Economic milestones are being made all the time for a labor market where available labor is increasingly scarce. Whether the lack of hands and feet will begin to limit business expansion is one question to ask and another (actually the eternal question which we'll pursue in this report) is if this scarcity will trigger a rush higher in wages. We'll look at the strength of the latest employment indications and the absence of strength in the latest inflation data.
The blue line of the graph tracks job openings, starting at 4.7 million in December 2000 then falling to low of 2.2 million in mid-2009 and ending at 6.6 million in March this year. The green line is the number of unemployed actively looking for a job, starting at 5.6 million then peaking at 15.4 million in mid-2009 and ending at 6.6 million. It's the comparison of the March results -- 6.6 million openings against the 6.6 million unemployed -- that makes the history books: the first one-to-one correspondence on record. Usually there are many more people looking for work than jobs available, peaking at a 2.75 ratio in 2009. The ongoing shrinkage means employers are having fewer and fewer candidates to choose from, and this naturally raises the risk that employers, by necessity, will increasingly raid the staffs of their competitors using the lure of higher pay and better benefits also by necessity. Are we getting to the point that there are more openings than people available to fill them? We may in fact have already passed that point based on April's employment report where the number of unemployed fell to 6.4 million. Job openings are part of the JOLTS report which stands for job openings and labor turnover survey and where data lag by a month.
The most up-to-date indications on the labor market come from weekly unemployment claims and the data for May are very favorable. Initial claims held unchanged at 211,000 in the May 5 week to pull the 4-week average, tracked in the blue line, down 5,500 to 216,000, which is a 49-year low. Continuing claims, which is tracked in green and where data lag by a week, are likewise moving lower with this 4-week average at a 48-year low of 1.813 million. With labor scarce, employers simply can't afford to lay off their workers. All these signs of course should gracefully lead into the theme of inflation but, in what is the story of our 9-year expansion, inflation is hard to find.
The week's other big news is the year-on-year rate of the core consumer price index which, as tracked in the blue line, held at 2.1 percent and failed to advance. This reading is closely shadowed by the core PCE price index which is the Federal Reserve's policy measure and which back in late April spiked 3 tenths to 1.9 percent and was closely followed by an inflation upgrade at the May FOMC meeting. But the latest CPI results do not point to a repeat of another PCE spike, at least not for April which for the stock market is good news, at least good short-term news.
And the news may prove good for more than the short term. There are very few indications of pressure in consumer prices and the direction of two key components -- housing and medical costs -- are only marginally higher at most. Housing costs have been struggling at the 3 percent line for the past year with components for rent and owners' equivalent rent flat to only slightly higher, at respective rates of 3.7 and 3.4 percent. Medical care has been struggling at the 2 percent line with April's 2.2 percent rate not indicative of runaway costs. These two components by themselves make up just more than half of the CPI -- at 42 percent for housing and 9 percent for medical care -- and unless they begin to pick up speed, runaway inflation won't be much of a risk for the Federal Reserve or anybody else.
Producer prices were also released in the week and there's little indication here of much trouble down the inflation pipeline. The ex-food ex-energy core index, at a year-on-year 2.1 percent in April, has been unable to make much headway over the past year while the total index, at 2.7 percent, has been unable to move past the 3 percent line despite the recent rise underway in oil. Tariffs are another risk for producer prices and a real one as wholesale prices for steel products rose a steep 3.2 percent in April with aluminum up 1.8 percent. And year-on-year rates are very elevated: up 7.4 percent for steel and 11.9 percent for aluminum. Yet personal consumption measures in the report, which offer further hints on what to expect for PCE prices, are very subdued, down 0.1 percent in the month overall and up only 0.1 percent on the core.
Import prices were billed last year as a positive for the consumer price outlook but they never panned out much. The red line tracks year-on-year change in import prices which have leveled this year at just over 3 percent, at 3.3 percent in April's data. This is running ahead of the 2.4 percent rate for total consumer prices but there's no increasing lift underway. The steady rise for import prices in the prior couple of years reflected easing strength for the dollar which, so far this year at least, has stabilized.
