Macro Commentary

Dive deeper into economic trends

Employment Preview: Moderating but Strong Labor Market

Jacob Hess
January 03, 2024

Another jobs report is coming this week, and it will be the biggest economic news of 2024 once it is released. However, it will be reporting on how the previous year ended and provide important context to a Fed that described job gains as having “moderated” but still “strong”. In the context of sharp monetary tightening, in 2023, that assessment is definitely fair.


In November, the establishment survey found that 199,000 jobs were added which topped both the previous month’s gain of 150,000 and the consensus estimate of 180,000. What was also noteworthy was that downward revisions were mostly inconsequential with just a -35,000 change to the September number. As these gains have moderated, the unemployment rate has started to trend upward. Despite the rate falling -0.2 ppts to 3.7% in November, it had reached 3.9% in the month before (about 0.5 ppts off the trough of 3.4% in April 2023). The Fed sees an unemployment rate of 3.8% to end 2023 which is what it has projected since September. This is significantly lower than the 4.6% projection that the Fed set in December 2022.

The consensus estimate for the nonfarm payroll increase in December 2023 sits just below the November number at 168,000 meaning that the trend of “moderating but strong” job gains is likely to continue. Analysts have also matched the Fed’s view of the unemployment rate reaching 3.8% in December. These results would be indicators of the continuation of the tight labor market where businesses are still finding their demand for labor unmet. Thus, the it is also expected that upward pressure on wages remains at the end of 2023. The consensus on that is an 0.4% MoM uptick which will push the YoY average hourly earnings gain back to 4% YoY.

An important factor in staffing levels in December is the demand for holiday shopping in the first two-thirds of the month. Mastercard reported that total holiday retail sales grew 3.1% in 2023 over 2022 with online sales up 6.3% YoY and in-store sales up 2.2% YoY. The moderate gains in consumption were likely enough to keep businesses hiring in December, but weaker in-store sales gains suggests the impact will not be large for retailers. However, food services and drinking places likely felt the need to boost their employment as holiday spending in that segment jumped 7.8% YoY. Therefore, I see the leisure and hospitality sector leading the jobs gains in the December report (around 100,000 jobs added) while the retail trade industry could lag a bit below what might be usually expected during the holiday season (around 20,000 jobs added).

In general, my expectations are that nonfarm payrolls should increase by about 150,000, and the unemployment rate should tick up to 3.8%. The latter could be a bit of an underestimation if the trend of higher participation is extended into December. November saw a strong increase of 532,000 in the labor force which pushed the participation rate up 0.6 ppts above where it was in November 2022 at 62.8%. I expect participation to continue to increase in early 2024 as consumers continue to spend down their cash stockpiles and sticky wage increases coax more people off the sidelines. This is likely one of the keys to the Fed’s path towards a looser a labor market.

Chinese CPI Trying to Buck the Deflation Trend

Jacob Hess
October 12, 2023

The latest data on Chinese inflation for both consumers and producers continues to reflect a struggling economy, despite expectations for some improvement. CPI growth had only recently recovered from a slightly deflationary trend observed during the summer, registering -0.2% YoY in July and accelerating to 0.1% YoY in August. However, the latest data for September shows no growth on an annual basis, indicating that consumer prices threaten to resume a downward trend. On a more positive note, the monthly rate of CPI growth has stabilized over the last three months, growing around 0.2-0.3% MoM from July to September. This consistency at the monthly rate should help inflate prices to a more normal level in the near future.

From China National Bureau of Statistics

Food and consumer goods prices have been the main sources of deflationary pressure, declining by -3.2% YoY and -0.9% YoY, respectively. When food is excluded from the equation in the calculation of core CPI growth, prices appear healthier at 0.8% YoY, primarily due to a growth of 1.3% YoY in the services sector. However it is worth noting that on a monthly rate, services prices edged down by -0.1% MoM. This is particularly concerning if it serves as a broader signal of weakness in services activity, which is supposed to be the main driver of economic growth.

