The November release of the ISM services index kicked off the week with a surprisingly strong reading on the U.S. economy. The index rose 2.1 points to 56.5 despite consensus expectations for a roughly one-point decline. The outturn was higher than any of the 60 forecast estimates submitted to Bloomberg. The better-than-expected gain was due almost entirely to a 9.0-point increase in the business activity index. This component is now at its highest reading in almost a year, signaling economic growth in the service sector remained widespread through November. The new orders component fell slightly but remained in solid territory at 56.0.
While the slowdown in service sector activity has been more muted than manufacturing, so has the impact on prices. The ISM services prices paid component declined last month, but a reading of 70.0 suggests price pressures still remain elevated. In contrast, the prices paid component in the ISM manufacturing index has fallen to 43.0, the lowest reading since May 2020. This is the largest gap on record for the two price indices and speaks to the different inflation dynamics for service-providers and manufacturers.
This week's producer price index (PPI) data for November was reflective of this divergence between goods and services inflation. The PPI for final demand increased by 0.3% in November. Beneath the headline, prices for final demand services rose 0.4%, while final demand goods prices inched up just 0.1% in the month. Even as we see a reprieve in goods prices, the slow descent in the larger services sector speaks to the fact that it will take time for inflation to return to target and that the Fed still has work to do in its fight against inflation.
Fortunately for the Fed's inflation fight, there was other data this week that suggested some modest improvement in reducing labor cost growth. Revisions to the unit labor cost and productivity figures for the third quarter showed unit labor costs rising at a 2.4% annualized rate in Q3, the slowest pace of growth since Q1-2021. Unit labor costs adjust hourly compensation for labor productivity. Put another way, unit labor costs measure how much it costs a business to produce one unit of output. All else equal, faster unit labor cost growth should be inflationary, and slower growth should be disinflationary. Although the Q3 reading was encouraging, this data can be very volatile on a quarter-to-quarter basis, and over the past year unit labor costs are up 5.3%, roughly triple the average pace in 2019.
Slower labor cost growth could be in the offing if the labor market cools in the year ahead, and this week's unemployment claims data suggest some looser labor market conditions on the margin. Continuing jobless claims increased to 1.67M through the week ending November 26. The above chart shows how continuing claims have been on the rise since bottoming at the beginning of the summer. On an absolute basis, the level of claims is still quite low. For context, continuing claims averaged 1.70M in 2019 in what was a tight labor market. But as we look to 2023, we expect this trend to continue as the labor market rolls over and employment begins to outright contract by the second half of next year. This in turn should help reduce labor cost growth and, by extension, move inflation much closer to the Federal Reserve's 2% target.
This Week's State Of The Economy - What Is Ahead? - 30 October 2020
Wells Fargo Economics & Financial Report / Oct 27, 2020
Real GDP jumped a record 33.1% during Q3, beating expectations. A 40.7% surge in consumer spending drove the gain.
This Week's State Of The Economy - What Is Ahead? - 04 March 2022
Wells Fargo Economics & Financial Report / Mar 08, 2022
February\'s employment data showed the economy had strong momentum, but that seems pretty dated now with Russia\'s invasion of Ukraine and the Fed\'s shift to a more hawkish tone on monetary policy.
This Week's State Of The Economy - What Is Ahead? - 22 January 2021
Wells Fargo Economics & Financial Report / Jan 23, 2021
Housing starts jumped 5.8% during December. Single-family starts soared 12%, while multifamily starts dropped 13.6%.
This Week's State Of The Economy - What Is Ahead? - 29 May 2020
Wells Fargo Economics & Financial Report / May 30, 2020
The beginning of this week saw some optimism that the economic downturn could be relatively short-lived, but data through the rest of the week provided grim reminder of the economic damage from COVID-19.
This Week's State Of The Economy - What Is Ahead? - 28 October 2022
Wells Fargo Economics & Financial Report / Oct 31, 2022
Headline GDP continues to send mixed signals on the direction of the U.S. economy. During Q3, real GDP rose at a 2.6% annualized rate, ending the recent string of quarterly declines in growth registered in the first half of 2022.
This Week's State Of The Economy - What Is Ahead? - 31 January 2020
Wells Fargo Economics & Financial Report / Feb 01, 2020
Mexico’s economy has slowed notably over the last year, with the economy contracting again in Q4, indicating a full-year contraction for 2019.
November 2020 Economy At A Glance
Wells Fargo Economics & Financial Report / Nov 12, 2020
U.S. gross domestic product (GDP) grew 7.4 percent, or $1.3 trillion in Q3, adjusted for inflation.
This Week's State Of The Economy - What Is Ahead? - 24 September 2021
Wells Fargo Economics & Financial Report / Oct 10, 2021
While fears of an Evergrande default in China were rattling financial markets, for those of us in Southeast Texas who have survived the typically very hot months of July, August and September, this week brought the very welcome first early fall-like
Where Will That $2 Trillion Come From Anyway?
Wells Fargo Economics & Financial Report / Apr 01, 2020
Net Treasury issuance is set to surge in the coming weeks and months. At present, we look for the federal budget deficit to be $2.4 trillion in FY 2020 and $1.7 trillion in FY 2021.
This Week's State Of The Economy - What Is Ahead? - 10 November 2022
Wells Fargo Economics & Financial Report / Nov 11, 2022
Relief in October inflation gives the FOMC the ability to slow the pace of rate hikes ahead. But make no mistake, the Fed\'s job of taming inflation remains far from over.
