U.S. Economic Update: Inflation, Employment and the Fed’s Next Move

U.S. Economic Update: Inflation, Employment and the Fed’s Next Move

March 11, 2024


Fed’s Expectations for Rate Cuts Hinge on Inflation Decline

Chairman Powell addressed Congress noting stronger than expected economic growth and inflation decline. If declines in inflation and economic growth continue, the Fed expects to cut rates sometime this year. Powell reiterated that the Federal Funds rate is likely at its peak and that the Fed will likely cut this year. But, they are waiting until they are more sure that inflation is moving toward 2 percent. This will need more good news on falling CPI inflation and wage growth.

Core Inflation Remains a Concern

As noted last week, core PCE increased last month. While the year-over-year core inflation rate declined, this one-month increase is not something we want to continue. The biggest threat to the Fed’s expectation of rate cuts is still inflation.

Economic Data Releases

Payroll Report: Mixed Signals Amid Tight Labor Market

Last Friday we saw the latest payroll report. Total non-farm payrolls increased by 275,000, beating the consensus expectation of 200,000.

While the total number is good, we need to look beyond the headline. Employers revised payrolls down by 167,000 for December and January. Also, private sector payrolls were 223,000, but when we factor in prior month revisions, the gain is only 19,000. With relative weakness in private sector growth, the unemployment rate increased from 3.7% to 3.9%, which is still low. The labor market remains tight, and while wage inflation is easing slightly, it is a sticky metric and should stick close to 4% year-over-year with a tight labor market continuing.

Earnings and Hours Worked: A Balancing Act

With the payrolls number, we also received a reading on hourly earnings and average weekly hours.

Earnings declined in both the monthly and annual average hourly earnings. However, an increase in hours worked balances out the decline. So total wealth created there is not much changed.

ISM Services and Manufacturing: Contrasting Trends

ISM services also declined but remained in expansion territory. Yet, as the chart below shows, both goods and services declined last month, with goods moving deeper into contraction.

Readings from the global purchasing manager surveys show that, despite the Red Sea interruptions, supply chains are not as strained as expected. So, inflation is on track to get closer to the Fed’s 2% target.

The Case for a Soft Landing is Growing Stronger

Overall, with each data point, the case for a “soft-landing” becomes more plausible. The soft-landing achievement is leading to conversations around the economy being less vulnerable to recessions. Changes to the economy, like better inventory data, FDIC insurance cutting bank failures, and international trade, are lowering the chance of runaway inflation. What we have seen is Fed tightening that did not lead to a deep recession.

Inflation Path Remains Uncertain, Rate Cuts Likely

The biggest issue is the path of inflation and whether the recent upticks will continue. The ongoing ISM manufacturing contraction is not desirable long term, but it should keep down inflation for goods. Should the services continue to weaken, then inflation on the services side should also decline. We have seen in recent months that services inflation is sticky. Any decline in that area will likely be slower than anyone wants. It is likely that we will get rate cuts later in the year, but the magnitude of the cuts may be less than desired.

Looking Ahead: Key Economic Indicators to Watch

This week, we will get readings on CPI, PPI, and retail sales. We’re hoping to see inflation on the services side decline.

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