Further up the pipeline, pricing and profit margins for producers continue to be weak. While input and output producer prices have grown at the strongest monthly rates so far this year, on an annual basis, PPI remains deflationary. The most significant downward pressure on PPI comes from extracted commodity prices, which are down -7.4% YoY, and raw materials, down -2.8% YoY. Both categories did see substantial improvements in September. Consumer durables and production prices are also weak, registering -1.2% YoY and -3.0% YoY, respectively, and saw less of an acceleration in September.

The Chinese economy seems to be in need of additional support, but the options for monetary intervention may have already been exhausted. The silver lining in this challenging economic landscape is that the monthly rates suggest some life is coming back into firms’ pricing power. This could potentially help inflation rates reach a healthier level by the end of the year. Nonetheless, the overall picture remains one of an economy in desperate need of support, with inflation metrics serving as a critical barometer of China's systemic challenges.

Energy Prices Rise but the Core Disinflationary Trend is Maintained in September

Jacob Hess
October 12, 2023

The US Consumer Price Index (CPI) for September showed a month-over-month (MoM) growth of 0.4% and a year-over-year (YoY) increase of 3.7%, unchanged from August. This was mostly in line with market expectations that inflation rates would remain roughly the same as the previous month. Much of the trends that were evident in August were maintained, and in general, inflation continued its slow cooling outside of energy prices.

From BLS

One of the key drivers of September's inflation was the energy sector. Thanks to hot commodity markets stoked by expectations of low supplies, energy prices followed up their 5.6% MoM increase in August with a 1.5% MoM gain in September. Specifically, gas prices jumped 2.1% MoM, and electricity prices grew 1.3% MoM, both showing consistent uptrends. Natural gas prices are bucking the trend, down -1.9% MoM and -19.9% YoY. Despite the resurgence in energy costs, they are still lower than a year ago, down -0.5% YoY. Without this negative contribution to headline inflation, the CPI would be above 4%.

Food prices grew at a rate of 0.2% MoM for the fourth month out of the last five. The annual rate is now only up 3.7% YoY. A divergence exists in the details segregating food at home and food away from home prices. The food at home index was up 0.1% MoM and 2.4% YoY, while the food away from home index grew 0.4% MoM and is up 6.0% YoY. The larger increases in the latter are likely correlated with stronger services prices from restaurants and bars.

Core inflation, which excludes volatile food and energy prices, cooled down in September to 4.1% YoY from 4.3% YoY in August. The shelter index was once again a significant driver, up 0.6% MoM and 7.2% YoY, accounting for 70% of the YoY increase in core CPI. Other areas in services also showed robust growth: car insurance was up 1.3% MoM, hospital services increased 1.5% MoM, and transport services grew 0.7% MoM. Despit all of this, the annual rate of services inflation edged down -0.2 ppts to 5.7% YoY. The warmer services sector was offset by the very cool goods sector. Goods prices continued their broad deflationary streak with a negative monthly print for the fourth consecutive month. Prices fell in the used cars and trucks index (-2.5% MoM), the apparel index (-0.8% MoM), and the medical care commodities index (-0.3% MoM).

Inflation data continues to be a bit noisy with certain areas like energy and used car & vehicles driving the trends. That’s why the Fed is focused on the “super core” segment. The "super core" inflation, which excludes food, energy, shelter, and used cars, was up 0.2% MoM and 2.8% YoY in September, down from 3.2% YoY in August. The annualized rate of the last three monthly rates is just above 2.4%. The disinflationary trend is intact but hasn't really accelerated. This month's CPI data will likely leave Federal Open Market Committee (FOMC) members' opinions on the next policy step largely unchanged. The next FOMC meeting is at the end of the month, and there's still more data to come that will inform the decision... assuming the government stays open.

PPI's Quiet Rise and the Energy Elephant in the Room

Jacob Hess
October 11, 2023

Moderate gains continue for the Producer Price Index (PPI), with a September increase of 0.5% MoM. This marks the third straight month of increases in the 0.5-1.0% range. The annual increase of PPI was 2.2% YoY, just slightly higher than the 2.0% YoY. These gains in the headline index are heavily impacted by the rebound in energy goods producer prices, which grew 3.3% MoM in September, following a large 10.5% MoM jump in August. Core PPI increased at a more modest rate of 0.2% MoM. The annual increase remained sticky, just below 3% at 2.8% YoY, very similar to where it has been for the last five months. Let's look at the breakdown of the goods and services subcomponents.

