Macro Market Notes Digest - December 2023

Welcome to the December digest of posts published on Macro Market Notes! I do publish summaries of the blog posts on LinkedIn or Twitter right after I publish a post, but this newsletter is another way to keep informed about my publications on Macro Market Notes or elsewhere.

In December I wrote about both revisions in labor productivity data as well as the November jobs report, the December FOMC decision, what the latest data tells us about wage growth and inflation expectations, and the state of consumption, excess savings and core PCE inflation in November.

If you have feedback on any of the pieces outlined below or if you want to chat about a particular topic or want to discuss opportunities, let me know in the comments or message me.

The Monthly Digest

Rebounding Labor Market and Productivity Data (December 8th)

Key takeaways:

• Labor productivity growth accelerated for the second consecutive quarter, but as labor productivity still is below its trend estimate this mainly reflects catch-up dynamics.
• The labor share contracted again and remains below its trend estimate, which pushes down on the medium-run wage growth rate consistent with 2% inflation.
• Payrolls growth momentum firmed up since the summer and runs well above the breakeven pace needed to keep the unemployment rate constant.
• After slowing earlier in the year, the job-finding rate has been on a rebound since the summer, mainly reflecting a recovery in hiring by firms.
• Wage growth disinflation appears to lose momentum, with wage growth still outpacing the medium-run rate that is consistent with 2% inflation.

Dec FOMC Meeting: Heading for the Exit (December 13th)

A summary of this post was featured on LinkedIn News: Fed rate view lifts stock markets and Will the RBA follow the US Fed?

Key takeaways:

• The FOMC decided to keep the Fed funds target rate unchanged at 5.25%-5.50%, and clearly signaled that the hiking cycle has ended.
• Underlying core services inflation and near-term “Main Street” inflation expectations are showing tentative signs of a pick-up in downward momentum.
• On the other hand, the labor market and consumption spending remains relatively strong.
• Since the September FOMC meeting, however, the perceived monetary policy stance has become less restrictive and undershoots the Fed’s own assessment of its stance.
• Given some easing in the expected year-ahead real rate path and solid real economic activity levels, the FOMC will likely be patient in assessing more progress in inflation data and inflation expectations trends before deciding to cut policy rates.
• Fed funds rate cuts will likely not begin until mid-2024. There is, however, a risk cuts will already commence in 2024Q1 owing to a combination of the Fed overestimating the restrictiveness of its current policy rate level and possible continued rapid disinflation pace in the spot inflation data over the next two to three months.

Wages and Inflation Expectations - December 2023 Update (December 15th)

A summary of this post was featured on LinkedIn News: Fed rate view lifts stock markets.

Key takeaways:

• Between July and October “Main Street” inflation expectations have been stuck around a 3.2% PCE inflation equivalent rate, but since November they eased to about 3%.
• Consequently, trend wage growth based on these inflation expectations (W*) started to ease again, suggesting that there is some additional wage disinflation in the pipeline.
• But W* is consistent with about 3% PCE inflation, above the Fed’s 2% inflation target. So, any actual further wage growth easing in line with this measure will keep wage growth at an above-target pace.
• Most wage growth measures were stable in November and corrected for expected inflation, trend productivity growth and trend labor share growth, these continue to boost households’ real incomes and spending.

Nov Personal Income & Outlays: Sparky Households (December 22nd)

A summary of this post was featured on LinkedIn News: Has the Fed finally beat inflation?

Key takeaways:

• Personal income growth out of wages and salaries accelerated again in November and runs at a pace that can sustain a 3% PCE inflation rate for the year ahead.
• The stock of excess savings has NOT run out and continues to be a tailwind for consumption. Between October and November, it fell around $36 billion and equaled about $584 billion in November.
• Real PCE growth continues to show a strong momentum, with the underlying (trimmed mean) growth rate outpacing at an accelerated pace in November. This suggests that consumption will remain strong in 2023 Q4 and, likely, 2024 Q1.
• Core services excl. housing PCE inflation, the Fed’s favorite gauge of underlying inflation, remains at elevated levels on a year/year basis but has shown continued downward momentum. More progress is needed to convince the Fed to start cutting rates early in 2024.

Final Thoughts

Compared to November the outlines of an U.S. economy really have not changed much:

• The labor market remains solid and wage growth, while easing, remains elevated at an above-inflation target pace.
• The consumer remains buoyant owing to continued good labor market prospects and wages with households still having a lot of cash on hand (a.k.a. excess savings) that allows them to whether any headwinds.
• Near-term inflation expectations of firms and household remain stuck at above 2% target levels.

Consequently, conditions remain in place for the main component of core PCE inflation, core services excl. housing (about 55% of the core PCE price index), to remain elevated at an average rate higher than that observed in the pre-pandemic period. The Fed thus needs to assess whether the recently observed disinflation is transitory or whether it will stick, especially given the rather slow disinflation of housing services inflation (which is another 20% of the core PCE price index). A such the Fed will be keen to avoid Fed funds rate cuts that might be too soon and/or too much given the above mentioned underlying economic trends.

Many thanks for reading my outputs these past couple of months. I wish you all a Happy New Year and I'll see you on the other side in January!

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