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Steady as She Goes

Slower Payroll Growth and Softer Inflation Point the Way


A Superfluity of Data

It seems like we get a lot of data these days. I’ve read various statements comparing data to oil, gold and, most recently, water. We imagine that it is only a matter of time until data supplants even air in the hierarchy of necessities.


And while we ‘love’ data and consider ourselves to be ‘data-driven’, it is important to note the drawbacks of these characteristics. First, data are individual observations, the givens, and as such are both incomplete and certainly imprecise. Second, data are objects, and so yield to perception as well as manipulation. Third, data are facts, and facts are, drawing from the Latin, things that are ‘done’—which is to say that they are dead; they do not move, grow, evolve, or otherwise travel forward alongside us in time. Lastly, as they are remote from our futurity, they not only fix our gaze upon the past, but they blunt our focus on the present, and provide an imperfect atlas for the future.


We’ve made the point before that using past inflation data to drive interest rate policy is like driving forward while looking in the rearview mirror, but it is more than this. The incredible superfluity of data tempts us toward the use of manifold instruments of varying degrees of accuracy and timeliness all at the same time. As data become more abundant, they become less valuable, not more; and judgment—or the ability to determine context and assign weights—remains, as ever, supreme in value.


You will likely read more about how data is necessary and valuable. Amazon has certainly used its petabytes of data to improve its business and to sell more stuff to more people. Sponsors of Large Language Models require ever-increasing hordes of data on which to train their AIs, so much so that their engineers have exhausted a world-wide-web of content on which to train them, and now are tinkering with ways to generate new data from old.


As Wallace Stevens wrote “a wave is a force and not the water of which it is composed, which is never the same,” so, too are data not reality, and their value only proceeds from the truth that underlay them and that we tirelessly try to prise from their cold, dead hands.


Payrolls Weaken Slightly

We received Non-farm Payrolls for the month of April, and they exhibited both continued expansion as well as a slowdown in the pace of job creation. In April, the US created 175,000 new jobs according to the Bureau of Labor Statistics,

which agreed in both level and trend with the private ADP report, which showed 192,000 new jobs in April.

As these figures came in below expectations and the prior month’s reading, the markets generally took the change as a sign of a softening labor market. When combined with other readings over the past couple of weeks, the data point in the same direction: the labor market, after exuberant expansion at the end of 2023 and beginning of 2024, is likely becalming itself. The rate at which employees left jobs fell in April,

and the number of job openings fell, as well. This latter may be an indication that employers are becoming sensitive to the price of labor, less confident about the future, or discouraged in adding to their stock of labor.

The unemployment rate increased slightly, from 3.8% to 3.9%, which is to say effectively unchanged. Still, it rose less than Job Openings fell, so Labor lost some leverage in the wage rate price negotiation.

Comparing the number of jobs available to workers available, we can see that Labor’s bargaining power continues to decline,

which corresponds to the downward trend we see in the Wage Rate.

We wrote last time that we should “…[E]xpect more of the same until something changes in the labor market.” While hiring is slowing, openings are, uh, closing, and wages are declining, the fundamental balance in the labor market hasn’t shifted, as employers are still seeing profits growth and so have no need to shed workers. Layoffs and Discharges fell quite a bit after a slight uptick over the past quarter.


These data follow a contraction in demand and unprofitability, which we haven’t yet seen. Labor market fundamentals remain robust, are trending weaker, but still exhibit strength sufficient to support consumption going into North America’s summer months.


Dollar Strength Is a Problem for US Growth

One of the largest detractors from US GDP growth in the first quarter of 2024 came from Exports and Imports. Both are intimately connected with the value of the US dollar relative to other foreign currencies. On the one hand, home currency strength is awesome because you can buy more foreign goods like wine from South Africa and cars from Japan; on the other hand, the strength of your currency makes the things you export more expensive for the rest of the world to buy, such as Levi’s jeans and Boeing 787s.

As the market’s expectations of interest rate cuts have evaporated from those heady days of late 2023 when it seemed that the Fed would cut interest rates anydaynow, geopolitical risk emanating from the Middle East caused investors to seek the safety of the US dollar, and global credit expansion has been muted, the US dollar has rallied.


Exports have since fallen, a sign of the lack of competitiveness of US trade; but Imports fell as well, which may signal American consumers’ flagging power to consume. All told, dollar strength has meant that the United States has been importing more than it has been exporting, resulting in an expanding deficit in trade.

This shows up in the national economic statistics as a drag on growth, since net exports are subtracted from economic growth when calculating GDP. While the dollar isn’t running at historically high levels, it is still quite strong, though we expect this strength to diminish as the market comes to believe that US inflation is subsiding, rates are more likely to fall than remain where they are, global credit expansion picks up, and other markets return to economic growth and vie with the Big Dog for marginal flows of global investment capital.


