By Paul Gomme and Peter Rupert
The April employment report was released by the BLS and revealed a 253,000 increase in payrolls. However, there were downward revisions totaling 149,000 (down 78,000 in February and 71,000 in March) that threw a little cold water on the report. There were few sectors that had any decline except for temporary help services that shed 23,300 jobs. The workweek held steady at 34.4 hours so that total hours worked increased by 2.1%.
Measured over the past year, average hourly earnings rose 4.45% in April, up from 4.3%. However, when measured relative to the previous month, earnings growth accelerated from 3.3% to 5.9%. As the figure below shows, month-to-month growth rates for earnings are quite choppy. The 3 month change is somewhat smoother; measured this way, earnings growth rose from 3.4% to 4.3%.
The household survey showed that the labor force participation rate remained at 62.6% despite the labor force falling 43,000. The employment to population ratio was also unchanged at 60.4%. The unemployment rate fell from 3.50% to 3.39%.
Unemployment insurance claims spiked up to 264,000, the highest since October of 2021. Continued claims, however, were little changed.
Between March and April, there was little change in inflation as measured by 12 month percentage change in either the Consumer Price Index (CPI) or core CPI (excluding food and energy). However, the annualized monthly percentage change in the CPI rose from 0.6% to 4.5% while core CPI rose from 4.7% to 5.0%. As we have stressed in earlier posts, these annualized inflation rates are quite volatile while 12 month percentage changes respond sluggishly to changes in trend. The 3 month annualized percentage changes strike us as a good compromise between smoothing and quickly capturing trend changes. On this basis, CPI inflation was down slightly, from 3.8% in March to 3.2% in April; core CPI inflation was essentially unchanged at 5.1%. All of these measures of CPI inflation are currently running well above the Fed’s target of 2%.
Given that CPI inflation is higher than the Fed’s 2% target, it may not be surprising that inflation expectations similarly exceed this 2% target. While the May readings for the 1 year and 2 year expected inflation are unchanged at 2.65% and 2.4%, respectively, the 5 year and 10 year expectations rose marginally.
It seems that monetary policymakers no longer look at what’s happening to money growth. That the Fed changed its definition of monetary aggregates starting in May 2020 makes it difficult to take a long view on money growth. Nonetheless, since May 2021 (given the change in the definition of “money” in May 2020, the earliest date for which year-over-year growth rates can sensibly be computed) growth of the monetary aggregates M1 and M2 has slowed. Indeed, both have been contracting since late 2022. A traditional monetarist like Milton Friedman would likely look at the chart below and predict future deflation. One way to think through all this is via the quantity theory of money: Mv = PY where M is money, v velocity, P the price level, and Y real output. This relationship can be recast as: money growth + velocity growth = inflation + real output growth. If velocity is roughly constant (so that its growth rate is 0), and long run real output growth is constant, the quantity theory of money predicts a tight relationship between money growth and inflation. As Milton Friedman put it, “Inflation is always and everywhere a monetary phenomenon.”
Of course, there have been important developments within the banking system. One such development is that the Fed now pays interest on excess reserves of banks held at the Federal Reserve Banks (“excess” meaning above-and-beyond what is required to satisfy reserve requirements). Plausibly, changes in the gap between this interest rate on reserves and the Federal Funds Rate (the rate banks pay in an overnight market for reserves) might explain the above deceleration of money growth. However, as shown below, the interest rate on reserves and the Fed Funds Rate move in lock step.
