Author: peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS reported that nonfarm payroll employment increased 199,000 in November, 150,000 of which came from the private sector. September employment numbers were revised down 34,000 with no revisions in October.

The service sector accounted for the bulk of the employment gains, increasing 121,000. Retail employment continues to suffer, falling for the fourth consecutive month. Health care and social assistance continues to show strong growth.

Average weekly hours increased from 34.3 to 34.4 leading to an increase in total private hours of work.

Average hourly earnings increased from $33.98 to $34.10 and has increased 4.0% year over year.

The household survey showed considerable strength with the labor force increasing 532,000, the participation rate increased to 62.8, the number employed rose 747,000 and the number unemployed fell 215,000, all leading to the unemployment rate falling from 3.88% to 3.74%.

Princeton economist and former FOMC vice-chair Alan Blinder defines a “soft landing” as one in which, following a tightening of monetary policy, inflation is either stabilized or reduced either without a recession, or a mild one. In a recent article, Blinder identifies 11 monetary policy tightenings in the US since 1965. He characterizes 3 as hard landings, and 2 further episodes ending with a hard landing that was not the Fed’s fault. That leaves 6 soft(ish) landings. The lessons are: first, soft landings are not that uncommon, representing about half of recent episodes; and second, lowering inflation need not end with a recession, although economic activity slows. Predicting a recession in advance is notoriously difficult. Looking at the recent data, what we can say is that the slowing employment growth in 2023 is consistent with a soft landing scenario. Until recently, the same could be said of GDP (output) growth; the 4.9% annual growth recorded in the 3rd quarter being the notable outlier. On the other hand, why land at all? Just keep flying!! Stay tuned.

By Paul Gomme and Peter Rupert

The BLS announced that payroll employment increased by 150,000 according to the establishment survey. As we have argued about inflation, the one month change can be quite volatile. Looking at the three month average change, the picture shows a slowing trend for employment growth. The private sector added only 99,000, meaning the the government sector was responsible for about 1/3 of the overall gain. The payroll numbers for the previous 2 months were revised down 101,000; down 62,000 in August and 39,000 in September.

Private sector average weekly hours fell from 34.4 to 34.3. That, along with the jobs number drove total hours of work down by 2.6%, that largest decline in over a year.

Private sector average hourly earnings rose from $33.93 to $34.00, a 0.2% increase. Real wages continue to rise as the year over year wage increase is outpacing CPI inflation.

The household survey data paints a slightly darker picture. Employment fell 348,000 and the employment to population ratio fell from 60.4 to 60.2. The labor force declined 201,000. The number of people unemployed rose by 146,000. Those changes combined to increase the unemployment rate from 3.79% to 3.88%. The unemployment rate for men has increased faster than that for women since the beginning of 2023.

CPI

On an annualized basis, monthly CPI inflation plunged from 4.9% in September to 0.5% in October. As we have previously noted, monthly inflation is extremely volatile. One way to smooth out these fluctuations is to look at the annual inflation rate which fell from 3.7% (September) to 3.2% (October). However, the 12-month inflation rate sluggishly reflects changes in underlying inflation which is why we prefer to look at the three-month inflation rate. The good news is that this measure also dropped, from 4.9% to 4.4%.

Others prefer to look at core CPI inflation (removing the volatile food and energy components). The annualized monthly change in core CPI inflation is down, from 3.9% to 2.8%; the annual core CPI inflation rate dropped marginally, from 4.1% to 4.0%. However, the three-month annualized core CPI inflation rate rose, from 3.1% to 3.4%.

Remember that we at econsnapshot prefer the annualized three-month inflation rate over both the monthly inflation rate (too noisy) and the annual (12-month) inflation rate (too smooth and sluggish). Those who look to core inflation measures presumably think that it’s a better measure of trend inflation. But, what exactly is trend inflation? A minimal requirement is that over longer horizons, it tracks actual inflation, sort of like drawing a line through the monthly inflation numbers. One issue with core CPI inflation is that it often persistently deviates from overall CPI inflation.

Policy Outlook

The employment report did little to suggest either an increase or decrease in the Fed funds rate at the next meeting. Employment growth shows a slight decreasing trend over the last year or so. For the most part, CPI inflation for October was down relative to September; however, it is still well above the Fed’s stated 2% target. Keep in mind that the Fed’s target applies to core PCE inflation, not CPI inflation. At the end of the month, the BEA will release the October PCE price index data. However, there’s useful information to be gleaned from the CPI numbers. Since 1990, headline CPI inflation and core PCE inflation have outstripped core PCE inflation by roughly half a percentage point. This suggests that CPI inflation of around 2.5% is consistent with core PCE inflation of 2%. That CPI inflation is down in October suggests that PCE inflation will also be down. Given the current levels for CPI inflation, it seems doubtful PCE inflation will be close to the Fed’s target. The case for further tightening of monetary policy is that inflation remains stubbornly above target. The case against lies in Milton Friedman’s observation that the effects of monetary policy operate with long and variable lags — suggesting that the Fed should wait to see whether they have already built in sufficient tightening. Only time will tell whether Jerome Powell will manage the elusive soft landing.

