U.S. Economic Snapshot

By Paul Gomme and Peter Rupert

The BLS announced that CPI inflation rose 0.4% from February to March or 4.6% on annual basis. On a year over basis the CPI increased 3.5%. Our preferred measured of inflation rose to 4.11% in March after increasing 3.85% in February and 3.06% in January.

The core CPI inflation (excluding food and energy) also rose 0.4%, 4.39% annualized. The trend measure of inflation increased from 4.06% to 4.17% on an annualized basis.

We know that the folks on the FOMC look to core PCE inflation, not (core) CPI inflation. However, the March PCE price won’t be released for a couple of weeks. Given the overlap in the goods covered by the two price indices, the CPI presumably provides some information for what to expect of the March PCE price index. While the two price indices move together at “long” horizons (annual or longer), at a monthly frequency the relationship is looser. In other words, seeing an increase in core CPI inflation of, say, 0.2 percentage points, does not necessarily mean that the core PCE inflation rate will similarly rise by 0.2 percentage points. With all of these qualifications in mind, the March CPI inflation numbers give us little confidence that March core PCE inflation will be down — much less that it’ll be near the FOMC’s stated 2% target. Considering that the FOMC will probably like to see more than a single month’s inflation at it’s target before lowering the Fed funds rate, we would not bet on lower interest rates any time soon — especially given the continued strength of the labor market and GDP.

Uh oh! While the year-over-year inflation rate as measured by the PCE deflator was essentially unchanged in February (it rose slightly, from 2.43% in January to 2.45%), the annualized month-over-month inflation rate, at 4.1%, is still running well above the Fed’s 2% target. Our measure of trend inflation rose half a point, from 2.6% to 3.1%. It bears repeating that our measure of trend inflation is designed to filter out much of the high frequency movements in the month-over-month inflation rate while responding in a timely fashion to changes in the trend.

The outlook is not much better when the “volatile” food and energy components of the PCE deflator are removed: The month-over-month inflation rate dropped from 5.6% to 3.2% (good), but is still well above the Fed’s 2% target (bad). The year-over-year inflation rate fell slightly, from 2.9% to 2.8%. And our measure of trend inflation was essentially unchanged, coming in at 3.16%.

The Policy Outlook

In a sense, the latest core PCE inflation numbers are not a surprise: they were foreshadowed by core CPI inflation which came out a couple of weeks ago. For the first two months of 2024, trend core inflation is up and is considerably higher than the Fed’s 2% target. If the monthly inflation rate continues to come in on the high side, expect to see the year-over-year inflation rate start to rise — just as it did in 2020-21. Along side the solid GDP growth and labor market, recent inflation makes it easier for those building a case for raising (or not lowering) interest rates.

The annual (12 month-over-12 month) inflation rate as measured by the CPI rose marginally, from 3.11% to 3.17% in February. Taking out the volatile food and energy components, core CPI inflation was down marginally, from 3.87% to 3.76%. So, overall no change? As we have emphasized in the past, annual inflation rates respond sluggishly to changes in trend. The monthly annualized CPI inflation rate rose smartly, from 3.73% to 5.44% while annualized core CPI inflation fell from 4.81% to 4.39%. As we have previously discussed, monthly inflation rates are quite variable. Our trend measure of CPI inflation popped up from 3.06% to 3.85%; trend core CPI inflation saw an upturn from 3.89% to 4.06%.

Policy Outlook

The FOMC tends to look at core PCE inflation, not CPI inflation. However, the PCE data for February will be released in a couple of weeks. Given the overlap in the goods and services covered by the CPI and PCE, the February CPI report provides some “news” regarding the likely direction of the upcoming PCE data. Sorry folks, but the short term prospects for interest rate cuts are dim. At the horizons we report, PCE inflation for January exceeded the Fed’s 2% target, whether overall or the core measure. Given that the February CPI data shows an increase in inflation, it seems unlikely that PCE inflation for February will be heading down towards 2%, and may well be up from January. The Fed is unlikely to let inflation get out of hand as it did in 2020. At this juncture, it’s easier to make a case to raise, not lower, interest rates, especially since the real economy (labor market, productivity and GDP) has not shown signs of weakening.

By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

By Paul Gomme and Peter Rupert

The BEA announced that the Personal Consumption Expenditure (PCE) price index rose 0.3 percent over the month, 4.22 percent on an annualized basis. While the monthly spike was high, the year over year number fell from 2.62 percent to 2.40 percent. Our preferred trend measure rose from 1.57 percent to 2.45 percent.

As we mentioned in the CPI post of February 14, given the relationship between changes in the CPI and PCE it was expected that the PCE would also likely rise. In terms of policy, the Fed tends to concentrate more on the core PCE index. The core measure also blipped up, the annualized monthly number came in at 5.10 percent for January after a 1.75 percent December number. Year over year the core measure fell slightly, from 2.94 percent to 2.85 percent. Our calculated trend inflation came in at 2.99 percent after a 1.94 percent December reading.

