The Headlines Never Tell the Whole Story
GOOD NEWS! Inflation is down - Employment is up.
Hold on just a minute, let’s take a peek under the hood.
The data isn’t bad, it is mildly encouraging, but it isn’t what the headlines imply. But, the broad stock markets liked it and were quite enthusiastic with the markets rising quickly and 10 year interest rates dropping significantly when the news was announced with great fanfare from the government. Does the term ‘irrational exuberance' come to mind?
Inflation
The headline is that there was 0% inflation on the Consumer Price Index (CPI) for the month, and 3.3% inflation over the last year, down from 3.4% last month. However, the ‘core’ inflation (excludes volatile energy and food prices) was up .2% for the month and dropped from 3.6% to 3.4%. That is all improving, but not getting us to the 2% target. The reason it dropped is that energy prices (gasoline mainly) decreased during the month. Without that there would have been little/no change from the previous month. While it is an improvement, it is not a trend, and not yet a cause for celebration. Let’s watch the data, for that is key to eventually lowering interest rates. There is some other potentially good news, the Producer Price Index (PPI), decreased .2% and the core PPI was flat. That is a good sign for inflation, and may show a softening of demand. On the other hand, commodity prices have started rising again.
Regardless, the market liked the news, and the broad stock market averages jumped over 1% with the announcement. The 10 year Treasury bonds interest rates have also reacted quite well - dropping to a recent low of 4.25% as of June 13, 2024. That is a key factor in mortgage interest rates and if it holds or declines further, that would be good news for mortgages and housing.
The Federal Reserve is holding their base rate unchanged for now, waiting for the data to show more clearly if we are headed to a sustained 2% inflation rate. Until data shows we are at 2%, there will be little improvement to the overall high interest rates that we are currently experiencing.
Employment
A few weeks ago in #158, Real Unemployment Explained, we explained why the headlines do not tell the whole story. There is a strange and unusual dichotomy between the Employment Survey and the Household Survey. Year to date on the Employment Survey shows 1.2 million jobs added, but on the Household Survey, it shows we lost 100,000 jobs year to date. Normally these are very similar, but not now. What seems to be happening is that part time jobs are increasing with many folks taking second jobs, and full time jobs are decreasing. Of course, the government will focus on the positive headline of job growth.
The headline unemployment rate went up slightly to 4.0%, and that is still a very good number historically. But it may indicate a softening of the labor market. And the job increases on the Employment Survey were 272,000 for the month, much of that was concentrated in government and hospitality, with small increases in manufacturing.
There is other potentially good and bad news on employment, the Initial Unemployment claims last week rose to 229,000. While this is still a historically low number, it is higher than it has been, and may be an indicator of a slowing job market, good if you want a slower economy and lower inflation eventually - bad if you are the folks losing your job. There is no trend yet, we need to watch the data.
BOTTOM LINE
The inflation data and the apparent job increases do not support any interest rate decreases by the Federal Reserve in the near future.
In general economic terms, to get inflation down, there should be a decrease in aggregate demand. That does not appear to be happening as the federal government continues to spend heavily with very large and growing deficits (the new update this week is a $400 billion increase in the current year deficit projection, over the February estimate just 4 months ago to $1.9 trillion deficit). We continue to hope for a ‘soft landing’ (getting inflation under control without a recession), and lower interest rates when inflation is at or near the target of 2%. That does not appear to be the case as of now. To get inflation to 2%, there is a case to be made that interest rates should be increased, to induce slowing the economy further with the concurrent softening of demand That implies a recession. Stay tuned, as more data comes in, the cloudy picture may clear up.
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