By Paul Gomme and Peter Rupert

The BEA announced that real GDP for 2023Q3 rose 4.9% on an annualized basis, according to the advance estimate. This was the highest reading since the pandemic-related data in 2021Q4. Economists surveyed by Dow Jones expected 4.7%. Consumers continued to spend: real personal consumption expenditures increased 4.0% with consumption of durable goods increasing 7.6%.

Real domestic private investment rose 8.4%. Residential investment rose 3.9% after falling for 9 straight quarters.

Real government consumption spending continued to rise, with Q3 increasing 4.6%, the fifth consecutive quarter of increases after five consecutive quarters of decline.

One way to parse GDP growth is to compute the contributions made by its constituent parts. For example, in 2023Q3, real investment rose 8.4% on an annualized basis, far higher than GDP (4.9%). The contribution of the growth in investment is computed by taking its growth rate and weighting (multiplying) by investment’s share of output. The result is that investment contributed 1.5 percentage points to the 4.9% growth in output. The remaining major components are summarized in the figure below. The largest contributions to the headline 4.9% output growth were consumption at 2.8 percentage points, and investment, 1.5 percentage points.

The figure above can also be used to dissect the increase in GDP growth, from 2.1% in Q2 to 4.9% in Q3. By far, the largest contributor to this 2.8 percentage point increase in output growth was consumption at 2.2 (= 2.8 – 0.6) percentage points. Exports also made a sizable contribution, 1.8 (= 0.7 -(-1.1)) points, which was more than offset by that of imports, -2.1 (= -0.9 – 1.2) points. The contributions of investment (0.6 points) and government (0.2 points) were more modest. It is of interest to note that while some in the media talk about the decline in consumer confidence surveys, consumers were the largest contributors to the Q3 growth.

The personal consumption expenditure (PCE) price index climbed to 2.9%, up from 2.5% in Q2, the lowest readings since 2020Q4. In a sense, this uptick in inflation as measured by the PCE price index is old news: this series is also reported monthly, and our recent post on this index already noted that this measure of inflation, measured at the three month horizon, has been moving up and away from the Fed’s 2% inflation target.

Bottom Line

GDP growth was broadbased and the economy continues to defy the doom crowd. PCE inflation has moderated of late while consumption and investment show considerable strength. Will we enter a recession? You bet, see the graph below. When? Who knows…no one has been able to consistently forecast turning points.

The data remain unconvinced that we are currently in recession territory.

By Paul Gomme and Peter Rupert

The BLS announced that total nonfarm payroll employment increased 336,000 of which 263,000 came from the private sector as the government sector added 73,000 more workers. In addition, revisions to the two previous months increased employment by another 119,000.

This was a very strong jobs report that seems to have taken those prone to making predictions by surprise:

Economists surveyed by Dow Jones expect that September will show a 170,000 net gain in nonfarm payrolls.

CNBC

Looking back at the January 472,000 number (was 517,000 before revisions) here is what economists forecast:

The January jobs report showed nonfarm payrolls increased by 517,000, far higher than the 187,000 market estimate.

CNBC

Evidently, forecasting the US economy, or any economy for that matter, is not a simple task.

Total nonfarm employment has rebounded strongly from the depths of the pandemic and is now close to where it would have been had it stayed on the trend line post Great Recession.

The service sector added the bulk of jobs, up 234,000; 96,000 coming from Leisure and Hospitality that was obviously slammed during the pandemic and is still below its pre-pandemic level by 184,000 employees.

Average weekly hours remained at 34.4 and so the increase in total hours of work came solely from the new employees. Average hourly earnings increased from $33.81 to $33.88.

The household survey was remarkable as there was very little movement in any measure. Employment increased by only 86,000, there was no change in the employment to population ratio (60.4) or in the unemployment rate (3.8%).

Looking forward, it appears that what policy makers consider “inflationary pressures” are still hanging around given the strength of the labor market and the overall economy pretty much running on all cylinders. Although many of the price numbers have declined they still remain above the Fed’s 2% target indicating that more weight is likely being put on another rate hike than a continued pause.