From BLS

The PPI for goods increased 0.9% MoM and 0.8% YoY. Just like the headline PPI index, this was heavily impacted by energy, with the 3.3% MoM rise in energy PPI accounting for 75% of the rise in goods PPI in September. More specifically, 40% of the rise in goods PPI was attributed to a 5.4% MoM rise in producers’ gas prices. Core goods PPI, excluding food and energy, was up only 0.1% MoM but had a more robust annual gain of 2.0% YoY. The annual gain was driven by a 3.3% YoY increase in finished consumer goods PPI and a 3.6% YoY increase in private capital equipment PPI, although both are moderating on a monthly basis. Moving up the supply chain, there continues to be near-term upward pressure input costs from commodity prices. Unprocessed goods PPI jumped 4.0% MoM after two months of 2% or higher monthly gains in August and July. While the pressure here is almost entirely being applied by energy (7.5% MoM) and food (3.5% MoM), it is something worth watching.

Now we turn to the services sector. Services PPI increased at a moderate pace of 0.3% MoM in September and was up 2.9% YoY. The annual pace picked up considerably, around 0.7 percentage points from the previous reading of 2.2% YoY. That acceleration came on the back of a large upward revision to July’s monthly rate from 0.5% MoM in the August report to 0.8% MoM in September’s report. Another major reason for the acceleration in PPI growth was a 13.9% MoM increase in deposit services, which are now up a whopping 32.3% YoY. This large increase can likely be attributed to rising interest rates increasing the costs banks have to pay on deposits as a result of the Fed’s hiking. All together, the consumer services PPI (less trade, transport, and warehousing) grew 0.4% MoM and is up 4.0% YoY, which is actually a slight deceleration from the 4.1% YoY reported in August.

To really get to the core of the issue, we can look at a “Super Core” version of PPI which excludes energy, food, and trade services. This index increased just 0.2% MoM in September and was up 2.8% YoY, slowing from 3.0% YoY in August. Thus, in the end, we see that through the noise, producers are seeing a general trend of disinflation. This would be all fine and dandy, but the volatility in energy can’t be ignored. With new supply risks in the outlook from conflict in Israel and Gaza, which could lead to sanctions against Iranian oil, and from OPEC+ countries looking to maintain production cuts, high energy prices could be here to stay. With little volatility to the downside, this becomes an inflationary pressure that all producers have to pay attention to since energy input costs are almost universal. Suddenly, the picture becomes a lot less rosy.

Small Businesses Grapple with Inflation and Financial Strain in September

Jacob Hess
October 10, 2023

The NFIB Small Business Optimism Index remains below its long-term average for the 21st consecutive month, dropping by -0.5 pts to 90.8. This decline was primarily driven by sub-indexes like Economic Expectations, down -6 pts to -43, and Expected Credit Conditions, down -4 pts to -10. However, several other sub-indexes, like Job Openings and Hiring Plans, showed modest gains.

The Job Openings index saw a 3 pt increase, reaching 43, the highest level since May of this year. This aligns with the spike in job openings reported in the September JOLTS data. Additionally, the Hiring Plans index edged up by 1 pt to 18, also the highest since May. Despite the positive indicators in job openings and hiring plans, the Current Employment Changes index remained negative for the sixth consecutive month at -2. This is likely due to ongoing labor supply issues faced by small businesses. The Qualified Applicants for Job Openings index increased by 3 pts to 57, the highest level this year, and this lack of qualified workers continues to keep labor markets tight and wage growth high.

Let’s turn to the closely watched inflation indexes which showed that inflationary pressures were sticky in September. The Actual Price Changes index increasing by 2 pts to 29, the highest since June. The Price Plans index remained unchanged at 30, marking the second-highest reading in 2023. These index readings in September suggest a slowing in the disinflation trend caused by higher goods input costs, especially energy input costs. Indeed, inflation is still the (joint) highest problem for small businesses with 23% of respondents reporting this in the survey.