Import prices rose almost 1% in April and have been rising steadily since January. Higher prices for imports make them less affordable, so the widening trade balance may see some relief in the coming quarter; however, export prices have been keeping pace, too. The US has long served as the world’s Consumer of Last Resort. While this won’t come to an end due merely to increasing prices, it will certainly frustrate industrial policy setters in China who are hoping to export their way out of economic catastrophe.


Inflation, Inflation, Inflation

We received a couple of different surveys on inflation in the last two days, and both told different stories. First, we received the Producer Price Index (PPI) for April, and Headline PPI came in at a shockingly moderate 2.2% year-over-year rate of change. This reading is not so far off from the Fed’s target.

Core PPI on a year-over-year basis, however, showed a slightly higher rate of 2.4%. PPI on a month-over-month basis, showed a spike in prices to an uncomfortable .5%,

which was so pronounced it also showed up in the three-month moving average, which registered the same increase.

We had thought that the next tick in this series would be down, but the important thing to remember is that this is pipeline inflation and may not actually flow through to consumer prices.


A day later we received the Consumer Price Index, the not-fatally-flawed measure of prices that the Bureau of Labor Statistics calculates to index Social Security payments, and to which the US’ inflation-indexed bonds are linked. Despite the imputation of Owner’s Equivalent Rents, a shelter price that no one actually pays and is on a year lag, the index showed that price increases were slowing, an important development for the fixed income and equity markets.

Consumer price inflation registered at 3.4%, a fall of .1% from the prior month

The good news extended to Core Inflation, which strips out volatile food and energy prices. Here, the inflation rate fell to 3.6% from 3.8%, a three-year low.

Shelter inflation was 5.5%, still much, much higher than would be tolerable even if it were a real price, but this was down from 5.7% the prior month.

Alternative measures of the increase in the price of shelter show instead that shelter costs, while too high, are either flat or falling. This is welcome news but needs to be further aided by a housing construction boom and the general relaxation of zoning restrictions that favor landholders and incentivize rent-seeking behavior.


Checking in on the Indefatigable American Consumer

Retail Sales were flat in April, and March’s increase was revised downward .2%. We will keep a close watch on these figures since any deterioration in the labor market would translate directly into a further reduction.

Although most categories fell, gasoline sales were up, reflecting its recent move upward. Gas is probably taking from other categories of retail spending.

Although by these measures it seems like consumer demand is cooling, when looking at Retail Sales on a year-over-year basis and excluding automobiles, spending growth looks pretty healthy.

Housing Starts Up Slightly, Building Permits Decline

Housing Starts were expected to come in at 1.42 million units, but instead logged an increase of 1.36 million units. A 4.4% miss is no reason for alarm, but it is consistent with the pullback in construction we’ve been monitoring. If we’re going to do anything about the scary shelter inflation chart above, these figures are going to have to pick up—and from what Building Permits are telling us, that isn’t currently in the cards.

Building Permits lead Housing Starts by a month or two, so the decline allows us a window into the future of housing construction. A 3% fall coming on the back of a 5% fall the prior month indicates that much needed housing stock will likely be late in the arriving.

If there is one emerging reason why the Fed should begin cutting interest rates now, it's that housing construction is freezing up. Industry won't make investment in building houses they can't sell. They learned that lesson all-too-well in the aftermath of 2008. Since it is such a large source of price pressure, the US desperately needs more housing stock. It should lower interest rates to spur housing construction, and thus alleviate price pressures that will be sure to build further in future due to there not being enough places for new households to live.


Industrial Production, a Measure of Real Economic Growth, Unchanged

The subtitle says it all. Manufacturing and mining were lower, which was partially offset by growth in utilities. On a year-over-year basis, industrial production fell .4% after a quarter of increases. This isn’t an important indicator for the United States, as it accounts for less and less of economic activity, but it does nonetheless track real GDP fairly well.

Manufacturing Production also fell, mirroring and helping to explain the reduction in activity. Capacity Utilization also fell by .1%. The US economy isn’t running at inflationary levels of productive capacity.

As Capacity Utilization is falling, it’s curious to see PPI pick up. As you can see in the chart below, they tend to move correlatively.

Given this, we will await confirmation of whether we have a trend here, or if it is more echo effect from COVID’s negative supply shocks.


Tales of Brave Powellysses

High frequency data can be misleading. Imprecision and measurement error often cause the market to overreact. Unfortunately, discerning the Truth takes time, and time requires patience. The patient observer will note that the economy continues on a gradual, downward trajectory as it contends with restrictive interest rates. That rates are taking longer to wrestle the economy into submission seems due to the fact that leverage rates on the whole are lower, refinancings are not yet necessary, and income growth has been sufficient to support consumption growth. The best labor market in sixty years should continue to support current levels of economic activity. But shelter costs and the shakier financial security of lower-income and younger households could derail the economy. On a quiet day, if you listen closely, you can hear Chair Powell shout from the 2%-inflation-target-mast to which he’s bonded, Ulysses-like, ‘Steady as she goes.’


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