Month: January 2026

GDP and PCE

Posted on by peter.c.rupert

by paul gomme and peter rupert

This morning, the BEA released updated third quarter GDP and Personal Income and Outlays. Real GDP growth was revised up from 4.3% to 4.4% for the third quarter of 2025. The largest contributor to the GDP growth came from consumer spending, rising 3.5%, that contributed 2.34 percentage points to the overall growth. Investment showed no change, however, both non-residential and residential structures declined sharply, 5.0% and 7.1%, respectively, while equipment and intellectual property products increased 5.2% and 5.6%, respectively.

The BEA is clearly working hard to get back onto schedule, releasing Personal Income data for October and November 2025. This release is the source for PCE (personal consumption expenditure) price data. Starting with the overall PCE inflation, the annualized month-over-month inflation rate for November was 2.52%, up from 1.93% in October, but down from3.18% in September. The annual, or 12 month-over-12 month, inflation rate was 2.77% in November, little changed from September (2.74%) but up slightly from October (2.68%). Our measure of trend inflation was 2.55% in November, almost the same as in October (2.56%) and down from September (2.88%).

Turning to core PCE inflation (that is, excluding food and energy), the annualized monthly inflation rate was 1.94% in November, down from 2.30% in September and 2.52% in October. There was not much change in the annual inflatino rate: it was 2.79% in November compared to 2.83% in September and 2.75 in October. Our trend measure for November was down to 2.39% compared to 2.67% in September and 2.62% in October).

December PCE data is scheduled for release on February 20. The release schedule is scheduled to catch up to its previous pace (just under a one month lag) only by April 30. These continued lags are most unfortunate since the FOMC’s preferred measure of inflation is based on core PCE. In a previous post on CPI inflation, we discussed running a regression of PCE inflation against the contemporaneous measure of CPI inflation, then using the more timely CPI inflation to predict PCE inflation. Overall PCE inflation is predicted to rise on a month-over-month basis (from 2.52 in November to 3.29% in December), fall on an annual basis (2.36 in December compared to 2.72% in November), and our measure of trend is predicted to fall from 2.58% to 2.44%. Predictions for core PCE inflation show similar patterns: the monthly rate rising from 1.94% to 2.75%; the annual falling from 2.79% to 2.37%; and our trend measure falling to 2.11% from 2.39%.

A strong case can be made for keeping the Fed funds rate unchanged. Output growth is very strong and inflation is still above the FOMC’s 2% target. While job creation has weakened, the unemployment rate is quite low by historic standards.

Consumer and Producer Prices

Posted on by Paul Gomme

The BLS’s Consumer Price Index release is mildly bad news on the inflation front. While the overall CPI inflation rate fell, on an annual basis, from 2.61% in November to 2.65% in December, the monthly rate picked up from 1.23% to 3.75% (on an annualized basis). Our measure of trend rose from 2.19% to 2.71%.

Annual core CPI inflation (that is, excluding the `volatile’ food and energy components) showed little change, rising from 2.62% in November to 2.65% in December). However, the montly rate rose sharply from 0.96% to 2.91%. The increase in our trend measure was more moderate, rising from 1.94% to 2.26%.

The BLS also released Producer Prices for November 2025, so a bit dated. That portion of the producer price index relevant to personal consumption shows inflation running above the FOMC’s 2% target.

Much of our interest in the CPI data arises from its role as a signal for the PCE (personal consumption expenditure) index data that will be released in just over a week. Past experience tells us that while CPI and PCE inflation tend to move together, this is not a tight relationship in that one percentage point increase in CPI inflation is no guarantee that PCE inflation will similarly rise by one percentage point. With this in mind, we regressed measures of PCE inflation against their CPI counterparts, then used these regressions to develop predictions for PCE inflation later this month. This statistical model predicts that year-over-year PCE inflation for December will be around 2.36% (for both overall PCE and core PCE inflation) while our measure of trend will be 2.44% for overall PCE, and 2.11% for core PCE inflation. We will see how well these predictions fare.

Given these numbers it seems unlikely that the Fed will be lowering rates any time soon, i.e., inflation is, by no means, tamed.

Labor market stuff

Posted on by peter.c.rupert

by paul gomme and peter rupert

Employment

The BLS announced that December employment increased by 50,000, following November’s 56,000 (revised down from 64,000). October employment fell 173,000 after a 68,000 downward revision.

Despite the weak employment gains from the Establishment Survey, the unemployment rate ticked down from 4.54% in November to 4.38% in December. This fall in the unemployment rate is chiefly due to the number of unemployed persons falling from 7.8 million (November) to 7.5 million (December). This decline was large enough that the labor force fell (by 46 thousand). On its own, a drop in the labor force tends to push up the unemployment rate.

job openings and labor turnover survey (JOLTS)

According to the JOLTS data, there was very little movement in vacancies, hires or layoffs. The rates shown below are calculated by the variable in question divided by total employment or total employment plus openings. For example, if employment is 9.5 million and there are 0.5 million openings then the openings rate is 0.5/(9.5+0.5) = .05 = 5%. It is also useful to see the relationship between the level of unemployment and the level of openings. The number of unemployed persons fell by 278,000 in December, leaving 7.5 million unemployed persons, close to the number of job openings, 7.1 million.

Productivity and costs

Nonfarm business sector labor productivity increased 4.9% in the third quarter of 2025. Output increased 5.4% while hours worked increased only slightly, 0.5%. This led to a decline in unit labor costs of 1.9% as hourly compensation increased by 2.9% while productivity increased 4.9%.

Discussion

Despite the somewhat anemic employment numbers, other aspects of the labor market are doing well. Unemployment has fallen a bit, productivity is the highest we have seen in a couple of years. Firms continue to have vacant slots and, as can be seen in the JOLTS graphs above, tend to fall quite quickly at the onset of a recession. No sign of that yet. So, if you are searching for a reason to lower rates, this probably isn’t the best place to look.