Key inflation data will garner markets’ attention this week. Both headline and core consumer price indices are expected to have risen modestly in December from November, held back by lower gasoline prices and year-end discounting of last year’s car models as dealers prepare to bring new models onto lots.
On an annual basis, headline CPI inflation is anticipated to hold steady, while core inflation is expected to slow further to the lowest in two and a half years. The Producer Price Index (PPI) is expected to have edged higher on the month, while core PPI, which excludes volatile energy, food, and trade components, is expected to have increased by slightly more.
Consumer credit likely rose modestly in November as the saving rate edged higher. Small business sentiment likely improved in December as labor shortages eased and inflation slowed. Wholesale sales and inventories likely fell in November as lower petroleum prices reduced the dollar value of goods sold.
The minutes of the Federal Open Market Committee’s December meeting showed monetary policymakers believe the fed funds rate is at or near its peak for the current tightening cycle, but that they think it will be appropriate to wait for “some time” before starting to cut rates. In a further signal that the Fed is likely to pivot to a less restrictive stance in 2024, FOMC members also agreed that it is appropriate to begin discussing slowing the pace of the balance sheet reduction program (a.k.a. quantitative tightening, the Fed’s actions to reverse 2020 to 2022’s quantitative easing).
The American economy added 216,000 jobs in December, well above the consensus forecast for a 170,000 increase. However, the prior two months’ gains were revised down by a combined 97,000. The unemployment rate fell by a tenth of a percentage point to 3.7%, and the average workweek eased by 0.1 hours to 34.3 hours. A major negative in the jobs report was a 0.3 percentage point drop in the labor force participation rate to a nine-month low of 62.5%, with declines across most age, gender, and racial groups.
Average hourly earnings (AHE) rose by 0.4% for the second consecutive month, pushing wage inflation up to 4.1% from a year earlier from 4.0% and exceeding expectations. Wages in manufacturing, the largest goods-producing industry, rose sharply for the second month in a row, reflecting large pay increases in the auto industry after the end of the United Auto Workers strike. AHE also rose solidly across most private service-providing industries.
The ISM Manufacturing PMI showed manufacturing contracted at a slower pace in December. Led by a plunge in the employment sub-index to the lowest since mid-2020, the ISM Services PMI reported slower growth of service-providing activity last month, suggesting most of the economy ended the year on a softer note. Construction spending rose 0.4% in November, following a stronger increase in the prior month. Residential construction expenditures, up 1.0%, accounted for the gains in construction spending in November, while nonresidential construction expenditures fell a slight 0.1%.
Bill Adams is a senior vice pfesident and chief economist for Comerica. Waran Bhahirethan is a vice president and senior economist for Comerica.