Despite the hang up in inflation, the effects of the Federal Reserve's rate hikes are becoming increasingly evident. The average interest rate paid by small businesses rose to 9.8% in September, the highest since before the Great Financial Crisis, up from 9.0% in August. The Expected Credit Conditions index dropped to -10, its lowest in a decade. Given the combination of lower consumer demand and tighter financial conditions, it seems almost inevitable that small businesses will face some sort of recession as the economic environment becomes increasingly challenging.

A Wacky September Jobs Report Shows Strong Labor Market

Jacob Hess
October 06, 2023

Today's jobs report was a bit wacky, filled with unexpected data that underscores the volatility of labor market statistics. While some indicators point to a robust job market, others suggest underlying weaknesses. And a whole bunch of revisions make the whole thing even more confusing. Let's break down the numbers and see what they mean for the economy and possibly for the Federal Reserve's next moves.

From BLS

The most striking aspect of the report was the surge in nonfarm payroll employment, which added 336,000 jobs in September. This figure more than doubled the consensus expectations of 150,000, effectively debunking the notion that the labor market was on a downward trajectory. Revisions have been notable over the last few months, and most of those have been to the downside. However, in a bit of a twist, we saw revisions for July and August that added 119,000 jobs in total (July revised up 79,000 to 236,000 and August revised up 40,000 to 227,000). Despite the revisions, the September jobs gain was the largest this year. Finally, he unemployment rate remained at 3.8% after the few pips gain in August as the number of unemployed individuals was basically unchanged (only up 5,000) and the labor force participation rate stayed at 62.8%. All of these data points point to a strong labor market taking analysts and likely the Fed by surprise.

However, the report wasn't without its caveats. Household data indicated that the uptick in employment was largely fueled by part-time workers, which increased by 151,000, while full-time workers actually decreased by -22,000. This lends credence to the idea that the significant job gains may be a result of seasonal hiring as we approach the holiday season in Q4. This is further supported by the fact that the service sector did all of the heavy lifting this month. Services firms added 234,000 jobs, while the goods sector saw a modest bump of just 29,000. Wage growth took a small step down in September to contribute to weak hiring narrative. Average hourly earnings improved 0.21% MoM and was up 4.15% YoY, down from 4.26% YoY in August. The annualized rate of September’s monthly gain was just 2.5%, a very pleasing figure for the Fed.

A topsy turvy jobs report like this one will leave a lot of people scratching there heads, including Fed Chair Jerome Powell. While early signs had pointed to a softening labor market, this report throws a wrench in that narrative. The frequent and directionally inconsistent revisions add another layer of complexity to the task of understanding the new data's impact on the economic landscape. However, amid all the uncertainty, one thing remains clear: there's no mass layoffs, and a recession in 2023 appears increasingly unlikely.

A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report

Jacob Hess
October 05, 2023

The eagerly awaited nonfarm payrolls report for September is scheduled for release on Friday, October 6th, serving as an official barometer of the current state of the US labor market. This report is more than just a set of numbers; it's a critical tool that the Fed uses to gauge the health of the economy. In recent times, the Fed has been keeping a particularly close eye on labor market indicators to monitor wage inflation, which could influence their decisions on interest rates. As we prepare for the latest report, it's useful to first examine some other key labor market metrics to get a sense of what the landscape looks like. Over the past few months, these indicators have started to flash warning signs, suggesting a labor market that is increasingly fragile.

From Challenger, Gray & Christmas

The ADP National Employment Report for September showed a significant slowdown in job growth, the slowest since January 2021. The report indicated an increase of just 89,000 jobs, a sharp decline from the 180,000 jobs added in August. Large establishments were the main culprits behind this slowdown, shedding 83,000 jobs and nullifying the gains made in the previous month. The goods sector barely moved the needle, adding a mere 8,000 jobs, while the service sector saw a modest growth of 81,000 jobs. Wage growth is also showing signs of fatigue. For those who stayed in their jobs, the year-over-year pay increase for September was 5.9%, a slight dip from 6.0% in August. This marks the 12th consecutive month of slowing wage growth. Similarly, those who changed jobs saw their pay gains shrink to 9% YoY, down from 9.7% in August.


