U.S. Economic Snapshot

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.

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.

By Paul Gomme and Peter Rupert

The Bureau of Economic Analysis announced that, on an annualized basis, the personal consumption expenditures (PCE) price index increased 3.94% and core PCE (excluding food and energy) — the Fed’s preferred measure — rose 3.86%, up from 3.24% in the previous month. As we have commented many times, the monthly numbers are quite volatile and therefore we calculate a “trend” measure that we feel better captures the underlying trend, shown in red below. Both the trend measures indicate an uptick in inflation. These higher PCE inflation numbers were foreshadowed by the CPI release from about two weeks ago.

Earlier in the week the Bureau of Economic Analysis released its advance estimate for first quarter GDP. Output growth has decelerated from 4.9% in the third quarter of 2003 to 3.4% in the fourth quarter of 2023 and 1.6% in the most recent quarter. Personal consumption expenditures increased 2.5% in the first quarter after increasing 3.3% in the previous quarter. Indeed, consumer spending on services was a driving force in the most recent report. Investment increased 3.2% with the residential component increasing 13.9%, the largest increase since the fourth quarter of 2020.

The table below breaks down output growth by the contributions of its major components. The contribution of, say, investment (0.6 percentage points) is given by its growth rate (3.2%) weighted by its share of GDP (18%). Between 2023Q3 and 2024Q1, output growth has fallen by 3.3 percentage points. Of this decline, 0.4 percentage points (2.1 – 1.7) is due to consumption. Investment contributed 1.2 percentage points; government 0.8 points; and exports and imports have both contributed 0.5 points. This tells us that the fall in output growth has occurred due to all components of output, with particularly large contributions by investment and government spending.

Outlook

Over the last few months the likely prospect of several interest rate cuts became dimmer due to a rise in the underlying inflation trend. Has the deceleration in GDP growth over the last couple of quarters increased the likelihood of a rate cut? Given the rising trend in inflation it does not seem likely that a rate cut will happen any time soon.

Our measure of trend core PCE inflation now stands at 3.5% — considerably higher than the FOMC’s 2% target, and moving in the wrong direction. Some may point to the slower output growth numbers as a signal of lower future inflation. But, arguably the right thing to do at this stage is to raise interest rates. However, the FOMC has painted itself into a corner with earlier promises of lower interest rates. While it’s tempting to point to the real side weakness to justify a rate cut, in the longer term, addressing inflation is the better course of action as we learned in the 1970s when the U.S. was hit by stagflation — a stagnating real side along with high inflation.

By Paul Gomme and Peter Rupert

The BLS announced that CPI inflation rose 0.4% from February to March or 4.6% on annual basis. On a year over basis the CPI increased 3.5%. Our preferred measured of inflation rose to 4.11% in March after increasing 3.85% in February and 3.06% in January.

The core CPI inflation (excluding food and energy) also rose 0.4%, 4.39% annualized. The trend measure of inflation increased from 4.06% to 4.17% on an annualized basis.

We know that the folks on the FOMC look to core PCE inflation, not (core) CPI inflation. However, the March PCE price won’t be released for a couple of weeks. Given the overlap in the goods covered by the two price indices, the CPI presumably provides some information for what to expect of the March PCE price index. While the two price indices move together at “long” horizons (annual or longer), at a monthly frequency the relationship is looser. In other words, seeing an increase in core CPI inflation of, say, 0.2 percentage points, does not necessarily mean that the core PCE inflation rate will similarly rise by 0.2 percentage points. With all of these qualifications in mind, the March CPI inflation numbers give us little confidence that March core PCE inflation will be down — much less that it’ll be near the FOMC’s stated 2% target. Considering that the FOMC will probably like to see more than a single month’s inflation at it’s target before lowering the Fed funds rate, we would not bet on lower interest rates any time soon — especially given the continued strength of the labor market and GDP.

