Macro Commentary

A deeper dive into recent macro data

US CPI Cools Across All Segments that the Fed Cares About

Jacob Hess
May 10, 2023

The latest release of the US CPI showed that inflation continues to calm, especially in the service sector. The data reveals that CPI grew by 0.4% MoM and 4.9% YoY in April, down from 5.0% YoY in March. First the volatile components, food CPI was unchanged for the second month in a row, with food at home falling by 0.2% MoM, offset by food away from home, which was up by 0.4% MoM. The YoY change in the food index slowed from 8.5% YoY to 7.7% YoY in April. The energy CPI rose by 0.6% MoM in April, but it was still down on an annual basis thanks to a -3.5% MoM decline in March. Natural gas prices fell by -4.1% MoM, while gasoline prices grew by 3.0% MoM, but gas prices were still down by -12.2% YoY.

Core CPI (excluding food and energy) grew by 5.5% YoY (0.4% MoM), falling just slightly from the 5.6% YoY reading in March. Within that, the goods CPI was the fastest growing on the month, up by 0.6% MoM, as used cars and trucks bounced back by 4.4% MoM, and apparel and medical care commodities saw slight gains. Overall, goods inflation was still low, up by just 2.0% YoY in April versus 1.5% YoY in March. In the services sector, the shelter CPI expanded, but at a slower rate of 0.4% MoM, which helped the services inflation rate to fall by -0.5 ppts to 5.8% YoY. Other services segments fell as well, with transportation services down by -0.2% MoM and medical care services down by -0.1% MoM.

The April CPI report is almost entirely composed of good news as inflation trends looked favorable in just about every segment. The moderation in the YoY change in the food index, falling energy CPI on an annual basis, and a slower rate of expansion in shelter CPI were some of these trends, and they all were important factors contributing to the decline in overall inflation from March to April. The only area where prices picked up more than usual was goods inflation, heavily influenced by a bounce in used vehicle prices. However, while goods inflation has picked up, it is still relatively low at 2%. Removing all of what the Fed might consider “the fat” in the index, the "Supercore" index (all items less food, shelter, energy, and used cars and trucks) was up just 0.2% MoM and 4.7% YoY in April, down slightly from 5.1% YoY in March. These data points support a pause in June as there was significant progress made in the areas where the Fed is looking. Its focus should shift to wages and the labor market as it now appears to be the final piece in the inflation puzzle to solve.

Hot Services Inflation Sets Up the ECB for a Hawkish Announcement

Jacob Hess
May 02, 2023

If this inflation report was to provide some color to the ECB meeting this week, then that color is red. Euro area inflation was 0.7% MoM and 7.0% YoY in April, up from 6.9% YoY in March. The acceleration in the pace of annual inflation came even on the backs of an apparent peak in food inflation and another monthly decline in energy prices. The index for food prices grew just 0.2% MoM on the month which lead to a -1.9 ppts decline in the annual pace of price increases to 13.6% YoY. This is the lowest since November 2022. A further deceleration in food inflation could be observed if monthly gains stay muted as base effects start to have a major impact on the year-over-year comparison going forward. Energy prices declined -0.8% MoM which is a positive for sure, but some base effects led the annual pace to turn positive at 2.5% YoY after a brief period in negative territory at -0.9% YoY in March. This segment may continue to be volatile as energy markets in Europe settle on a consistent trend.

From Piet Haines Christiansen

The worrying trends came out of the core parts of inflation which are the ones that the ECB will be focused on in its meeting. As headline inflation has seen a consistent downtrend over the last few months, core inflation has been more resistant to downward pressure. In April, core inflation grew 1.0% MoM and 5.6% YoY which is only a slight decline from the 5.7% YoY pace recorded in March. The strong monthly pace means that core inflation is neutralizing base effects and keeping the annual rate of inflation near peaks. Non-energy goods prices saw a moderate pace of growth in April, up 0.7% MoM, which means that there was a small improvement in the annual pace, down -0.4 ppts to 6.2% YoY. This reading means that goods inflation has been above 6% for six months now which is troubling considering other developed countries like the US and Canada have seen clear downtrends in their goods inflation readings. It seems that supply chain disfiguration that is lingering from the Russia-Ukraine conflict remains the most impactful to the neighbors of the conflict.