The Challenger Job Cuts Report revealed that U.S.-based employers announced 47,457 job cuts in September, a 37% decrease from August but a 58% increase compared to the same month last year. The third quarter of this year saw 146,305 job cuts, a staggering 92% increase from the same quarter in 2022. Interestingly, the technology sector, which has led in job cut announcements this year with 151,989—a 716% increase from last year—saw only 2,537 job cuts in September, the lowest since June 2022. Another signal of the level of job cuts, initial jobless claims, was just 207,000 in the last week of September, a minor increase of 2,000 from the previous week. The monthly average for September stood at 210,400, the lowest since the start of the year and a significant drop from the 256,750 average in June.

The key takeaway is that the hiring pace is decelerating, a trend that has become more evident over the past quarter. However, it's not all doom and gloom; unemployment isn't skyrocketing either. The spike in jobless claims and job cuts, particularly in the tech sector, seems to have plateaued. As for the upcoming BLS employment report, don't hold your breath for a big jump in employment numbers. We're likely looking at a low increase, possibly in the low 100,000s or even below. However, the unemployment rate is expected to remain relatively stable, given the slight uptick reported previously.

A Breather for the Eurozone as Inflation Hits Two-Year Low

Jacob Hess
September 29, 2023

Euro area inflation showed signs of cooling off in September, registering at 0.3% month-over-month (MoM) and 4.3% year-over-year (YoY). This is a notable drop from the 5.2% YoY reported in August and marks the lowest annual inflation rate since October 2021. Core inflation, which excludes volatile items like food and energy, followed suit, coming in at 0.2% MoM and 4.5% YoY, also slower than the previous month's 5.3% YoY.

From Eurostat

The deceleration in price growth was evident across all segments. Food prices inched up by 0.1% MoM and 8.8% YoY (lower than previous annual rate of 9.7% YoY), while energy prices rebounded by 1.4% MoM but were still down by -4.7% YoY (also lower than previous YoY rate of -3.3% YoY). In terms of goods and services, annual inflation rates also cooled. Goods inflation was 2.2% MoM and 4.2% YoY, down from 4.7% YoY, and services inflation was -0.9% MoM and 4.7% YoY, down from 5.5% YoY.

The recent dip in annual inflation to an almost two-year low is undoubtedly good news for everyone, including the European Central Bank (ECB). This cooler rate of inflation significantly increases the likelihood that the ECB will hold steady in its next meeting, including concluding that the current policy rate has peaked. However, it is important to note the major drivers of the deceleration this month. Much of the cooling in the inflation rate can be attributed to base effects in the German CPI report. Additionally, rapid disinflation in two other large European countries—Belgium and the Netherlands—has likely had a significant impact on the euro area level numbers. Belgium's September inflation rates were -0.4% MoM and 0.7% YoY, while the Netherlands posted rates of -0.8% MoM and -0.3% YoY.

It's not time to let our guard down just yet. There are some upside risks to consider, particularly the recent rise in energy prices. This uptick could reverberate throughout various goods and services industries, leading to rising costs that could eventually be passed on to consumers. So while the latest inflation data offers some room for cautious optimism, it's essential to keep an eye on these other factors that could influence the inflation trajectory in the coming months.

Germany's September CPI Report: A Clearer Picture of Inflation Trends

Jacob Hess
September 28, 2023

Germany’s inflation rate sees a strong deceleration in September thanks to some base effect magic. The CPI was up 0.3% MoM and 4.5% YoY in September, down from 6.1% YoY in August. The slowdown in the annual rate can be attributed to the discontinuation of the German government’s final inflation relief measures including the fuel discount which impacted energy prices and the 9-euro ticket which impacted services prices. Regardless of that, it is notable that this annual increase in headline CPI inflation is the lowest since February 2022 when it was 4.3% YoY.

