Why has the Fed got it so wrong with inflation, even though the inflation rate has been falling steadily for more than a year?
Paul Krugman in a recent NYTimes Op-ed said the personal consumption expenditure deflator (PCE) excluding food and energy—the Fed’s preferred inflation indicator—has risen at an annual rate of only 2.5 percent over the past six months, down from 5.7 percent in March 2022. When food and energy prices are added it still rose just 2.5 percent.
Even U.S. unit labor costs were much weaker than initially thought in the third quarter amid surging labor productivity, which meant unit labor costs (i.e., wages) weren’t pushing inflation higher. So-called ‘sticky wages’ were the main reason the Fed kept saying inflation would remain high, hence their refusal to say when they would begin to drop interest rates.
The markets now believe it could begin as early as in May next year.
“Unit labor costs fell at a 1.2% annualized rate in the third quarter, the Labor Department's Bureau of Labor Statistics said, revised down from the previously reported 0.8% pace of decline. Unit labor costs rose at a 1.6% rate from a year ago, the smallest year-on-year increase since the second quarter of 2021.”
Slowing wage pressures were underscored by the ADP National Employment Report, which showed that private payrolls increased by just 103,000 jobs in November after rising 106,000 in October. ADP said almost all the new jobs were created in transportation, education, and health care.
There is another obscure economic statistic that can show a better next year. It’s the Labor Department’s JOLTS report that counts the number of job openings each month. The number of openings was sky-high after the COVID pandemic as evidenced by the black line in Calculated Risk’s graph because employers wanted to re-hire workers as the economy recovered so quickly.
It has been steadily declining since then, as has the number of hires (blue line).
But the unemployment rate is still below 4 percent (currently 3.9%) and has been since December 2021. Americans are fully employed, and companies are wanting to hire more despite inflation and soaring interest rates.
“The number of job openings decreased to 8.7 million on the last business day of October, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 5.9 million and 5.6 million, respectively. Within separations, quits (3.6 million) and layoffs and discharges (1.6 million) changed little.”
The difference between hires (5.9 million) and separations (5.6 million) in the JOLTS report means approximately 300,000 new jobs were created in November, changing little in the employment picture.
That should tell us there will be a strong November unemployment report on Friday, though slower GDP growth is forecast for the fourth quarter. Americans are experiencing an incredible recovery, fastest in the developed world, including China.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment