Macro Commentary

Dive deeper into economic trends

Bank of Japan is Too Optimistic on Inflation

Jacob Hess
September 22, 2023

The Bank of Japan held its policy rate unchanged in the most recent September meeting after it made a slight change to its yield curve control policy in the previous meeting. The maintenance of ultra-loose policy is justified by the Bank of Japan’s insistence that “Japan's economy is projected to continue growing at a pace above its potential growth rate” while at the same time projecting that “the year-on-year rate of increase in the CPI (all items less fresh food) is likely to decelerate.” Coincidentally, we got an update on CPI inflation just a few hours before this announcement was made.

In August, Japan's headline Consumer Price Index (CPI) recorded a growth of 0.3% MoM and 3.2% YoY, a slight dip from July's 3.3% YoY. This decline was significantly influenced by a drop in Energy CPI, which decreased by -0.6% MoM and is now -9.8% lower YoY, marking its lowest annual increase since August 2016. Meanwhile, Food CPI rose by 0.4% MoM and 8.6% YoY, both rates slowing down from the previous month. Household goods CPI, which encompasses furniture and household utensils, saw a deflation of -0.8% MoM in August. Notably, Recreation CPI, a semi-proxy for services inflation, surged by 1.8% MoM, reaching a YoY rate of 5.0%, the highest since 1981.

From Statistics Bureau of Japan

The Bank of Japan's (BoJ) core inflation metric, which excludes fresh food from the CPI, increased slightly by 0.3% MoM, maintaining an annual rate of 3.1% YoY. This is consistent with rates reported in February, March, and July of this year, but down from January's peak of 4.2% YoY. When excluding both food and energy, the core CPI rose by 0.3% MoM and 2.7% YoY. Interestingly, this annual pace remains at its zenith, unaffected by the declining energy prices. Despite the decline in energy prices contributing to some progress on inflation in 2023, these prices are set to incline in the near future. The BoJ continues to view these inflationary pressures as temporary, even as the Japanese economy consistently outperforms expectations. The latest S&P Global Flash Composite PMI indicates that Japan's economy is still expanding, albeit at a modest rate, the slowest since February. Service sectors are driving this growth, even though the pace has decelerated to an eight-month low. The report also highlighted that Japanese manufacturing is experiencing a four-month high in input price inflation, with output price inflation remaining stable.

Given the current trajectory of growth and inflation, it's plausible that the BoJ might hike rates within the next year, potentially by the end of 2023. The bank's inflation projections are consistently overly optimistic, and inflation figures consistently surpass prior estimates. Significant changes in wage and employment data will be required to align with the BoJ's inflation narrative, especially as current indicators suggest a labor market that bolsters Japanese purchasing power. As it stands, the BoJ's commitment to an ultra-accommodative policy sets it apart from other developed nations.

The Bank of England Pauses in a Near Split Decision

Jacob Hess
September 21, 2023

This morning, the Bank of England maintained its Bank Rate at 5.25%, ending a string of rate hikes that started back in December 2021. The pause was not without controversy as the BoE Monetary Policy Committee (MPC) as the vote was passed by slim margin of 5-4. The dissenting minority wanted a 25 bps rate hike. The announcement also included the decision to reduce to slow the rate of quantitative easing. Specifically, the MPC voted to reduce the amount of UK government bond purchases over the next 12 months by -£100 billion to £658 billion. This announcement comes after UK CPI inflation rates surprised to the downside on lower-than-expected services inflation.

From Bank of England

It appears that the reason for the pause was likely related to that inflation release which may have caused an abrupt reassessment of the inflation risks. The MPC noted that the decline in annual inflation from 7.9% in June to 6.7% in August was “0.4 percentage points below expectations at the time of the Committee’s previous meeting” with both goods and services CPI inflation surprising to the downside. However, it also notes that these outsized declines were caused by the airfares & accommodation segment which “tend to be volatile over the summer holiday period.” In the next paragraph, it retreats from its admission of progress and states that services inflation “is projected to remain elevated in the near term.”