From Destatis

The discontinuation of the fuel discount relief program last year led to a significant surge in energy prices. As a result, September 2023’s energy CPI inflation has cooled down considerably. From a high 8.3% YoY in the previous report, it plummeted to just 1.0% YoY. This figure now offers a more accurate reflection of the oil and gas price situation, devoid of any distortions caused by government price controls. Unlike energy, food CPI wasn't influenced by the 2022 government relief measures. Yet, it too experienced a slowdown this month. From 13.7% YoY at the start of the summer, it dropped to 9.0% YoY a month ago and now stands at 7.5% YoY. Food inflation has been on a downtrend in 2023 which will likely continue through the end of the year.

Core CPI, which excludes food and energy, also felt the ripple effects of the expiration of government relief measures. It slowed down to 4.6% YoY in September, a drop from the 5.5% YoY recorded in both July and August. Goods prices, influenced by fuel prices, are still up by 5.0% YoY, but this is a significant decrease from the 7.1% YoY of the previous month. However, the most notable revelation from the report is the significant deceleration in services inflation. It dropped by 1.1 percentage points to 4.0% YoY, finally breaking below the 5% threshold where it had been lingering for a while.

Germany's CPI readings had been skewed for a considerable period due to the government relief packages introduced as a countermeasure to inflation. Now, with those distortions out of the picture, two main observations emerge:

  • Germany's services inflation is currently lower than the overall euro area rate. This suggests that the upcoming Eurostat inflation report will show a significant deceleration in services inflation for the whole euro area, a measure closely followed by the ECB.
  • Germany's goods inflation, which does include energy and food, stands high at 5.0% YoY. It's not often that we see the goods annual rate surpass the services annual rate these days, but in Germany, this is the case.

One thing that is distorted in this report is how much of the deceleration in the inflation rates across all categories are attributed to the relief package and how much is a result of tighter financial conditions. That means that the monthly rates, which are reported in the final version of the Destatis inflation report, are especially important for September.

US Manufacturing Demonstrates Resilience Amidst Volatility in August

Jacob Hess
September 27, 2023

US durable goods activity took a break from a volatile series of readings in August with its first reading between -0.5% and 0.5% since September 2022. Durable goods new orders were up just 0.2% MoM after a massive drop of -5.6% MoM in July (revised down from -5.2% MoM). This is the fifth increase in the last sixth months, and over the course of that time period, the total value of new orders has increased 5.1%. That trend alone suggests that the US manufacturing sector remains resilient.

Of course, this headline figure includes volatile data points so it is important to look at the details. Durable goods new orders (excluding transportation) were up 0.4% MoM, but orders (excluding defense) were down -0.7% MoM. This comes down to volatility in the transport segment: nondefense aircraft orders fell -15.9% MoM while defense aircraft orders jumped 19.2% MoM. The sharp decline in the former is not necessarily something to worry about. Nondefense aircraft orders have been falling consistently since surging up to $37.5 billion in June which is the second highest on record only after an even sharper spike in July 2014 to $77.4 billion.

From Census Bureau

Beyond the volatility, most segments gained in September. Machinery new orders were up 0.5% MoM, electronics products were up 0.3% MoM, and electrical equipment and components jumped 1.1% MoM. All are were positive components of the “core” segment of durable goods new orders, nondefense capital goods (excluding aircraft). In September, this segment saw a health gain of 0.9% MoM, reversing two straight months of losses. The incline saw the annual increase go from 0.8% YoY to 2.1% YoY, and the current quarterly gain in Q3 improved from a negative reading to up 0.5% MoM which is supportive of optimistic GDP growth estimates (see GDPNow forecast).

The US manufacturing sector once again refuses to capitulate and will go into the final quarter of the year with positive momentum. This is positive momentum that analysts continue to be surprised by. Today’s release of the core segment topped the consensus estimate of no growth by a considerable margin. The unexpected expansion is a sign that manufacturers can operate under tighter financial conditions which give credence to the Fed’s insistence on “higher for longer.” It also means that the US remains on track to avoid a recession and glide into a soft landing.

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