Macro Market Notes Digest - February 2024

Welcome to the February digest of posts published on Macro Market Notes in 2024! 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 February I wrote about productivity in 2023 Q4, the January jobs report, what the latest data tells us about wage growth and inflation expectations, as well as the state of consumption, excess savings and core PCE inflation in January.

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

Q4 Productivity & Wages: The Catch Up Continues (February 1st)

A summary of this post was featured on LinkedIn News: Jobless claims jump amid layoffs

Key takeaways:

• Labor productivity growth was again strong in Q4, but labor productivity still undershoots its trend estimate.
• The pace of trend labor productivity growth slowed down during and after the pandemic, which read 1.3% year/year in Q4 compared to an average trend labor productivity growth rate of 1.9% year/year in 2019.
• The labor share remained flat and below its trend estimate, which declined by 0.7% year/year in Q4 compared to an on average flat trend labor share estimate for 2019.
• The Q4 ECI index for wages of private sector workers went up 4.3% year/year in Q3. This is about 1.6 percentage point above the wage growth rate consistent with 2% inflation given the trend growth rates of labor productivity and the labor share.
• The Q4 overshoot in ECI wages of private sector workers was driven by elevated near-term inflation expectations of firms and households and above trend labor productivity growth.

Jan Payrolls: Starting the Year with a Bang (February 2nd)

Key takeaways:

• Payrolls growth momentum picked up after the comprehensive benchmark revisions and comfortably runs above the breakeven pace needed to keep the unemployment rate constant.
• After slowing earlier in the year, the job-finding rate continues its up trend that started after the summer.
• Wage growth firmed again but this might have been distorted due to bad weather.
• Combined with an expected year-ahead real interest rate that has passed its peak, today’s data means the Fed will be in no hurry to cut rates.

Wages and Inflation Expectations - February 2024 Update (February 22nd)

Key takeaways:

• Since November “Main Street” inflation expectations eased notably below 3% and appear to have stabilized around a 2.6% PCE equivalent rate in January and February.
• Consequently, trend wage growth based on these inflation expectations (W*) eased, which suggests potential additional wage disinflation for 2024.
• With W* consistent with about 2.6% PCE inflation, this wage growth trend measure is closing in on the Fed’s 2% inflation target. But any actual wage growth easing in line with this measure will still keep wage growth at an above-target pace.
• Actual wage growth measures for January, however, remain stuck at a pace far above the inflation target pace. Corrected for expected inflation, trend productivity growth and trend labor share growth, these continue to boost households’ real incomes and spending.

Jan Personal Income & Outlays: Coming Off the Boil? (February 29th)

A summary of this post was featured on LinkedIn News: January prices pop most in year

Key takeaways:

• Personal income growth out of wages and salaries slowed down in January but still outpaces the growth rate that is consistent with 2% PCE inflation over the medium-term.
• The stock of excess savings has NOT run out and continues to be a tailwind for consumption. Between December and January, it fell around $37 billion and equaled about $561 billion in January.
• Real PCE growth eased, with the underlying (trimmed mean) growth rate similarly slowing while still outpacing the headline rate in January. This suggests that consumption will remain firm in H1 2024 but less so than in H2 2023.
• Core services excl. housing PCE inflation, the Fed’s favorite gauge of underlying inflation, remains at elevated levels on a year/year basis and re-accelerated.
• Despite slowing momentum in real spending, still solid growth rates of wage income and spending as well as re-accelerating non-housing core services inflation will mean the Fed remains wary of starting to cut rates too early in 2024.

Final Thoughts

Going into 2024 the U.S. economy can be characterized as follows:

• The labor market remains solid and wage growth, while easing, remains elevated at an above-inflation target pace.
• Consumption spending trends remain firm 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 have eased. Recent spot inflation data, however, suggests a risk that disinflationary trends could peter out.

Based on these factors and the fact that underlying (services) inflation seems to be structurally more volatile than in the pre-COVID era, the Fed thus likely will feel the need to carefully assess the incoming data before committing to a rate easing cycle. And as expected real rates are not trending up further, the Fed, for now, will be happy to "sit tight" with Fed funds rate cuts likely not happening before mid-2024. I have outlined this in more detail in a recent interview:

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