On the labor market and wages, the MPC says that it has started to see the impact of higher rates. This is likely referring to the recent rise in the unemployment rate and the continued decline in job vacancies which had been elevated for some time. The language that ends the official announcement suggests that these numbers are being just as closely monitored as inflation rates. In fact, the MPC specifically mentions that it is closely monitoring signs of inflationary pressures such as “the tightness of labour market conditions and the behaviour of wage growth and services price inflation.” Thus, we should look there as well for guidance on the BoE future decisions.

The final paragraph is a quick note on the reduction of asset purchases. The MPC notes that this action was already and agreed upon discussion point in September, and that the decision to implement some form of quantitative tightening should be a surprise to no one. The size of the reduction looks to have been guided by the market as the minutes mention that “the median market expectation for the MPC’s pace of gilt stock reduction over the year ahead was £100 billion.”

The minutes of the MPC describe the situation best: “For most members within this group, the latest developments meant that the judgement to keep Bank Rate unchanged at this meeting rather than increase it was finely balanced.” While the pause feels decisive, it was not by any means, and because of that, it really does feel like this week’s inflation release made a huge difference in the voting today. Since the BoE has adopted this hyper-data-dependent mode, it should be no surprise that a reversal in the disinflation trend as demonstrated by future data would likely cause a reversal on the sentiment of the MPC. For now, however, the members can rest on the fact that the lagging nature of monetary policy suggests that much of that tightening has yet to make a major impact yet. The hope is that inflationary pressures will respond to these restrictive conditions and continue to trend the right direction.

UK Inflation August Update: A Precursor to the Bank of England's Announcement

Jacob Hess
September 20, 2023

The UK's inflation data for August, released just before a highly anticipated Bank of England announcement, will set the stage for a huge decision of whether to pause or hike once again. The Consumer Price Index (CPI) for the UK rose by 0.3% MoM, reaching an annual rate of 6.7% YoY, a slight dip from July's 6.8%. This marks the lowest inflation rate since February 2022, a notable decline from the peak of 11.1% YoY in October 2022. The primary driver of this month's inflation was energy, mirroring trends observed in other countries. Despite a 1.7% MoM surge in the UK's energy CPI, it remains down by -3.2% YoY. Meanwhile, food inflation, which previously peaked at 14.8% YoY, has moderated, registering a 0.5% MoM increase and settling at 12.6% YoY. This reduction was influenced by a 1.5% MoM rise in alcohol and beverage prices, while non-processed and seasonal food prices both experienced a decline.

From ONS

The surprise today was in the core CPI, which saw a modest 0.2% MoM increase, bringing the annual rate down from 6.9% YoY to 6.2% YoY. This deceleration was largely attributed to the services sector, where prices remained unchanged for the month, resulting in a YoY rate of 6.8%. Several service segments, including travel & transport (-0.2% MoM), package holidays & accommodation (-1.0% MoM), and non-catering recreational & personal services (-0.8% MoM), reported deflationary trends. Consequently, the combined impact of the recreation & culture and restaurants & hotels segments led to a 0.24 ppt reduction in the annual CPI rate, though this was almost entirely offset by the influence of energy prices on the transport index. Goods inflation, influenced heavily by energy and food prices, rose by 0.5% MoM, reaching 6.3% YoY. Some segments, such as household goods (0.2% MoM) and non-energy industrial goods (0.3% MoM), showed signs of disinflation. Recreational goods prices actually declined (-0.2% MoM).

Producer Price Index (PPI) movements in the UK underscored the volatility of energy prices. Both input and output producer prices witnessed an uptick, largely due to surging crude oil input prices (12.1% MoM) and petroleum production prices (7.7% MoM). Notably, of the output PPI segments only petroleum products showed an upward contribution to the change in the annual inflation rate, at 1.42 ppts. This upwards contribution was greater in magnitude than the sum of the contributions of the other product groups.