At least some news outlets have emphasized the decrease in the year-over-year PCE inflation rate, with the pop up in the monthly, annualized rate treated as an afterthought. As the saying goes, ”Those who forget their history are condemned to repeat it.” In 2021, monthly inflation started running well above the FOMC’s 2% target; it took at least half a year before the 12 month inflation rate reflected this increase. While one month doesn’t make a trend, the size of the increase makes it difficult to build a strong case for loosening monetary policy in the near term. We will be looking closely at the CPI report that comes out in a couple of weeks time.

By Paul Gomme and Peter Rupert

The US economy once again fools forecasters. The BLS announced that payroll employment increased 353,000 in January, with 317,000 added to private payrolls…about twice the Dow Jones prediction. In addition, December employment was revised up 117,000 and November up 9,000. Overall, growth was pretty widespread as the diffusion index (percent of industries increasing employment plus one-half of those with unchanged employment) rose from 64.0% to 65.6%.

However, not all in the report was good news. Average hours worked plunged to 34.1 from 34.4. Outside of the pandemic months, the 34.1 reading was the lowest since coming out of the Great Recession. The drop in average hours in combination with the 317,000 lead to a 4.1% decline in total hours of work.

The unemployment rate dipped from 3.74% to 3.66%.

January 30: Jolts

The Job Openings and Labor Turnover Summary (JOLTS) for December was released on Tuesday. The number of job openings increased slightly from 8.925 million to 9.026 million. New hires increased to 5.621 million and separations declined to 5.365 million. Moreover, there are still about 3 million more job openings than unemployed job searchers.

The Beveridge Curve, plotting vacancy rates against unemployment rates, also shows a very strong labor market. As the vacancy rate has declined over the past year or so, the unemployment has barely moved. Consequently, the recent combinations of vacancies and unemployment have been moving down towards the post-Great Recession Beveridge curve.

January 31: Employment Cost Index

The employment cost index rose 3.5% in the third quarter of 2023 at a seasonally adjusted annual rate. The ECI growth rate has declined by 2 percentage points since Q1 of 2022.

Our trend measure of core PCE price index is sitting around 2%, meaning that the real ECI has risen about 1.5%.

February 1: Productivity and Costs

Productivity (real output per hour) increased 3.2% in Q4 at a seasonally adjusted annual rate. Output increased 3.7% while hours worked increased 0.4%.

Putting together the ECI and Productivity Numbers

One way to think through these numbers is that when worker costs grow faster than the revenue they bring in, profits (or capital returns) get squeezed. For the final quarter of 2023, nominal employee costs rose 3.5% while real labor productivity grew 3.2%. However, we also need to account for the effects of inflation: the ECI is a nominal variable expressed in current dollars while labor productivity is a real variable expressed in constant’ dollars. Using recent trend core PCE inflation (around 2%) then tells us that per worker revenue rose around 5.3% while employee costs `only’ grew 3.5%. In other words, the recent data implies that capital income (per worker) is actually growing.

Final thoughts

Taken together, the economy is still humming along and inflation has been falling. The decline in hours worked throws a little cold water on the reports, however. Those hoping for cuts in the Fed funds rate may have to wait.

On January 25, the BEA released its Advance Estimate for 2024Q4 GDP. The key headline number: GDP grew at an annualized rate of 3.3% in the fourth quarter, down from 4.9% in the third quarter. The recent number, though down from the fourth quarter, was the largest since the first quarter of 2022. Moreover, surveyed economists from the Wall Street Journal forecast 2% growth.

A useful way to think about this drop in output growth is in terms of the contributions of the major components of GDP. These contributions are the growth of a component multiplied by its share of GDP. The 1.6 percentage point decline in GDP growth is chiefly due to investment (contributing 1.4 percentage points, that is, falling from 1.8 to 0.4) with lesser contributions due to government spending (0.4 points) and consumption (0.2 points). Offsetting contributions were recorded by imports (-0.3 points) and exports (-0.1 points).

The quarterly personal consumption expenditures price index (PCE) fell to 1.7%, continuing an impressive decline starting in Q3 of 2022.

The BEA reports that the PCE price index increased 0.2% in December, up from -0.1% in November. At annual rates, these work out to 2.0% (December) and -0.8% (November). Our measure of trend PCE inflation rose, at an annual rate, from 1.4% in November to 1.6% in December. The earlier CPI report foreshadowed these increases. On a year-over-year basis, PCE inflation was essentially unchanged between November and December at 2.6%.

Our measure of trend core PCE inflation was up slightly, from an annualized 1.9% (November) to 2.0% (December). On a monthly basis, core PCE inflation shot up from 0.8% to 2.1% while the year-over-year rate fell from 3.2% to 2.9%. All in all, core PCE inflation looks to be settling into the Fed’s target of 2.0%. It will simply take a few months for the year-over-year rate to catch up with recent developments.