While the dynamics of goods inflation are discouraging, services inflation is the real area of focus for the ECB because it has advanced again. Services prices were up a strong 1.2% MoM, pushing the annual pace to a new high of 5.2% YoY. The pressures from high wages and possibly from the lasting tenacity of demand from reopening effects. The former factor seems more likely the major driver of persistent services inflation. Employment trends in the euro area do not point to any major depressurization in wage growth as unemployment remains near all-time lows. Measures of wages in the euro area are only released on a quarterly basis, so it’s hard to be clued into where that is trending in non-quarter-ending months. The latest data point we got was for nominal labor costs in Q4 2022. In that report, labor costs growth had risen to a new high of 5.7% YoY with services labor costs up 6.2% YoY. It is hard to see how that has come down in Q1 2023.

While services inflation and wage growth dynamics play against the ECB, it does have some relief in the current trends in credit conditions. Today, its report on monetary policy found that the expansion of the euro area money supply is slowing. In fact, the narrow reading of money supply, the M1 monetary aggregate, was down -4.2% YoY in March (-2.7% YoY in February). The report also showed that lending to households and non-financial corporations was slowing which confirms the findings in the Q1 2023 bank lending report. In that report, the ECB notes that a net 27% of banks tightened lending standards in Q1 2023 which is the sharpest tightening since the 2011 debt crisis. ECB members will seek to balance inflammatory services inflation with the cooling of credit conditions. However, the former priority will likely take precedence in the meeting this week since the inflation number will be on everyone’s mind. The ECB will have to move by at least 25 bps (the likely option) and will likely prepare for another rate hike in the next meeting. Additionally, it will keep hawkish language in its communications to assure that markets understand its commitment to reducing inflation.

Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption

Jacob Hess
April 27, 2023

What recession? The US economy grows for the third straight quarter after the technical recession experienced in the first two quarters of 2022. US GDP grew 1.1% QoQ SAAR in Q1 2023 which is slower than the 2.6% in Q4 2022 but still a strong reading considering the interest rate situation. Personal consumption was strong, growing 3.7% QoQ SAAR which surpasses consumption growth in each 2022 quarter. The surge in durable goods new orders seen through the months of Q1 translated to a strong durable goods spending component which grew at a rate of 16.9%. This is the first quarter of growth for durables since Q1 2022 and the first quarter for general goods spending growth since Q4 2021. Services spending also expanded to start the year, up 2.3% QoQ SAAR, stronger than Q4 2022 services consumption growth of 1.6% QoQ SAAR. Consumers continue to surprise us. Despite interest rates ballooning over the last year, spending is as strong as in normal times. It seems like there was a slight boost in activity thanks to some warmer weather in the latter part of the winter, and the lingering of excess savings is apparently still strong enough to keep people buying things. Overall, consumption added 2.48 ppts to headline GDP growth, the strongest contribution since GDP bounced back after the pandemic in Q2 2021.

Offsetting the growth in consumption was a dismal investment number. Gross private domestic investment fell -12.5% QoQ SAAR. The number looks bad at first glance but fixed investment only fell -0.4% QoQ SAAR in the quarter. This includes further downsizing in firms’ investment in residential structures (residential investment -4.2% QoQ SAAR) that was mostly offset by nonresidential investment, up 0.7% QoQ SAAR, which benefitted from strong nonresidential structure investment, up 11.2% QoQ SAAR. The nonresidential strength likely comes from a rebound from the weak numbers a year and a half ago when supply in the sector was really low. The main reason why gross domestic investment fell so sharply was a decline in private inventories which was largely expected after the inventory growth in Q4 2022. Private inventories contributed -2.26 ppts to headline GDP which almost entirely accounts for the -2.34 ppts contribution made by private investment as a whole.

Outside of these two categories, which had large, offsetting contributions, we find that net exports made a small contribution of 0.11 ppts as easing supply chain pressures helped export growth offset import growth which was solid after two weak quarters. Additionally, there was decently strong support from the government consumption which expanded 4.7% QoQ SAAR, the strongest since the stimulus-laden Q1 2021. This segment contributed almost a full percentage point of growth to GDP (0.81 ppts) as both federal and state & local governments expanded their consumption.