The Bank of England, which has been a bit more hawkish than its other developed market central bank peers, has been closely monitoring wage and core CPI pressures, which have been more persistent in the UK than elsewhere. This latest report provides one of the first pieces of tangible evidence of inflation easing, primarily driven by a slowdown in service price growth and the largest deceleration in core CPI since the pandemic ended. However, most of disinflation was seen in recreation and travel categories and in just this one month, so it might be risky to change the perspective on inflation based on such a short-term, limited trend. On the other hand, there are signals from the labor market that the demand for hiring is cooling with vacancies falling and the unemployment rate starting to tick up. With that in mind, the Bank of England should be able to get away with a pause, and a clear guidance that it will raise rates in the future if progress on inflation is reversed.

Housing Starts Tumble in August Amid Rising Mortgage Rates

Jacob Hess
September 19, 2023

Housing starts crumbled in August to the lowest rate in the post-pandemic period. At just 1.28 million, housing starts fell -11.3% MoM and -14.3% YoY to close the summer, ending the near-term bounce in the construction market after the initial rise in mortgage rates through 2022 and early 2023. The decline came from a sharp move downward in multi-unit starts of -26.3% MoM in August. The start rate of 334,000 is more than -40% below what it was a year ago and is the lowest since August 2020. Single family home starts also contributed to the downtrend but not as much. That segment of construction was down -4.3% YoY but at 941,000, was at the third highest rate this year, outpacing all of the rates seen in Q1 and Q2.


Multi-unit starts had been at an elevated level for the past year and a half as apartment construction ramped up in response to the surge in housing prices and came with a similar up trend in rents. Multi-unit starts averaged 536,000 and 522,000 a month in H2 2022 and H1 2023, much higher than the pre-pandemic average of 419,000 in H2 2019 (which was the highest multi-unit start rate since the 2008-2009 recession ended). So with all that being said, we are looking at a bit of mean reversion here combined with unfavorable financing conditions.

Despite the large move in starts, there was some bullish housing market data to contend with in the report. Building permits issued increased 6.9% MoM and included gains in permits issued for both single (+2.0% MoM) and multi-units (14.8% MoM). However, it is worth nothing that the year-to-date total (Jan-Aug) of permits issued for 2023 is still down -15.8% compared to the same period in 2022. The total number of homes completed increased as well in August, up 5.3% MoM, with a huge increase in the number of multi-unit projects being completed, up 45.8% YoY. Housing completions have become an important data point to look at since low housing inventory became a problem in the pandemic housing boom. As such, completions remain well above the pre-pandemic average, reaching its highest average rate of 1.49 million in the first half of 2023.

The main reason for the sudden plunge in housing starts in August was the recent move upward in mortgage rates. The average 30-year fixed mortgage rate in August was 7.07% which is the highest since December 2021 and just above the previous peak seen about a year ago at 6.90% in October 2022. As a result, we’re about to see the resilience of the housing market be tested over the next two quarters. The market has pushed off its expectations of rate cuts, and the Fed has adopted a clearer guidance on “higher for longer” interest rates. Builder confidence has already started to decline again with the September reading of the NAHB Housing Market Index at 45, a drop of-11 pts in the past two months. Finally, potential homebuyers will be feeling even more constrained than the previous mortgage rate peak as they have less in excess savings, student loan payments no longer in a moratorium, and a weaker labor market. All of these dynamics should lead to a renewed decline in housing demand and thus, residential construction.

US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year

Jacob Hess
September 14, 2023

US retail sales expanded once again in August, extending a streak of gains to five months. In August, the headline growth of retail sales was 0.6% MoM which is the fastest since January 2023. The annual rate of growth only slowed by -0.1 ppts to 2.5% YoY last month. The more core measure of total retail and food services sales was up just 0.2% MoM since gasoline sales played a significant impact in the headline number. No matter where the spending is going, one thing seems to be true, the US consumer is still spending and proving to be resilient in the face of increasingly murky economic waters.

As evidenced by the difference between the headline and core figures in August, there was a significant increase in gasoline sales of 5.2% MoM. The increase in gas sales was almost entirely the result of rising energy prices. In the CPI report yesterday, we saw that the gasoline index increased a sharp 10.6% MoM which meant that drivers in August were paying a hefty premium. Despite the jump to end the summer, the YoY growth in gas sales is still sharply negative at -10.3% YoY (though this is much higher than the -20.9% YoY in the month before).


Growth rates in other categories were mixed. There was growth in clothing sales (0.9% MoM), electronics (0.7% MoM), and health & personal care sales (0.5% MoM). On the other hand, there were some categories that saw significant moves down like sporting goods sales(-1.6% MoM), miscellaneous store sales (-1.3% MoM), and furniture sales (-1.0% MoM). It is worth pointing out that the furniture and building materials store segments have the worst YoY growth rates (excluding gas sales) at -7.8% YoY and -4.9% YoY respectively because they are related to more expensive purchases that may require consumers to need access to credit to purchase. Additionally, both have some relation to the real estate industry which is currently the most struggling area of the economy. The fact that both of these categories saw their YoY declines intensify suggests that there is some underlying consumer weakness that is being hidden by rosier headline results.

The bottom line is that as long as consumers are spending, the economy is growing. And at the moment, retail spending is keeping pace with price growth and in some cases slightly ahead of it. There are some underlying trends that point to weakness ahead, but so far in Q3, it looks like consumption will be on track to be a positive contributor to GDP growth. Of course, things can and likely will change as tighter financial conditions eventually show out in full force. For now, resilience is the keyword.

US Consumer Prices Surge in August Driven by Energy Costs

Jacob Hess
September 13, 2023

In August, the US witnessed a significant uptick in consumer prices, marking the fastest monthly growth since June 2022. The Consumer Price Index (CPI) rose by 0.6% MoM and 3.7% YoY, a noticeable acceleration from the 3.2% YoY recorded in July.

From BLS

A primary driver behind this surge was the energy index, which reversed its declining trend observed in Q2 2023. Energy prices soared by 5.6% MoM. Breaking it down, the gas index witnessed a substantial jump of 10.6% MoM. In contrast, electricity and natural gas indexes saw marginal increases, with rates of 0.2% MoM and 0.1% MoM, respectively. Fuel oil prices also experienced a significant rise, increasing by 9.1% MoM. On the food front, inflation continued its trend of modest gains, registering a growth of just 0.2% MoM. Both grocery prices and food away from home prices reflected this slow pace, with increments of 0.2% MoM and 0.3% MoM, respectively.

While the headline CPI showed a robust growth, the core CPI (ex-food and energy) recorded a more subdued monthly gain of 0.3% MoM. Goods inflation, excluding energy, remained particularly low, with prices declining by -0.1% MoM. This marked the third consecutive month of decline. A significant contributor to this drop was the used car and vehicle index, which decreased by -1.2% MoM. Other indexes in this segment presented a mix of muted gains or slight declines. Services CPI saw an increase of 0.4% MoM, but its annual pace decelerated by 0.2 percentage points, settling at 5.9% YoY. The shelter index, a consistent contributor to the core CPI's monthly gain, rose by only 0.3% MoM, marking its smallest gain this year.

There does seem to be a lot of noise in CPI data with many different segments seeing mean reversions and just in general volatile swings. These are often ignored by the Fed which is why the special “Supercore” aggregate can be important to look at. The Supercore CPI, which excludes food, shelter, energy, and used cars, grew by 0.4% MoM and 3.2% YoY in August. For comparison, in July, this aggregate was flat MoM and up 3.4% YoY. Through all the noise, it looks like the trend of disinflation is being maintained. The significant downtrend in the monthly paces of core CPI growth is another strong indicator of this. Over the last three months, it has grown at about 0.23% MoM which is an annual rate of just under 2.8% YoY.