By Paul Gomme and Peter Rupert

The BLS announced that the all items CPI increased 0.2% over the month and 3.2% year over year. It is interesting to observe the various measures of “inflation” that appear in the media. For example, Bloomberg highlights the monthly change:

CNBC highlights the year over year change:

A New York Times columnist spotlights food prices:

Of course there are many others including the median CPI, trimmed mean CPI and the new “supercore” measure. What all of these analysts are trying to decipher is whether “inflation” has slowed enough to warrant a pause in the FED’s tightening spree. While there are many ways to parse the underlying data, such as the cost of eggs, milk and chicken, the preferred measure of the Econsnapshot is to look at the CPI over a 3-month horizon. Month to month the data is very volatile (hence the notion of core CPI that removes two very volatile components, food and energy) and year-over-year is very slow moving. As seen in the graph below, the annualized 3 month inflation is a bit under the FED’s 2.0% target at 1.9%. The year-over-year ticked up slightly.

The BEA recently released the July PPI (Producer Price Index). While the annualized one month change popped up from -0.5% to 3.6%, this series is very noisy; the annualized 3-month change came in at -0.2% for July, up from -0.6% in June.

In our May post on prices, we noted that the BEA points to the PPI for Consumption Expenditures as being closest in coverage to the CPI. Over the past three months, the annualized growth in this index was -6.8% indicating that by this measure, consumer prices are falling. Looking back a year, the index grew at a rate of -2.7%.

However, as we noted in May, there does not appear to be a very tight relationship between the growth of either of the PPI measures and either the CPI or core CPI.

Both the CPI and PPI measures point to a moderation in prices. Given that, it seems likely that the Fed will take a pause and let the economy speak a little more before a move in either direction.

By Paul Gomme and Peter Rupert

The BLS announced the CPI and PPI for June. The CPI rose 0.18% from May to June on a seasonally adjusted basis, 2.18% when annualized, and was up 3.1% year over year. Rather than strip out a lot of goods that comprise the CPI, we look at the CPI on a three month average basis. As shown in the graph, the year over year continues to decline while both the annualized monthly and the 3 month ticked up slightly. The CPI-X (ex food and energy) differs, however. The annualized monthly rate grew 1.91%, below the Fed’s 2% target.

Of course, the question the Fed faces comes down to: What has been happening to the trend in inflation? Given the 2% target, the Fed hopes to see progress toward that goal. But, as we have commented on in several previous posts, what measure of inflation is the best indicator? Headline CPI (PCE)? Core CPI (PCE)? The Fed’s new Supercore CPI (PCE) (the price of services excluding energy and housing services)? Paul Krugman (NYT, July 11) has his own measure of supercore: “My preferred measure these days is “supercore,” which excludes food, energy, used cars and shelter (because official measures of housing costs still reflect a rent surge that ended a year ago.)” And goes on to say he is not a fan of the Fed’s measure, “The Fed has a different measure of supercore — non-housing services — but when you look at the details of that indicator, it’s a dog’s breakfast of poorly measured components that I find hard to take seriously.” Here is a graph of the Fed’s supercore measure:

So what are we to make of all of this? The main problem is that all of these measures are purely arbitrary; there is no underlying theory as to how, or what to measure. The BLS states, “Inflation can be defined as the overall general upward price movement of goods and services in an economy. The U.S. Department of Labor’s BLS has various indexes that measure different aspects of inflation.” These new so-called supercore measures omit various categories of goods that are purchased in the market. The overall CPI is comprised of 243 commodities and services measured in 32 different geographic areas. To show just how big these omissions are, the following table recreates a subset of the BLS table where the relative importance is the share of total expenditure used to weight the respective change and the May 2023-June 2023 column gives the monthly change:

The table above shows that the core CPI includes about 79.7% of all expenditures. Removing shelter from the core means the price measure includes only 45% of the things we buy. If only services prices are included that would vastly reduce the set of prices used to calculate inflation.

The BLS announced that the Producer Price Index (PPI) for final demand increased 0.1% from May to June or 1.65% annualized. Year over year it increased 0.24%. Our 3 month measure fell -0.69%, the third consecutive month with a decline.

Trend Inflation

What we (the writers of this blog) mean by “trend inflation” is a series that tracks the movements of actual monthly inflation but somewhat smoothed (taking out the more extreme fluctuations). As we’ve discussed before, this is a signal-extraction problem. Every month, we get a new CPI number from which we want to make an inference concerning the current trend inflation rate. Trend inflation is the “signal”. However, the news (the new CPI number) is a noisy indicator of this signal, both because the CPI is reported in levels and because of transitory factors affecting monthly inflation. Further, the nature of the data is such that we cannot easily extract the signal (trend inflation) from the data. With all of this in mind, the reason for looking at core or supercore CPI inflation is that it has a higher signal-to-noise ratio than CPI inflation. Both seem promising in that they omit the more volatile price components of CPI: in the case of core CPI, food and energy; in the case of super core CPI, lots of other stuff. However, the charts above show that over the past couple of years, core CPI inflation has been running well above actual CPI inflation while the Fed’s supercore inflation has been well below actual.