The biggest news of the quarter is the strong consumer. Calls for a US recession relied on consumers (and businesses) to react to shy away from spending when interest rates surged. These calls included forecasts from the Fed which saw a slower economy helping them achieve its goal of reducing inflation. However, it seems that this foresight was overly pessimistic. While consumption could crash in an instant, it doesn’t appear that there are reasons to believe that this will happen. The labor market remains robust, and strong wage growth is providing consumers with robust income from which to draw. The business sector, on the other hand, has dialed back its activity in response to a rising cost of capital and an expected economic weakness. The large drawdown in inventories makes this clear. However, that could shift as the Fed eases away from rate hikes and spending remains stable. Looking ahead, it is hard to expect a recession in 2023. Growth will slow, but the current economic resilience suggests that GDP is unlikely to turn negative in the quarters ahead.

A Strong March Leads to a Surge in Chinese GDP in Q1 2023

Jacob Hess
April 18, 2023

After a disappointing start to the first quarter, it appears that a strong March in China helped the economy bounce back strongly from a weak 2022. GDP grew 2.2% QoQ and 4.5% YoY in Q1 2023, beating consensus expectations that were heavily influenced by the frailty of the January/February numbers. In particular, China saw its industry grow 3.0% YoY, up slightly from 2.7% YoY in Q4 2022. This includes manufacturing growth of 2.9% YoY and mining growth of 3.2% YoY. The GDP beat was not a result of better factory activity. Instead, China’s services sector finally experienced its resurgence from the harsh restrictions of the last two years. Services grew a robust 5.4% YoY, up significantly from 2.3% YoY in Q4. The annual improvement in the service industry production index in March was a sharp 9.2% YoY. It appears that Chinese consumers got up and out into services businesses as spending there finally increased as it was expected to for some time. Tourism has especially been a boon for growth as domestic and international travel has recovered in Q1. One key area to note is real estate. The struggling sector has suffered from weak financial conditions and thus weak investment. It appears that the trend will continue in 2023. Real estate activity was down -5.8% YoY.

From China National Bureau of Statistics

GDP received a huge boost from consumer spending in Q1 which was bolstered by surge in retail sales in March. Sales jumped 10.6% YoY which is a sharp acceleration from February's growth of 3.5% YoY. There was growth in almost every segment of sales, but non-durable goods categories saw the largest expansion. Food sales surged 26.3% YoY on the month alongside other non-durable goods markups including clothing (17.7% YoY) and entertainment goods (15.8% YoY). Durable goods categories, especially related to real estate, were the weakest. Building materials sales were down -4.7% YoY, and household appliance sales fell -1.4% YoY. These trends confirm that there are two major factors impacting the Chinese economy’s path. The first is a strong reopening catalyst that is sparking positive consumption developments, something that was largely expected by analysts when putting together growth estimates. The second is shaky credit conditions that are restricting both businesses’ and individuals’ abilities to make big purchases. Fixed asset investment grew 5.1% YoY in March which was a -0.4 ppt decline from February growth. Private investment was up only 0.6% YoY. Fiscal and monetary policy actions to address credit concerns are increasingly being considered in 2023.

Finally, we have a vigorous improvement in Chinese industrial production in March, up 9.3% MoM and 3.9% YoY in March (production grew 2.4% YoY in February). Manufacturing production was up 4.2% YoY, and as discussed before, was up 2.9% YoY in the first quarter. The two big areas of growth were in the auto manufacturing industry, up 13.5% YoY, and the electrical machinery manufacturing industry, up 16.9% YoY. Both are seeing booms from Chinese investment in green energy industries which has been a new goal of the Xi administration’s plan to dominate the space as it escalates competition with the US and Europe. New energy vehicle production surged 33.3% YoY, and solar cell production jumped even more, up 69.7% YoY. This will continue to be a trend driving growth in China for years to come.