The Fed will be looking through the volatility in its next September meeting. The core messages of disinflation should shine through to them, but that may not be enough to keep them from hiking one last time. Key employment indicators have slowed, which will also be encouraging in the fight against inflation, but many FOMC members have already indicated their preference for one more 25 basis point increase in the Fed funds rate. It will be a close call, however, as there are many reasons to maintain the pause.

August NFIB Survey Showed a Tough Environment for Small Businesses

Jacob Hess
September 12, 2023

The NFIB Small Business Optimism Survey for August emphasized the mixed momentum of the recovery in business sentiment as inflationary pressures ease and interest rates rise. The headline Optimism Index fell -0.6 pts to 91.3 which reversed most of the 0.9 pt increase in July. Regardless, it is still the second highest reading of the year which shows that the general upward trend in sentiment from the lows of late 2022 and early 2023 is intact. A similar trigger could be seen in the biggest moving subindex, the General Business Conditions index, which fell -7 pts to -37 in August, offsetting the improvement in July. This reading is still one of the highest in the last two years. The second largest mover was the index tracking small business earnings. It improved 5 pts from a 2023 low to -25. The volatility in these readings suggests that the inflation situation remains largely questionable for many small businesses. In fact, there was a slight uptick in the percentage of survey respondents who saw inflation as their single most important problem.


The slight rise in inflation concerns is consistent with marginal positive movement in the indexes tracking small business pricing. The Actual Price Changes index which looks at price changes over the last three months ticked up 2 pts to 27 after falling near a three-year low in July. The Price Plans index, tracking the expectations of price changes in the next three months, increased 3 pts to 30. This is the second highest in 2023 though not by a substantial amount. The movements in these price indexes suggest that there is some resistance to the disinflationary path which could be revealed in this week’s CPI release. The rise in energy prices has already reversed the course for headline inflation, and the deceleration in core inflation has already more or less stopped. The lingering concern of elevated inflation continues to threaten to increase small business owners’ inflation expectations which would be damaging to the Fed’s ability to maintain price stability.

The subindexes tracking labor force dynamics for small businesses show that there are some signs of easing in the demand for workers. Most noticeably, the current employment index fell back to the lowest value of 2023 at -4, a -2 pt decline, and the job openings index also fell -2 pts to 40, the lowest since February 2021. Both reflect trends in earlier BLS reports on the labor market like the JOLTS report which showed that the official number of job openings has fallen significantly from its all-time high of over 11 million and the employment situation which showed a notable tick up in unemployment to 3.8%. Despite some strength falling out of demand. there is still a sense that labor shortages are still an impact as the labor supply situation still hasn’t fully returned to where it was before the pandemic. A net 54% of respondents are still seeing few or no qualified applicants and, as a result, the compensation plans index ticked up 5 pts to 26, the highest so far in 2023. Overall, it seems that some of the post-COVID excess hiring demand has started to fall away, but the lack of skilled workers is creating a shortage of skills that small businesses are increasingly having to pay more money to get. This will provide some resistance against easing wage growth.

The NFIB surveys are important because they provide an in-depth look into many aspects of small businesses as they navigate the new high interest rate environment. Small businesses reported an average interest rate of 9.0% on short-term loans in August, this is sharply higher than 6.2% a year ago and 4.6% two years ago. The higher cost of borrowing does appear to be having effects on inflation and hiring as we have seen in the trends of the subindexes tracking these dynamics, but in recent months, the trends have started to move sideways. The Fed meets later this month to decide if it will hike interest rates one more time, and it has a lot of evidence to consider in its deliberations. The stagnation in NFIB Small Business Survey in August will likely be a part of the argument for one additional rate hike to tie up loose ends.

