Good Monday AM,

Markets starting off leaking to the downside but not by much. It is a typical trading pattern heading into a Fed meeting that no one is going to get too far ahead and gamble.

This week is a big data week.

Tuesday

• The Labor Department releases its employment-cost index for the fourth quarter, which captures employers’ labor costs by measuring wages and benefits paid to workers.
• S&P Global releases its S&P CoreLogic Case-Shiller National Home Price Index, which will show home-price trends across the country in November. S&P also releases January surveys of purchasing managers measuring economic activity in China’s manufacturing sector.
• The Conference Board releases its January consumer-confidence index, which measures Americans’ attitudes toward jobs and the economy.

Wednesday

• The Federal Reserve announces its latest interest-rate decision as it attempts to cool the economy and bring down high inflation. The central bank began to slow interest-rate increases in December and is likely to step down to a quarter-point rise to assess the impact of their increases.
• The Labor Department releases December data on job openings, quits, hires and layoffs. 

Thursday

• The Labor Department reports the number of worker filings for unemployment benefits in the week ended Jan. 28. The department also releases fourth-quarter data on U.S. nonfarm labor productivity and unit labor costs. 

Friday

• The Labor Department reports on the state of the U.S. labor market in January, including the number of job gains, the unemployment rate and average weekly earnings.

There was also a good piece in Bloomberg that I thought I would share. I have to admit, I have been a bit myopic thinking that the rest of the economy is feeling the same pain as housing (and financing) but that is not the case.

Was the economy good or bad in 2022?

The answer isn’t totally obvious one way or another. Inflation was red hot throughout most of the year. This spurred the Fed to raise rates, which contributed to a frozen housing market and a plunge in stocks. On the other hand, the labor market boomed, with the unemployment rate falling to a 50-year low. We also saw a general ongoing normalization of the economy, with healing supply chains and so forth.

As such we saw a number of commentators point to real wage growth as the key determining indicator. Wages were growing more slowly than prices, therefore workers were falling behind, therefore things were bad. This was kind of the verdict that everyone came to. This is why consumer confidence was in the tank.

So given how much focus this indicator received, it’s worth noting that real wages (the monthly change in average hourly earnings minus the monthly change in headline CPI) grew nicely for two straight months at the end of the year (Credit to Victoria Guida at POLITICO for reporting on this last week).

Of course, there’s a problem with making real wage growth the centerpiece of your economic analysis. As you can see, this measure absolutely boomed in March and April of 2020, with some of the highest gains in real wages ever. Were March and April of 2020 good months for the economy. Unambiguously not. Everyone knows that. And yet if you just went by this measure you would say those were good months. Then later on in 2020, we saw huge plunges in real wage growth as activity started picking up again after the initial pandemic depression. Was the economy getting worse in the summer of 2020? Again, obviously not.

In fact, this is a common phenomenon. If we look back to around the Great Financial Crisis, we saw huge real wage gains in the second half of 2008, a period when we all know the economy was collapsing into the worst recession in a century.

Here’s the chart:

So there are two points here:

Real wage growth is clearly insufficient if you’re looking for a single datapoint to determine the health of the economy.

If you place a heavy emphasis on them anyway, then things really did start to improve at the end of the year.

There’s another point, which is that we’re using headline CPI and headline CPI is heavily influenced by oil (gasoline) prices, as everyone knows. And so a huge part of the story with all of these charts is that to some extent, they’re just gasoline charts. Gasoline fluctuates a lot faster than average hourly earnings do. So when gasoline prices plunge (like they did in late 2008, March 2020, and at the end of 2022) you get those nice green bars. And when gasoline prices surge (like in 2021 and the first half of 2022), you get those red bars.

So that’s another problem with the real wage centric view of the universe. You’re basically taking a gasoline centric view of the universe, at least over the short term. Now of course, gasoline prices matter a lot in the US economy — to take home pay, to consumer psychology, and even probably to the President’s approval rating. So it’s important. But still, most economists would probably be uncomfortable suggesting that we render a verdict on the whole economy by whether gasoline is falling. And yet implicitly, from time to time, economists do exactly this.

Anyway, on a semi-related note, it’s Fed week, with a decision due out this Wednesday.

There’s a lot of hope out there that the rate hike cycle is coming to an end soon. The expectation is that the Fed will just hike by 25 basis points this week, and that possibly it could be the last hike, with perhaps even rate cuts coming into view at some point. On the other hand though, there’s a sense that the underlying momentum of the economy has turned up. Housing seems to have stabilized. The cost of freight seems to have stabilized. The consumer seems to be in strong shape. Meanwhile, in the bond market, break-evens (across various tenors) have picked up over the last couple of weeks. And speaking of gasoline, the daily national average, per AAA is around $3.50 right now. In late December, it was around $3. So it’s a weird moment. Lots of Goldilocks optimism. Hope that the Fed is ready to declare victory. And yet perhaps some upward forces to growth and prices are showing up out there

Please remain safe and stay healthy, make today great!