China’s economy looks to be back. The Asian giant’s resurgence from COVID is being fueled by its citizens finally going out and spending again, sparking a much-needed boom in the services sector. Businesses are starting to feel that they have room to stretch their legs and expand again, especially in industries that are favored by Xi’s focus on high-tech manufacturing and green energy which aligns with China’s geopolitical struggle with the US and Europe. For now, though, weakness in those two regions is keeping Chinese export growth limited as they maintain the status of primary trading partners. Additionally, fragile financial conditions keep a solid ceiling on Chinese growth as debt concerns first sparked by the real estate sector persist. As reopening effects fade and the boom in consumption stabilizes, it seems that the economy will have to be driven by stimulating monetary and fiscal policies to sustain the strong performance that we have seen in Q1 2023. Nevertheless, for now it seems like the world’s Asian giant is back.

Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers

Jacob Hess
April 14, 2023

Consumer activity continued to be weak in March as a result of a decline in durable goods sales. US retail sales fell -1.0% MoM in March after a -0.2% MoM decline in February. On an annual basis, sales were only up 2.9% YoY. The decline was heavily impacted by contractions in both vehicle and gas station sales. Ex-motor vehicle and gas sales were down at a softer rate of -0.3% MoM and had an improved year-over-year gain of 6.0% YoY. The dismal results were impacted by fewer purchases of big-ticket items like electronics (sales down-2.1% MoM), furniture (sales down -1.2% MoM), and building materials (sales down -2.1% MoM). Each of these categories is now down on a year-over-year basis, including a sharp -10.3% YoY decline in electronics sales (the lowest since 2009 when excluding the pandemic period). Higher interest rates are clearly impacting consumers’ confidence in purchasing expensive items and limiting the ability to easily access or afford credit.

US electronics retail sales are down -10.2% YoY, the most since 2009 (excluding the pandemic period), From FRED

If there were sharp declines in these categories, then where were the gains? The main source of growth came from the sales of nonstore retailers which increased 1.9% MoM in March and are up 12.3% YoY. The increase in this segment represents a jump of over $2 billion in sales which offsets the declines in furniture, electronics, and building materials on the month. Additionally, there was an improvement, albeit slight, in other non-durable and services segments including sporting goods & hobby sales (up 0.2% MoM), health & personal sales (0.3% MoM), and food & drinking services (0.1% MoM). These might include more of your day-to-day purchases that don’t take a chunk out of finances when purchased and, most likely, consumers would not need to access credit when shopping for items in these segments.

Durable goods purchases tend to take the lead in indicating where the economy is going. Purchases for these types of goods are the first to decline when a recession is on the horizon as consumers start to consider their finances more and tighten their purse strings. This is especially true if they don’t have access to easy credit. Interest rates on credit card plans at commercial banks are up to 20.1% as of February 2023, just before the pandemic, this averaged around 15%. We should be set for more declines in sales going forward as rates will probably stay high for the rest of the year, and savings and checkings accounts are still recovering from inflation.

Choppy GDP Means UK Should Avoid Q1 Recession

Jacob Hess
April 13, 2023

To say UK GDP has been choppy in the last year is an understatement. Today we got a look at another month of growth, and it continues to paint a mixed picture. UK GDP is estimated to have been flat (0.0% MoM) in February, after growth of 0.4% MoM in January (which was revised up from 0.3% MoM). For the three months leading up to February, GDP grew only 0.1% since it includes the weak -0.5% MoM growth in December 2022. In February, the construction sector lead the way with strong growth of 2.4% MoM after a notably weak January (-1.7% MoM). The increase was driven by a jump in repair & maintenance work of 4.5% MoM and a smaller increase in new work of 1.1% MoM. The ONS points out that favorable weather helped to boost the former as it allowed firms to get more work down. Thus, the bump might be temporary, and we might get some sort of a reversal in March.

From ONS

Outside of construction, the services and production sectors both contributed negatively to overall GDP but at small magnitudes. The production sector contracted -0.2% MoM after a -0.5% MoM decline in January. Manufacturing, specifically, was unchanged as there were a mix of subsectors that gained and lost. Contributing positively were electronics and transport equipment production which were offset by declines in electrical equipment and chemical production. In the end, the production sector made a minuscule -0.03 ppt contribution to topline GDP. The services sector also contracted, down -0.1% MoM after a strong 0.7% MoM growth in January. Like production, there was a mix in the performance of subsectors with the contracting subsectors offsetting those that grew. Of note was a decline in education, down -1.7% MoM, as some teachers went on strike. Additionally, this followed growth of 2.5% MoM in January, so there was a bit of a bounce back there. Services ended up being the worst performing sector of the three, contributing -0.11 ppts to topline GDP.