All Signs Point to a Weaker Labor Market in August

Jacob Hess
September 01, 2023

The weakness in the ADP employment report earlier this week was confirmed by similar numbers in the BLS report, and additional data supports the narrative of a loosening labor market. In August, nonfarm payroll employment increased just 187,000 showing that hiring in the US has clearly slowed its pace. On top of the weaker number reported in August, we got substantial revisions downward in previous months. The employment gain in June was revised lower by a huge -80,000, resulting in a third estimate of just 105,000 for that month. A smaller revision of -30,000 was reported for the month of July, and that gain is now just 157,000. Together, this means that there were 110,000 job losses just in revisions! Funnily enough, the revisions mean that August’s job gains of 187,000 is the highest of the summer, but it is almost guaranteed that the final number will see similar downgrades if that trend continues. In 2023, the late downward revisions have caused a distorted view of the labor market as initial reports often have mischaracterized how strong hiring is.

From BLS

There is plenty more data in this report to properly describe the true weakness of the labor market. Sluggish hiring in August led to a substantial increase in the unemployment rate, up 0.3 ppts to 3.8%. This is the highest since early 2022 which is significant, but it is also only one tick higher than a year ago. The total rise in the number of unemployed was quite large at 514,000 which means that there are now a total of 6.4 million unemployed individuals in the US. Within that group, there was a strong increase of 294,000 in the total number of job losers or people who did temporary jobs. While that was the largest reason for unemployment, there was also a significant group of people who entered the labor force in August. Specifically, the BLS reported that there were 77,000 reentrants and 94,000 new entrants and both groups are larger than they were a year ago. This led to the participation rate ticking up 0.2 ppts to 62.8%. The increase in participation rate translates to an additional 736,000 people in the labor force which is great news for businesses facing labor shortages.

Data on average hourly earnings also showed some weakness, but the progress was less jarring. At the aggregate level, hourly earnings was up 0.24% MoM in August which caused the annual rate to slow to 4.29% YoY, down from the 4.36% YoY in July. Both goods and services sector wages slowed at the annual rate, up 5.15% YoY (prev 5.29% YoY) and up 4.07% YoY (prev 4.12% YoY) respectively. ADP pay data saw a much more substantial decline, but it was also higher to begin with. While this months decelerations in wage growth in encouraging, the short-term trend is still a bit too high for the Fed. The current monthly rate of wage growth annualized is just 2.88%, but higher growth in June and July results in the average growth of the last three months annualized is a more substantial 4.49%.

In general, though, this morning’s jobs report is a significant piece of evidence in the case for a weakening labor market. Job gains are getting weaker, in both initial reporting and revisions, and the unemployment rate is ticking up. Not only are we seeing substantial increases in the supply of labor through higher participation, but we are seeing a steeper rise in the number of unemployed. While wage growth is still proving to be a bit sticky, it likely will move a few months behind weaker hiring data. Thus, further deceleration should be expected in September and Q4. The Fed will undoubtedly take this report as a reason to pause in September, but there are still some lingering fears that inflation could rebound which would reinforce their belief that a final hike this month is the correct move. However, this will not stop the market and observers from becoming markedly more dovish in response to the weak employment data today.

The End of Summer Sees the End of Disinflation in Europe

Jacob Hess
August 31, 2023

As the summer comes to a close, so does the disinflation trend in Europe. Euro area annual inflation was stagnant in August at 5.3% YoY, unchanged from the July reading of 5.3% YoY. The moderate monthly gain of 0.6% MoM was the largest since April and ended a string of cooler readings earlier in the summer. The healthy pace was a result of energy prices bouncing off of near-term lows. The energy index increased 3.2% MoM on its own which reversed some of the deflationary pressure that the segment put on the headline rate. The decline of -3.3% YoY was the smallest since April and is likely to continue to get smaller. On the other hand, food inflation was much smaller on a monthly basis, 0.1% MoM, and helped to offset the gains in energy prices. With the annual rate dropping to 9.8% YoY, food price growth has fallen back into single digits for the first time in a long time. The coolness in food prices this month was thanks to a -0.6% MoM decline in unprocessed food prices. Similar trends were evident in August CPI releases from Germany, France, and Italy where each saw the annual rate of growth in food prices ease.

