Focus On The Economy

The stock market may continue to be weighed down by uncertainty over Trump's tariff policies and their implications for growth and inflation.  Evidence so far points to slow economic growth in Q125  and a continuing downtrend in inflation -- not as bad as feared.  This week's releases of the February PPI and CPI could confirm the downtrend in inflation.

Consensus looks for +0.3% m/m  for both the February Total and Core CPI.  This would be down from 0.4% Total and 0.5% Core in January (start-of-year price hikes).  A 0.2% print for both cannot  be ruled out, even though last year February Core repeated January's high 0.4% print.  Airfares will not likely jump as they did in February 2024.  

Consensus also looks for 0.3% m/m for both February Total and Core PPI.  The Total would be down slightly from 0.4% in January.  Core would match its pace in January's as well as in February 2024, so the y/y should be steady at 2.2%.

The February Employment Report pointed to slow economic growth and low wage inflation.  While it did not completely shut the door on recession, it did not confirm one either.  There were signs of cautious behavior by companies rather than their "throwing in the towel" to brace for recession.

Some of February's +151k m/m Payroll gain was likely a weather-related rebound from January.  The 2-month average, which eliminates the weather effects, is +138k, consistent with a steady Unemployment Rate.  Indeed, the rebound in the Unemployment Rate to 4.1% from 4.0% in January puts it back to the Q424 average.  Although both Civilian Employment and Labor Force fell, the declines could be due to the small sample bias of the Household Survey. This bias is canceled out in the calculation of the Unemployment Rate, making the latter more significant than its components.  A steady q/q Unemployment Rate is not indicative of recession.

The one part of the Report that keeps the "recession" door open is the soft Total Hours Worked (THW).   Although they edged up m/m, they remained below the Q424 average.  The January-February average is 0.5% (annualized) below the Q424 average.  However, Q125 Real GDP Growth still could be positive once productivity is taken into account.  A low Nonfarm Workweek is responsible for the q/q decline in THW.  It suggests companies are responding cautiously to tariff uncertainty by working fewer hours rather than taking the more drastic action of cutting headcount.

There are signs in the Report that DOGE is reducing headcount in the Federal Government.  Jobs there fell 10k m/m (7k in Postal, 3k elsewhere).  The typical m/m change is +3k.

Some of the January-February Payroll slowdown could have resulted from labor shortages stemming from the drop in immigration.  If so, an increase in Job Openings is conceivable.  This week's release of JOLTS data will show Job Openings data for January.  However, it may be depressed by the bad weather and could be too early to see an impact from the drop in immigration.  

Perhaps reflecting a slower economy, wage inflation is back to looking tame.  The 0.3% m/m increase in Average Hourly Earnings in February, after a downward-revised 0.4% in January (was 0.5%), is below the recent 0.4% trend.  The February slowdown was widespread across sectors.

Besides the February Employment Report, there were other important data released last week:

1.  The decline in Initial Claims back to their recent low trend suggests the prior week's jump was related to faulty seasonal adjustment for the holiday.  A drop in Continuing Claims in next week's report would help to confirm this reason.  At this point, the labor market still looks solid.

 2.  Labor Compensation -- the broadest measure of labor costs -- were revised down sharply in both Q424 and Q324.  It now shows that Compensation/Hour rose only 3.8% q/q saar (was 4.2%) in Q424 and 1.3% (was 2.9%) in Q324.  The y/y is now reported as 4.0% in Q424 (same as the y/y for AHE in February) and 2.0% for Unit Labor Costs (which takes account of productivity growth).  The latter is in line with the Fed's 2% inflation target.