Last week produced two very different reads on the current state of the US labor market. On Friday, the Bureau of Labor Statistics release their monthly report that showed the US economy added 304,000 jobs during the month of January. This was one the strongest reports we have seen over the last several years. It is ironic that the report came just two days after the Federal Reserve decided to pause it’s gradual pace of interest rate increases. The Fed fears that slowing global growth, trade disputes, and the partial government shutdown have weighed on the economy.
However, on Thursday, the Department of Labor released their weekly update on the number of people who filed for unemployment insurance. The number jumped to 253,000 for the week ending January 26th, from 200,000 the prior week. The increase of 53,000 was the third largest weekly increase since the 2008 Financial Crisis. This report alone should not raise any red flags; it’s quite possible that the spike was due to the partial government shutdown. Additionally, weekly jobless claims are very volatile so economists put more emphasis on the 4-week moving average of jobless claims. This variant of jobless claims is one of the components in our business cycle indicator.
Why is This Important?
The 4-week moving average of jobless claims bottomed back in mid-September and has been inching higher. Looking back over history, every recession has been preceded by a noticeable increase in the number of people filing for unemployment. It’s too early to tell if this is simply a temporary rise, or if the job market is peaking, signaling the end of the business cycle. Our Business Cycle Indicator monitors this, and a slew of other data, to determine if a recession is imminent. For now, the coast appears clear.
Conventional wisdom suggests that wage inflation is a precursor to broader inflation measures within the economy, whether it be Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE). The Fed raises interest rates to tame inflation, but because their policies don’t immediately impact the economy, they often pay close attention to leading indicators of inflation, like wages.
The chart below, from the Federal Reserve of Atlanta, tracks wage growth across the economy. Wage growth has been steadily improving since 2010 with one noticeable pause in 2017. The growth in wages suggests that inflation could become a concern in the not too distant future. However, the Fed last week decided to pause their plans for raising interest rates.
While President Trump likely took a victory lap after Jay Powell announced the pause, the victory may be short lived. Below is a chart the two most commonly used inflation measures, Core CPI and Core PCE (both exclude volatile food and energy categories), and the annual percent change in the price of crude oil. While both inflation measures excluding energy prices, the cost of oil plays an important role in transportation costs. And since most products are transported in some way shape or form, moves in oil prices do correlate with inflation.
Crude oil peaked in October around $70 per barrel, then dropped to nearly $40 per barrel during the 4thquarter of 2018. This puts downward pressure on inflation and gives the Fed room to pause. However, oil prices have quickly bounced back and are now around $55 per barrel. If the rebound continues, it could soon bleed into broader inflation measures, and the Fed could resume its process of hiking interest rates.
So, what’s the point to all this? Ultimately, the Fed kills economic expansions because they try to slow inflation. If inflation picks up and the Fed begins hiking rates, it will pull forward the next recession.