Month: January 2025

Q4 GDP, Inflation and Claims

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

2024 ended on a strong note as the BEA announced that real GDP increased 2.4% on a seasonally adjusted annual rate, lower than the very strong previous two quarters, but still above the long term trend. Over the year, GDP increased 2.8% following a 2.9% increase in 2023.

Personal consumption expenditures led the way, increasing 4.2%. Investment went the opposite direction, declining 5.6%.

One useful way to look at this data is to decompose the growth in output into contributions by its constituent parts. By way of example, the contribution of consumption, 2.9%, is given by the growth rate of consumption (4.2% in 2024Q4) weighted by the share of consumption (69%). Comparing across the third and fourth quarters, one can see that the contribuiton of consumption rose, from 2.5 percentage points to 2.9 points while that of investment fell from 0.1 points to -1.0 points. At the same time, the contribution of exports went from 1.1 points in the third quarter to a drag of 0.1 points in the fourth; in contrast, imports were exerted a 1.7 point drag in the third quarter but contributed a positive 0.1 points in the fourth.

The PCE price index was released today and, much like the CPI released earlier this month, delivered mixed signals. Inflation as measured by the PCE price index jumped to its highest level since April of 2024, increasing 3.11% on a seasonally adjusted annualized basis. Removing the highly volatile food and energy categories, the increase was only 1.89%, the second consecutive month below the FOMC’s 2.0% target. Our preferred trend measure revealed a similar pattern, with the PCE trend rising 2.36% (highest since last April) but the PCE core measure fell to its lowest level since December of 2023, 2.17%.

The Department of Labor released weekly initial claims for unemployment, falling 16,000 to 207,000, indicating that the labor market continues a strong performance.

Are we there yet?

We all know that the Fed looks at core PCE inflation. Less clear is whether they look at the month-to-month inflation rate, or year-over-year rate. Over the past three months, our trend measure has moved down towards the Fed’s 2% target, but: the same could be said of June to August of 2024, and our trend measure is still above target. There is still (some) work to be done on the inflation front. Fortunately, the real side of the economy continues its strong showing. Earlier this week the FOMC decided to keep rates as they were:

Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.

a mixed message december CPI

Posted on by peter.c.rupert

The BLS announced that the CPI rose 4.82% on an annualized, seasonally adjusted basis, the highest reading since last February, and an increase of a full percentage point compared to November. The year over year reading increased from 2.73% to 2.90% and our preferred trend measure increased from 2.81% to 3.48%. The surge, however, came largely from energy commodities (fuel oil and gasoline) rising 4.3% over the month, 66.5% annualized!! The extreme volatility of energy and food is the main reason the BLS also reports the CPI ex food and energy, likely a better measure of underlying inflation.

The CPI core measure (ex food and energy) plunged from an annualized 3.76% in November to 2.73% in December. The year over year number fell from 3.30% to 3.25% and our trend measure fell from 3.37% to 3.16%.

The following graph shows the extreme volatility of energy prices, often rising or falling 50% or more in a month. Food prices are also volatile, but no where near that of energy.

PCE inflation for December will be available in just over two weeks. Given the overlap in the goods and services in the CPI and PCE deflator, the CPI provides a useful signal of the likely direction for PCE inflation. Clearly, the signal from this CPI report is mixed: Overall CPI inflation rose between November and December while core CPI inflation fell. Since the policymakers on the FOMC focus on core inflation measures, perhaps the CPI report is good news: we may be in for a moderate decline in core PCE inflation. Stay tuned.

Job Market Remains Strong

Posted on by Paul Gomme

As reported by the Bureau of Labor Statistics (BLS), according to the Establishment Survey, nonfarm payroll employment rose by 256 thousand jobs in December — well in excess of expectations of 165 thousand new jobs reported by Bloomberg. The BLS noted that December’s job gains exceeded the average monthly gain for 2024 of 186 thousand.

Sectors receiving particular attention by the BLS were: health care added 46 thousand jobs in December (lower than the average of 57 thousand jobs per month in 2024), government gained 33 thousand jobs (down from the 2024 average of 37 thousand), social assistance was up 23 thousand (compared to an average of18 thousand per month in 2024), and retail trade accrued 43 thousand additional jobs in December after losing 29 thousand jobs in November (for the year, retail trade was essentially unchanged).

The household survey showed an increase in employment of 478,000 and a decrease in unemployed persons of 235,000. The employment to population ratio increased to 60% and the participation remained at 62.5%. The unemployment rate fell from 4.23% to 4.09%.

Although the overall labor force participation rate is still much lower than its peak in the late 1990’s, the rate for prime-age workers is close to it’s all-time high.

With a decline in the number of unemployed persons and a recent increase in job openings, we continue to see more openings than persons searching for jobs, meaning jobs are, in some sense, plentiful.

These stronger than expected labor market gains cast more doubt on the potential for future declines in the Fed Funds rate, as indicated in their December 18 announcement:

In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Indeed, if the next inflation report shows no real progress in moving toward the 2% target, it is quite likely, in our view, that the Fed should take a pause while they wait for more incoming signals.