An alternative to slicing and dicing CPI is to compute inflation over a horizon longer than a month. The idea in this case is that the monthly noise is an independent draw (in the jargon of economics, it’s independently and identically distributed) while trend inflation has memory and changes relatively slowly over time. Consider headline inflation. Typically, it’s calculated as the 12 month percentage change in the CPI. But a different way to think about this calculation is as the average of the 12 one month inflation rates. If there is no change in trend inflation over this period of time, the 12 noise terms will have a mean of roughly zero, and the year-over-year inflation rate will provide a good estimate of trend inflation. The rub is that there have been changes in trend inflation over the past couple of years. Consequently, the year-over-year inflation rate also takes an average of trend inflation over the past year. This is why, in the chart above, year-over-year inflation has consistently exceeded the monthly inflation rate for the last year and a half.

But there’s nothing magic about year-over-year inflation rates, and we’ve previously advocated for annualizing the three month inflation rate as a good compromise between capturing changes in trend in a timely fashion, and seeing through the noise in monthly inflation rates. By construction, the three month inflation rate tracks movements in monthly inflation while removing much of the noise – as can be seen in the chart above. One thing that the three month inflation rate lacks is a fancy name like supercore; oh, and the NYT soap box.

By Paul Gomme and Peter Rupert

The BLS released the Job Openings and Labor Turnover Survey (JOLTS) for May on July 6. The data reveal a pretty mixed view. Job openings fell 496,000 and now stands at 9.8 million vacancies. The number of unemployed workers in May was 6.1 million so that there were 1.6 jobs available for each unemployed worker.

The JOLTS data also contains information on the rate at which workers are hired, laid off, quit and job openings. The rates are determined by dividing by the level of employment. The JOLTS covers about 95% of all nonfarm payroll jobs in the US. While the openings rate declined the hiring rate and the quit rate rose. The layoff rate remains at one of its lowest rates since the inception of the JOLTS in December of 2000. Note that all of the other rates are well above their historic average.

The JOLTS data provides some evidence for those looking for nascent signs of a recession. Quit and hiring rates fell through the March-November 2001 and December 2007-June 2009 recessions, and both series started falling prior to the latter recession. The declining quit and hiring rates since early 2022 fit this pattern. Unfortunately, JOLTS only covers three recessions, so it’s tough to make much of the historic precedents, particularly since the February-April 2020 recession was due to COVID-19. Another potentially confounding factor is that both quits and hires are at historically high rates, and the recent declines may be due to reversion to the mean.

The data on initial and continued claims for unemployment insurance also came out on July 6. Initial claims rose slightly but remain relatively subdued. Continued claims have been trending down over the past few months.

On July 7, the employment situation report for June was released by the BLS and showed a payroll employment increase of 209,000 but downward revisions for April and May totaling 110,000 for the two months. One way to think about these changes is that roughly half of the employment gains reported for June were offset by the downward revisions in the previous two months. The employment change in the private sector was the smallest increase over the past couple of years.

The phrase “little changed” was peppered throughout the press release for the Employment Situation Report. The report highlighted gains in employment in government (60,000), health care (41,000), social assistance (24,000) and construction (23,000). Yet the gains in professional and business services, and leisure and hospitality (both 21,000) were described as “little changed”. It would seem that the difference between a gain warranting notice, and “little changed” is 22,000.

Average hours worked in the non-farm sector inched up 0.1 hours to 34.4. That increase, combined with the increase in private employment led to about a 5% in total hours of work in the private sector. There was little change in average hourly earnings.

One way to combine data from JOLTS and the employment report is through the Beveridge curve which plots the vacancy rate (from JOLTS) against the unemployment rate (the household survey). As seen in the chart below, the data up to and including the Great Recession (2007-09) appears to lie on a stable Beveridge curve. After the Great Recession, the Beveridge curve shifted out. And after the pandemic, the Beveridge curve shifted out yet again, with the most recent data in the north west quadrant. One interpretation of an outward shift in the Beveridge curve is that it reflects lower efficiency in the matching process between jobs and workers. Under this interpretation, at a given level of unemployment, firms need to post more vacancies in order to fill jobs. An alternative interpretation is that the outward shifts in the Beveridge curve are due to lower costs of recruiting workers: firms post more vacancies because doing so is simply much cheaper that in the past. One way to distinguish between these two alternative interpretations is to look at how quickly vacancies are filled: less efficient matching says it should take longer while lower job posting costs implies a shorter period of time. Unfortunately, the speed at which vacancies are filled is no longer available.

According to the BLS household survey, employment increased 273,000, the number of people unemployed fell by 140,000 and the labor force increased by 133,000. The participation rate and employment to population ratio were unchanged. The unemployment rate fell from 3.65% to 3.57%.