There have been suggestions that the UK would fall into recession in Q1 2023, but so far, it looks like that might be avoided. A strong January has bolstered growth in the first quarter and good weather seems to have provided support for economic activity in February. Strength in these two months sets us up for disappointment in March but there is a lot of room on the downside before the whole first quarter will turn negative. Remember, December growth was -0.5% MoM, and quarterly growth through February was still up 0.1% MoM. However, early signals of March activity have been a bit disappointing. The UK Manufacturing PMI fell to 47.9 in March (down from 49.3) meaning a deeper contraction likely occurred there, and the Construction PMI’s growth of 54.6 in February was neutralized to just 50.7. The only source of growth will be the services sector which maintained a moderate expansion per last month’s PMI. There is also an improvement to come in education once teacher strikes are quelled. Once you put all the pieces together, it looks very likely that the UK’s GDP will shrink in March, but it is unclear whether or not it will be enough to make quarterly growth negative.

Japanese Consumer Confidence Jumps to Highest Level in Over a Year

Jacob Hess
April 10, 2023

Consumers are feeling a lot better in Japan after they ended last year with a sour economic perspective. Japan’s Economic and Social Research Institute reported that the consumer confidence index jumped 2.6 pts to 33.9 in March. This is the highest it has been in over a year after a dip in confidence was seen throughout 2022. The sub-indexes have all followed similar trends reaching near-term highs not seen since early 2022 and late 2021. The index tracking the overall livelihood of Japanese consumers increased 2.6 pts to 30.3, and the index tracking consumers’ willingness to buy durable goods jumped 3.2 pts to 26.4. Both the employment and income indexes saw comparable gains.

From Economic Research and Social Institute

The consumer survey also asks about Japanese individuals' inflation expectations over the next year, an important measure for the Bank of Japan to track the development of one of the key drivers of actual inflation. The percentage of respondents expecting prices to “Go up” has been at all-time highs (survey data goes back to 2004) since February 2022 and remained in that territory in March where it fell just -0.2 ppts to 94.1%. The Bank of Japan does consider inflation good, but runaway inflation would be an undesirable effect of its exhaustive campaign to keep borrowing rates ultra-low. Consumers seem to think that there is a strong possibility of that as 61.1% of them responded that they expect year-ahead inflation to be 5% or more. This measure has been elevated ever since it jumped from 39.7% in February 2022 to 53.1% in March 2022. After a year, however, the measure is starting to ease as the 61.1% reported percentage is a -5.7 ppts decline from the all-time high set in February 2023.

These results are the first that the new Bank of Japan governor, Kazuo Ueda, will get to digest before he considers how to leave his mark on Japan’s monetary policy. For now, it seems that he will maintain the current state of things, but the recent developments in inflation should have him and his peers looking to normalize policy as soon as this year. A rebound in consumer confidence and the general Japanese economy will give the BoJ some support to make that decision to reduce some of its quantitative easing. The recent surge in inflation expectations will provide the impetus for making this decision sooner rather than later since a feedback loop can develop between expectations and actual price changes which make inflation harder to control.

Inflation Has Eased Somewhat, but There is Still Work to be Done

Jacob Hess
February 01, 2023

The Federal Reserve increased the target range of the Fed funds rate by 25 basis points to 4.5-4.75% in what many believe will be the second to last rate hike of this hiking cycle. This size was pretty much priced in by markets, and recent economic data had done little to sway the opinions of investors and Fed officials alike.

As a result, the bond market has already started to shape itself for a Fed pivot with the 2-year Treasury note looking to retest the 4% level, and the 3-year note moving comfortablely below it to around 3.8%. This represents about 50 to 75 basis points worth of cuts from the current lower bound of the target range. While these cuts may not come in 2023, there is very little pushback against the idea that a weak economy this year will preclude lower policy rates in 2024.

The Fed started off the press release with a slight acknowledgment of this sentiment by changing the brief phrase “inflation remains elevated” to “inflation has eased somewhat but remains elevated” which is an important admission that they are winning the fight against rising prices. This alone is a fairly dovish statement as the Fed has already positioned itself as “data-dependent” which means its actions are likely to be sensitive to observations like this. However, it does not necessarily mean that a pivot is coming soon.