From Eurostat

Core inflation is the bigger talking point from the report. It came in at 5.3% YoY in August which was a slight deceleration from July’s reading of 5.5% YoY, but it still stuck in the 5-6% range where it has been since the beginning of the year. The monthly increase of 0.3% MoM represented a consistent, moderate gain in core prices that is keeping core inflation sticky. Both goods and services annual inflations decelerated in August, but not by very much. The former’s YoY rate was 4.8% YoY, down -0.2 ppts from previously, and the latter’s YoY rate was down just -0.1 ppt to 5.5% YoY. Services inflation is also stuck in that 5-6% range but the latest readings have been towards the mid-to-high part of that range. This will do no favors for anyone who is trying to see a disinflationary trend in euro area core inflation.

This is the last major release before the September ECB meeting, so it will likely set a hawkish tone when members gather to discuss the progress on inflation in the next month. We found out that in today’s ECB minutes for the August meeting, it was decided that “A further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down…” That statement suggests that there will be heavy support for another rate hike given how sticky core inflation looked in August. The only major argument against this is that the next two months feature favorable base effects (September 2022 saw 1.2% MoM inflation and October 2022 saw 1.5% MoM inflation) which will help cushion further moderate gains in prices, but that is about it. Energy prices are back on the rise, and food prices are not moving against them. Other goods and services prices are just not falling fast enough. These things point to a hike once summer ends.

Labor Market Indicators are Starting to Unify on Easing in Hiring

Jacob Hess
August 30, 2023

The labor market is finally loosening, and several indicators are coming together to support that. The preshow to the BLS jobs report, the ADP National Employment Report, recorded job growth of 177,000 in August, down from 371,000 jobs added in July. The July employment increase was upgraded by 47,000 from the previous reading of 324,000 in a slight nod to labor market strength, but that was the extent of the signals of strength. The job gains were still heavily in the services sector with another substantial 154,000 gain there, but within that sector, the gains were more spread out. The robust growth of employment in business services and leisure & hospitality has slowed and was just 15,000 and 30,000 this month. The services sector was also slightly distorted by a strong increase in education (52,000) that came as a result of schools being back in session following the summer break.

From ADP

More weakness can be found in the ADP’s wage data which pointed to a significant easing in the growth of annual pay in August. For job changers, annual pay growth reached the lowest since July 2021 at 9.5% YoY, down from 10.3% YoY last month. The softness in pay growth for job changers in August matches up well with the decline in the total number of quitters in July from the JOLTS data yesterday. There are increasingly weaker incentives for employees to jump ship to other positions as job prospects gradually become dimmer. Pay growth for job stayers also slowed, down -0.3 ppts to 5.9% YoY, but the deceleration was much slower than for job changers’ pay growth. The spread between the two has reached the lowest since May 2021.

The ADP data jives well with JOLTS July release where it was discovered that the trend in falling job openings was continued. Specifically, job openings fell over -330,000 from June to July to 8.8 million. The decline over the last year has been -2.4 million from a total of 11.4 million in July 2021. The sharpest decline over the past year has been in the business services industry where openings fell -750,000 in that period. It is no surprise that this sector has also seen a sharp slowdown in the pace of hiring over the past few months. As mentioned before, the number of quits reported by the BLS has also come down substantially. From June to July, total quits fell -253,000 to 3.5 million and was down more substantially over the past year, down around -460,000. This is basically back to the average amount of quits observed just before the pandemic (the average in Q4 2019 was just under 3.5 million).

The Fed will have a lot of new data to think about in its next meeting. It will be happy to see several of the employment indicators cooling together to provide broad evidence that the labor market is loosening. At the same time, the Fed will hope to see this while the unemployment rate remains near the current low level. Further confirmation of the trend of labor market easing this Friday might be convincing enough to keep the FOMC members from opting for a final hike in September.

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