Import prices never did match the promise from the decline in the dollar. The green line of the trade-weighted dollar has fallen very sharply, from a 15.7 percent year-on-year peak in mid-2015 to a decline of 4.9 percent in April. Import prices in contrast have failed to move to the same degree which suggests that foreign sellers are discounting prices to protect their U.S. market share. And it doesn't look like foreigners will have to increase their discounting since the dollar the past couple of months has been improving. The window for the import-price effect may be closing.
Even if imports don't give much of a boost, inflation does look like it's safely moving higher. The blue line is inflation expectations as measured by the consumer sentiment survey and at 2.8 percent they are up 1 tenth so far this month and follow April's jump in business inflation expectations which are at 2.3 percent. Behind all this is the pink line for total consumer prices which is at 2.5 percent and pointing up. It's notable that the 2.8 percent consumer rate, though matched recently in March, has not been surpassed since March 2015 while the 2.3 percent business rate is the highest in seven years of records.
The run of soft numbers in the week has lowered the risk that the Fed will need to beat back inflation with accelerated rate hikes and is inviting a run up for the stock market. The Dow moved from a year-to-date decline in the week to a year-to-date gain, rising a weekly 2.3 percent for a 0.5 percent rise for 2018. Soft inflation isn't raising demand for bonds as it often might but bonds did hold steady, at least the 10-year Treasury note whose yield, now testing 3.0 percent for the first time in five years, inched only 2 basis points higher to 2.97 percent. But there was a little more selling pressure on the 2-year whose yield rose 4 basis points to 2.55 percent consistent perhaps with a little bit of caution over Fed hikes. An increasing wildcard for everybody, however, is the price of oil which topped $70 for West Texas Intermediate and which may move yet higher should troubles in the Middle East escalate.
|Markets at a Glance
|Crude Oil, WTI ($/barrel)
|Gold (COMEX) ($/ounce)
|Fed Funds Target
||1.25 to 1.50%
||1.50 to 1.75%
||1.50 to 1.75%
|2-Year Treasury Yield
|10-Year Treasury Yield
There are hints here and there, whether tariff effects or inflation expectations, that price pressures may be building but the pressures don't appear very great. Subdued rates of inflation are in line with FOMC expectations and confirm the outlook, at least for now, for a gradual pace of incremental rate hikes. Yet if inflation does take off we can look back at mid-2018 as a time of stress in the labor market, specifically a time when rising demand for labor found a dwindling pool of supply.
The consumer was the no-show story of the first quarter and getting the week rolling on Tuesday will be the first look at second-quarter consumer spending -- April retail sales. Expectations are moderate as strength in core sales and price gains for gas sales are expected to be held back by weakness in vehicle sales. Attention then turns to a factory sector that may be accelerating though expectations are pointing to only a moderate gain for the manufacturing component of Wednesday's industrial production report and steady to easing strength for Tuesday's Empire State and Thursday's Philly Fed reports. The new home market is also in focus: home builder assessments in Tuesday's housing market index followed on Wednesday by housing starts and permits which, after surging in March, are expected to slow but only slightly in April. Capping the week will be Thursday's jobless claims data where the sample week will match the sample week of the monthly jobs report and offer another glimpse of what to expect for May employment.
Retail Sales for April
Consensus Forecast: 0.3%
Consensus Range: 0.1% to 0.5%
Retail Sales Ex-Autos
Consensus Forecast: 0.5%
Consensus Range: 0.3% to 0.8%
Retail Sales Ex-Autos Ex-Gas
Consensus Forecast: 0.4%
Consensus Range: 0.2% to 0.5%
Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)
Consensus Forecast: 0.4%
Consensus Range: 0.3% to 0.4%
At a moderate 0.3 percent consensus gain, April retail sales, unlike those for March, are not expected to get any boost from vehicles following the separately released falloff in the month's unit sales. A more solid 0.5 percent increase is the call for ex-auto sales which are expected to get a boost from the month's higher gas prices. When excluding both autos and gasoline, sales are seen rising 0.4 percent with control group sales, which also excludes food services and building materials, also expected to increase 0.4 percent. Consumer spending proved very soft in the first quarter and this report will mark the first spending data for the second quarter.
