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Superlative Labor & Missing Inflation - March 12, 2019

“Job Creation Broke the 45-Year Record in February”

February Unemployment Rate data was released last week and surprised forecasters, beating expectations and continuing the march downward. Today’s NFIB SBOI data provides some insight into the dynamics underlying the unemployment numbers. The SBOI headline index rose a tepid 0.5 points, “even with the potential negative impact of the government shutdown on government workers but also on government contractors who laid off workers as well”. However, the summary’s analysis of Labor Markets was filled with records and near-records. Job creation was a record high while the number of respondents reporting reduced employment was the lowest in the survey’s history. The number of business owners who said finding qualified workers was their biggest problem was three points below the record. Businesses reporting job openings they could not fill was two points below the record high. As Bill Dunkelberg, NFIB Chief Economist explained, “Owners still want to grow and expect they could hire employees to produce more... want to expand in this growing economy but only if they can find qualified applicants for their open positions”.

 Where Art Thou, Inflation?

 Once again today’s inflation data underwhelmed. Both Core and Headline CPI missed expectations, though Core managed to remain over the ever-important 2.0% Fed threshold. The lack of inflation pressures, especially in the context of the job data discussed above, continues to ruffle feathers.

While we have discussed research that calls the relationship between unemployment and inflation “NonPuzzling”, articles, such as this one from Christopher Condon at Bloomberg, continue to ask, “[W]here is the inflation?”. Condon points to labor slack, disinflation, and anchored expectations as reasons for the continued undershoot, underscoring the danger to Fed credibility if the Fed misses “persistently to one side”. Whatever the underlying reason, the disconnect, according to Condon has “begun to vex the Fed” and is likely part of the impetus behind the Fed’s announced strategy review. As Vice Chair Clarida explained in a speech on the Fed’s review, ‘[A] question the review will consider is, "Are the existing monetary policy tools adequate to achieve and maintain maximum employment and price stability, or should the toolkit be expanded?”‘ Far from a simple debate over administrative technicalities, the Fed will be reviewing a wide range of tools, including the BoJ’s price controls that would “establish a temporary ceiling for Treasury yields at longer maturities.” Time will tell if the markets take talk of these ideas in-stride.