Uh oh! While the year-over-year inflation rate as measured by the PCE deflator was essentially unchanged in February (it rose slightly, from 2.43% in January to 2.45%), the annualized month-over-month inflation rate, at 4.1%, is still running well above the Fed’s 2% target. Our measure of trend inflation rose half a point, from 2.6% to 3.1%. It bears repeating that our measure of trend inflation is designed to filter out much of the high frequency movements in the month-over-month inflation rate while responding in a timely fashion to changes in the trend.

The outlook is not much better when the “volatile” food and energy components of the PCE deflator are removed: The month-over-month inflation rate dropped from 5.6% to 3.2% (good), but is still well above the Fed’s 2% target (bad). The year-over-year inflation rate fell slightly, from 2.9% to 2.8%. And our measure of trend inflation was essentially unchanged, coming in at 3.16%.

The Policy Outlook

In a sense, the latest core PCE inflation numbers are not a surprise: they were foreshadowed by core CPI inflation which came out a couple of weeks ago. For the first two months of 2024, trend core inflation is up and is considerably higher than the Fed’s 2% target. If the monthly inflation rate continues to come in on the high side, expect to see the year-over-year inflation rate start to rise — just as it did in 2020-21. Along side the solid GDP growth and labor market, recent inflation makes it easier for those building a case for raising (or not lowering) interest rates.

The annual (12 month-over-12 month) inflation rate as measured by the CPI rose marginally, from 3.11% to 3.17% in February. Taking out the volatile food and energy components, core CPI inflation was down marginally, from 3.87% to 3.76%. So, overall no change? As we have emphasized in the past, annual inflation rates respond sluggishly to changes in trend. The monthly annualized CPI inflation rate rose smartly, from 3.73% to 5.44% while annualized core CPI inflation fell from 4.81% to 4.39%. As we have previously discussed, monthly inflation rates are quite variable. Our trend measure of CPI inflation popped up from 3.06% to 3.85%; trend core CPI inflation saw an upturn from 3.89% to 4.06%.

Policy Outlook

The FOMC tends to look at core PCE inflation, not CPI inflation. However, the PCE data for February will be released in a couple of weeks. Given the overlap in the goods and services covered by the CPI and PCE, the February CPI report provides some “news” regarding the likely direction of the upcoming PCE data. Sorry folks, but the short term prospects for interest rate cuts are dim. At the horizons we report, PCE inflation for January exceeded the Fed’s 2% target, whether overall or the core measure. Given that the February CPI data shows an increase in inflation, it seems unlikely that PCE inflation for February will be heading down towards 2%, and may well be up from January. The Fed is unlikely to let inflation get out of hand as it did in 2020. At this juncture, it’s easier to make a case to raise, not lower, interest rates, especially since the real economy (labor market, productivity and GDP) has not shown signs of weakening.

By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

By Paul Gomme and Peter Rupert

The BEA announced that the Personal Consumption Expenditure (PCE) price index rose 0.3 percent over the month, 4.22 percent on an annualized basis. While the monthly spike was high, the year over year number fell from 2.62 percent to 2.40 percent. Our preferred trend measure rose from 1.57 percent to 2.45 percent.

As we mentioned in the CPI post of February 14, given the relationship between changes in the CPI and PCE it was expected that the PCE would also likely rise. In terms of policy, the Fed tends to concentrate more on the core PCE index. The core measure also blipped up, the annualized monthly number came in at 5.10 percent for January after a 1.75 percent December number. Year over year the core measure fell slightly, from 2.94 percent to 2.85 percent. Our calculated trend inflation came in at 2.99 percent after a 1.94 percent December reading.

At least some news outlets have emphasized the decrease in the year-over-year PCE inflation rate, with the pop up in the monthly, annualized rate treated as an afterthought. As the saying goes, ”Those who forget their history are condemned to repeat it.” In 2021, monthly inflation started running well above the FOMC’s 2% target; it took at least half a year before the 12 month inflation rate reflected this increase. While one month doesn’t make a trend, the size of the increase makes it difficult to build a strong case for loosening monetary policy in the near term. We will be looking closely at the CPI report that comes out in a couple of weeks time.