After 3 years of pain, America has finally achieved economic nirvana (Neil Dutta, Dec 3, 2023, Business Insider)
The signs of a well-balanced economy are everywhere. The most obvious example is the slowdown in inflation. The core consumer price index, the widely cited measure of inflation that strips out volatile categories such as food and energy costs, has risen since June at an annualized rate of 2.8%, roughly half the pace heading into the year. And there are clear signs of continued disinflation on the horizon: Wholesale auction prices for vehicles imply used-car prices could start to come down, private measures of rent prices suggest that housing inflation will continue to cool off, and an improvement in supply chains suggests prices for core goods outside cars, including washing machines and clothes, will ease.
Another positive signal is coming from productivity data, which measures a worker’s output within an hour. Productivity growth strengthened notably in the third quarter, hitting its highest nonrecession level since 2003, and appears to be growing in line with its pre-pandemic trend. The growth in the number of hours people are working has slowed, but output has been steady, meaning people are accomplishing more in less time. This boom in productivity means that as workers get more efficient, businesses can give employees pay raises without having to turn around and pass on those increased labor costs to consumers in the form of price hikes.
While things are slowing in the labor market, it’s not enough to cause a panic about unemployment. The October jobs report — with the economy adding just 150,000 jobs and the unemployment rate ticking up to 3.9% — was a disappointment. Of particular notice, the unemployment rate has increased by half a percentage point over the past six months. The uptick in joblessness is close to triggering the Sahm rule, which states that the economy is in recession when the average rate of unemployment over the prior three months is half a percentage point above its prior 12-month low. The current three-month average is 3.8%, a meaningful uptick from the low point of 3.5% in April but not quite high enough to hit the 4% average needed to trigger the rule.
But the job market isn’t all bad news. Over the past three months, average hourly earnings for all employees have jumped 3.2% — a strong number for American workers that’s broadly consistent with the Fed’s long-term inflation objectives. It’s also highly likely that the last employment report understated the growth in nonfarm payrolls since tens of thousands of workers were on strike. (You need to be on the job to be counted as employed.)