Empire State Index for May
Consensus Forecast: 15.5
Consensus Range: 14.0 to 19.0
The Empire State index is expected to hold steady in May at a consensus 15.5 vs 15.8 in an April report that included visible slowing in new orders and backlog orders. Outlook readings in this report fell dramatically in April in what hinted at tariff concerns.
Business Inventories for March
Consensus Forecast, Month-to-Month Change: 0.3%
Consensus Range: 0.1% to 0.6%
A moderate 0.3 percent rise is the consensus for March business inventories, a build that would be in line with underlying sales that have been slightly ahead of inventories. An unexpected reading in this report, whether high or low, could effect expectations for the second estimate of first-quarter GDP which, in the first estimate, got a sizable lift from inventories.
Housing Market Index for May
Consensus Forecast: 70
Consensus Range: 69 to 71
Home-builder confidence has been leveling in contrast to new home sales and permits which are both accelerating. Econoday's consensus calls for slightly strength for the housing market index, at 70 in May vs April's 69 which was a 5-month low.
Housing Starts for April
Consensus Forecast, Annualized Rate: 1.325 million
Consensus Range: 1.260 to 1.350 million
Consensus Forecast: 1.350 million
Consensus Range: 1.325 to 1.370 million
Slight step backs are the expectations for both housing starts and permits which, boosted by a turn higher for multi-unit activity, rose very sharply in March. April's consensus for starts is a 1.325 million annualized rate vs March's 1.319 million with permits seen at 1.350 vs 1.379 million (revised from an initial 1.354 million).
Industrial Production for April
Consensus Forecast, Month-to-Month Change: 0.6%
Consensus Range: 0.2% to 0.9%
Consensus Forecast, Month-to-Month Change: 0.3%
Consensus Range: 0.1% to 1.0%
Capacity Utilization Rate
Consensus Forecast: 78.4%
Consensus Range: 78.2% to 78.5%
Mining has been the strength of the industrial production report which is expected to rise a solid 0.6 percent in April. Manufacturing has been uneven in this report though a respectable 0.3 percent gain is April's call. Pressures on capacity utilization have until now been limited though forecasters are looking for a sizable 4 tenth gain to 78.4 percent.
Initial Jobless Claims for May 12 week
Consensus Forecast: 217,000
Consensus Range: 208,000 to 230,000
Initial claims are expected to come in at 217,000 in the May 12 week which is also the sample week for the monthly employment report. This would be a 6,000 increase from 211,000 in the prior week but would still compare very favorably with 231,500 in the sample week for the April employment report. Low readings in this report are consistent with strong demand for labor.
Philadelphia Fed Manufacturing Index for May
Consensus Forecast: 22.0
Consensus Range: 18.5 to 26.0
The consensus forecast is 22.0 for May's Philly Fed which in April, belying the 23.2 headline, showed sharp slowing for both new orders and backlogs. But prior rates of order growth were very strong in this report; stresses on current production have been evident with both delivery delays and the workweek near 50-year records and both input and selling prices at expansion highs.
Index of Leading Economic Indicators for April
Consensus Forecast, Month-to-Month Change: 0.3%
Consensus Range: -0.1% to 0.4%
The index of leading economic indicators had been posting a run of very strong readings though the gain back in March, at 0.3 percent, was held down by a temporary rise in unemployment claims and a dip in the factory workweek. But with the stock market soft and ISM orders slipping forecasters aren't looking for any acceleration in April with a 0.3 percent gain the consensus.