Month: May 2024

Inflation and GDP

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

The BEA has released PCE (personal consumption expenditure) price data for April. By all measures we look at, this measure of inflation is down. While the annualized monthly core PCE inflation rate dropped from 4.08% to 3.03%, our measure of trend only fell by 0.17 percentage points, from 3.53% to 3.35%. The reduction in our trend core PCE inflation is in line with that reported earlier for the April trend core CPI inflation rate (a drop of 0.2 percentage points). While the year-over-year core PCE inflation rate continues to fall, and run below these other measures of inflation, we anticipate that the year-over-year rate will start rising as the favorable monthly inflation rates in mid-2023 fall out of the calculation of the annual inflation rate.

The picture is largely similar for overall PCE inflation: a large drop for the month-over-month rate and more modest declines for the year-over-year and our trend measures.

The rapid increase in the Fed Funds rate from mid 2022 to mid 2023 and the decline in inflation now has the Fed Funds rate higher than the inflation rate and, more often than not, tends to keep inflation at bay. Note that after the Great Recession the inflation rate was above the Fed Funds rate longer than at any time since the 1960’s.

Earlier, the BEA released its second estimate of GDP for the first quarter of 2024. Output growth for that quarter was revised down slightly from 1.6% to 1.3%.

In the perverse world of monetary policy, slowing GDP growth is considered good news in the sense that so-called inflationary pressures are thought to be easing. Nonetheless (core) PCE inflation is still running above the Fed’s 2% target. Interest rate cuts appear to be some time off in the future.

April CPI

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The consumer price index (CPI) rose 3.82% over the month on an annualized basis. While the increase was less than the previous month’s 4.65%, there is still some work to do according to the most recent FOMC announcement:

The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

May 1 FOMC statement

According to our trend measure the CPI fell only slightly, from 4.11% in March to 4.02% in April. The core measure saw a steeper decline, from 4.39% in March to 3.56% in April. Our trend measure of core inflation fell to 3.97% in April compared to 4.17% in March.

All of these measures attempt to remove the highly volatile price movements. Indeed, there is another measure, dubbed Supercore, that contains only services with shelter prices removed. Our trend measure was 2% a year ago but has now climbed to 6.12%

As we have discussed before, the value of looking at CPI inflation is that it gives a hint as to what to expect from the PCE (personal consumption expenditure) inflation that will be released in a couple of weeks. And recall that core PCE inflation is what the FOMC members seem to have their sights on. The good news is that our trend and year-over-year measures of CPI inflation fell by roughly 0.1 percentage points while core CPI inflation fell by around 0.2 percentage points. It would be reasonable to conjecture similar declines in PCE and core PCE inflation. Since our trend measures of these inflation series were 3.5% in March, we’re looking at 3.3 to 3.4% inflation. While inflation is moving in the “right” direction (at least for this one month), inflation is still running well above the Fed’s stated 2% target for core PCE inflation. While today’s news did not rule out a rate cut by the end of the year, it also did little to change anyone’s mind either.

April Employment Report

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

The BLS announced that payroll employment rose by 175,000. In addition, the BLS revised down previous estimates by a total of 22,000, down 34,000 in February but up 12,000 in March. Expectations by professional economists were in the 240,000 range. The slowing was evident pretty much across the board as can be seen in the charts below.

Employment gains in retail and health care, however, remained about the same over the last several months.

Temporary help services have been on a steady decline over the past two years, with only January this year showing an increase.

Average weekly hours of work fell from 34.4 to 34.3, leading to a decline in total hours of work.

The household survey showed an increase of 85,000 in the number employed, 63,000 more unemployed and no change in the labor force participation rate. The unemployment rate rose slightly from 3.83% to 3.86%.

Policy Outlook

The stock market shot up due to several events that occurred over the past week: Q1 GDP, PCE price index, Fed announcement after their meeting and today the employment report. We commented on the GDP and PCE price index reports here. Q1 GDP came in somewhat lower than expected and the PCE price index showed continued inflation pressures. Our bottom line was that while it may have slightly increased the probability of upcoming rate cuts, inflation was still stubbornly high. Indeed the FOMC statement contained the following comment, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” Evidently, there has been no recent progress to that end.

Today’s jobs report seems to have the market increasing the odds of a rate cut by summer’s end. The WSJ called it “goldilocks job report for the Fed.” Does a downtick in employment lead to an imminent recession?

To “see through” the effects of the pandemic recession, we removed a set observations from March to September 2020, since those effects were massive. In the figure, months during which the NBER determined the economy was in an expansion, and for which the monthly employment change was less than 175,000 are marked with red dots. There’s a lot of red dots. Looking at periods when the economy did well for a prolonged period of time, 1960s, 1990s, 2010s, the current job numbers look similar. Staring at this figure, it’s difficult to put a lot of credence in the notion that low job gains precede recessions. Or, to borrow a phrase, low job gains have predicted 9 of the last 3 recessions.