Chair Powell in his press conference did everything he could to make sure that observers would not mistake the slowing of the pace in rate hikes and the slight admission that inflation has eased for a Fed pivot or even a Fed pause. In the speech, Powell made three very clear assertions that hiking is not over and that there is “more work to do.” The rhetoric is very clearly aimed at preventing the premature loosening of financial conditions which would soften the effects of tighter monetary policy. According to the Chicago Fed National Financial Conditions Index, the financial conditions have generally loosened since October 2022 which is counterproductive to the Fed’s intentions. Recent trends in short-term interest rates have been the culprit.

From Chicago Fed

The moral of the story is that the job is not done yet. Powell did a good job of summarizing the work that still needs to be done to cool the economy to the desired level. “Labor demand substantially exceeds the supply of available workers, and the labor force participation rate has changed little from a year ago” which is importantly keeping wage inflation sticky. Some have pointed to some cooling in the Q4 2022 Employment Cost Index release as evidence that we can stop worrying about wage inflation, but there are way too many job openings, especially after we found out that 600,000 were added in December. The “higher for longer” narrative is the way that the Fed will likely go as it avoids cutting rates in 2023 despite growth challenges.

Q3 2022 GDP Preview

Jacob Hess
October 23, 2022

Before the Fed gets together, we’ll get some important economic data points to digest including US Q3 GDP and the PCE price indexes for September. This will be accompanied by central bank announcements from the ECB, the Bank of Japan, and the Bank of Canada which will provide the backdrop for the Fed’s early November decision. There have already been some signs of central banks in other countries leaning towards a pivot (the Reserve Bank of Australia and the Bank of England opted for smaller hikes in their last announcements), and that transition will be on FOMC members’ minds next week.

The Q3 2022 GDP and September PCE report will be so crucial in showing how the economy is reacting to the rate hikes that have been administered so far. So far this year, we have yet to see a positive quarterly growth rate with the Q1 2022 report coming in at -1.6% and the Q2 2022 report improving only slightly to -0.9%. The consecutive periods of contraction prompted discussion of whether or not the US economy is in a recession, and that discussion will be reignited this week. Many policymakers, including the Fed, will have more force in their pushback against using the “r” word if the Q3 GDP pops out a strong positive number.

From Atlanta Fed

This is what the Atlanta GDPNow model forecasts. As of October 19, 2022, the GDPNow estimate for Q3 2022 is 2.9%, revised up from the 2.8% estimate at the beginning of the week and up from the 2.1% estimate that it began with on July 29. At the moment, this skates just above the upper range of the Blue Chip consensus GDP forecasts (according to the GDPNow chart) and more than a full percentage point above TD Bank and ING, which see Q3 2022 forecasts of 1.1% and 1.5% respectively. The GDPNow forecast is not alone in its optimism though as Wells Fargo posted its most recent estimate at 3.0% in its October US Economic Outlook report.

Here’s what we see:

  • Personal consumption was relatively strong in Q2, up 2.0% QoQ SAAR, after a strong June saw consumption growth 1.2% MoM. The first two months of the third quarter showed consumption pretty much flat with elevated inflation stabilizing but not declining. It would take a hefty gain in September for consumption to have any type of strong showing in Q3, and that is unlikely to happen given how hawkish the Fed was in Q3, how high goods prices got, and how low consumer sentiment was. PCE is likely to come in at 0.6% QoQ SAAR with a moderate decline in goods consumption offsetting a moderate decline in services consumption.
  • The massive -14.1% QoQ SAAR decline in gross private domestic investment in Q2 was a result of large declines in investment in structures, both residential (-17.8% QoQ SAAR) and nonresidential structures (-12.7% QoQ SAAR). August readings of construction spending were dismal with residential construction spending down -1.0% MoM and nonresidential construction spending down -0.4% MoM. The decline in private inventories also made a significant negative contribution (almost -2.0 ppts). This quarter, the negative effect is likely to be more muted as major inventory adjustments have likely already been done.
  • The government spending component has made negative contributions to GDP for the last five quarters as it continues to back away from programs that provided liquidity during the pandemic. With that being said, there hasn’t been much in new spending passed as midterm elections are approaching in November, so this component will likely remain flat and or/slightly lower.
  • The trade deficit was a major part of the Q1 GDP miss, with a -3.13 ppt contribution, but it rebounded swiftly in Q2 with exports growing 13.8% QoQ SAAR and imports up just 2.2% QoQ SAAR in that period. Data for July and August show an even sharper decline in the trade deficit, down -$13.5 billion since July. At this pace, the impact of net exports on GDP in Q3 will likely be similar and will actually offset much of the weakness elsewhere.

