue to soften as wage inflation generally pressures overall inflation, but data does always move in a straight line. It is something to keep an eye on, but I do believe wage inflation will also soften in 2024.

JOLTs

According to the Job Openings and Labor Turnover Survey (JOLTs), the labor market is continuing to soften. The report showed that job openings fell to 8.79 million in November. This was right in line with the estimate of 8.8 million, but it was lower than October’s upwardly revised report by 62,000 openings. If it stands, the report produced the lowest level of openings since March 2021. While this continues to sound negative, there are still 1.4 openings for every available worker. While this is lower than the 2 to 1 ratio, we saw for much of 2022, it is still well above historical levels and shows we have a good labor market that is softening from historic levels.

Dividends & Buybacks

Dividends and buybacks for 2023 came in with dividends holding strong at $588 billion which was an increase of 4.2% compared to 2022. Buybacks were still higher than dividends at $780 billion, but company executives in 2023 cut back 15.4% on stock buybacks for the year. Don’t think dividends at 2% or 3% are not worth putting your investment dollars into, going back 100 years dividends as a percent of the total return still account for 38%. For the long-term, investors should have equities in their portfolio that not only grow the stock price but also pay a dividend that the company increases overtime.

Federal Debt

In the first part of January, it was announced that the federal debt for the first time surpassed $34 trillion. Yes, a very large number, but it is important to understand the debt to GDP. Debt to GDP is like looking at your own personal situation where your income is rising and you can take on more debt to either buy a home, a car, or some other asset that you want to finance because you can afford the payments. The debt to GDP peaked at the end of 2020 touching 126% and the most recent data shows debt to GDP has now fallen to under 120% of GDP. If the economy can continue to grow faster than the increase in the debt, the percent of debt versus GDP will go down and put the country in a better financial position.

Financial Planning: Structuring Income for 2024

With the new year comes a fresh slate for your taxes, so now is the time to plan out your income for 2024. If you are withdrawing money from investment accounts, you’ll probably want to take another look at it as tax brackets and RMD’s have changed. Withdrawals from pre-tax accounts are considered ordinary income, Roth withdrawals are tax-free, and withdrawals from taxable accounts are tax-free. Taxable accounts contain capital gains and dividends which are taxable even if you don’t withdraw anything, but they are taxed at lower rates. Depending how you structure where your income comes from will determine how much you have to pay to the government. Ordinary income is taxed the highest, and it’s okay to have ordinary income as long as it only fills up the lower tax brackets. Tax-free income is obviously preferred, but you don’t need to only have tax-free income because then you’re missing out on the benefit of the lower tax brackets. Ideally you want to have the right amount coming from each source to satisfy your living expenses while keeping your income on paper at the most efficient thresholds. For those with lower expense needs, a threshold to plan around is an adjusted gross income of $30,000. At this level there would be no tax because the standard deduction would reduce taxable income down to nothing. $30,000 might seem low, but at that level social security is largely tax-free and if there is some Roth income, it is possible to have $5,000, $6,000, or even $7,000 of monthly cash flow while keeping that annual AGI at $30k. The next threshold is an income level of about $125,000. This is the point where ordinary income moves from the 12% tax bracket to the 22% tax bracket and where capital gain and dividend income moves from the 0% bracket to the 15% bracket. You really have to be careful here because a little extra ordinary income might fall in the 12% bracket but that can push some capital gain income up to 15% so your marginal rate temporarily is 27%. Next is an income level of about $210,000 for those 63 and older. This is when Medicare premiums start to increase based on higher income levels and since there is a 2-year gap between income and premiums, you need to be aware of this at 63 and not 65. Lastly for those with higher incomes, the threshold to watch out for is income of about $415,000 which is where the tax rate increases from 24% to 32%. No matter your income needs, it will help to plan it out because ultimately the goal is to be able to retire sooner with more income and pay less tax on that income.