All that being said, the Q3 2022 GDP report should show that the economy grew 1.6% QoQ SAAR. A light improvement in consumption will offset more weakness in domestic investment which will see a small decline than Q2. The biggest driver of GDP growth will be net exports which could provide up to 1.5 ppts of growth in the quarter. Government consumption and inventory changes will be smaller drags on GDP growth than in Q2 but will still be felt.

One unknown that could cause some negative surprise is the impact that Hurricane Ian had on Florida. An earlier IHS Markit estimate had the destruction of Ian shaving off about 0.2 ppts from national GDP measures which seems like a reasonable projection. This suggests that GDP could come in anywhere from 1.4-1.6% QoQ SAAR if that impact makes its way into the report.

Job Openings Crushed But Labor Market Still Tight

Jacob Hess
October 04, 2022

Job openings crashed in August as noted in the most recent version of the colloquially named JOLTS report. Openings had been hovering around record highs since the end of last year following the meteoric post-pandemic rise, and it seemed that the labor market was able to avoid damage from the first round of rate cuts. In reality, labor demand had just been holding on through the summer, and August’s crash is a signal that it is starting to unwind.

The number of nonfarm job openings fell a record-setting -1.1 million to just above 10.0 million in August, the decline was topped only by the pandemic-fueled decline of -1.2 million set in April 2020. The largest loss in openings was seen in social assistance (-236,000), other services (-183,000), and retail (-143,000) but declines were also significant in manufacturing (-115,000), finance & real estate (-77,000), professional & business services (-119,000), and leisure & hospitality (-111,000). There were very few industries that saw increases, and in those industries, the increases were small.

Outside of openings, the JOLTS report was pretty much a non-event. Total hires increased by 39,000, and total separations increased by a slightly more significant 182,000. The growth in separations was caused by a 100,000 swell in quits which had been falling since the beginning of the summer. The quiet moves in hires and separations suggest that the reduction in job openings was a result of firms deferring plans to hire rather than terminating existing employment. In fact, based on the slight differential of about 150,000 separations over hires, one would expect job openings to increase if firms’ labor demand hadn’t shifted.


There may have been some indication of this coming in the regional PMIs future employment indexes. The New York Fed, Philadelphia Fed, and Dallas Fed have all reported declines in the Future Employment Diffusion Indexes over the course of 2022 through the end of summer. The same trend can be seen in the NFIB’s Small Business Hiring Plans index. While the declines have been substantial, the actual index readings are still positive and point to an expected expansion of employment. However, the pace of that expansion has slowed significantly. Similarly, the number of job openings did fall significantly in August, but the resulting level is still well above the norm and indicative of an overly tight labor market.


How do we know we are still in an overly tight labor market? One can look at the spread between the job openings rate and the near-term real rate of interest as calculated using the two-year Treasury yield and the core PCE price index. Rising rates and the August blow to the job openings rate have put the spread at 7.9%, much lower than its peak of 11.5% in December 2021, but it is still well above the stable range of 4-5% seen in the period before the pandemic and after the financial crisis of 2008 (it’s also much higher than the peak of 2.9% set before the financial crisis of 2008).

What does this mean? There will likely be movement in one or more of the indicators affecting the spread to cause it to revert towards the pre-pandemic mean such as 1) labor demand will extend its new decline and the job openings rate will normalize, 2) the Fed will continue to raise rates which will lead short-term interest rates higher, or 3) inflation will peak and start to ease. The Fed’s hawkishness has been priced into yields sharply over the summer, and inflation appears to be stickier after the upside surprise in the August CPI report. Therefore, that leaves some deflation in job openings and labor demand to be the main force narrowing the spread.