International Forecaster Weekly

INFLATION EXPECTATIONS DOWN; LABOR MARKET SHOWING SIGNS OF 2019

Over the last several months, consumers’ expectations of future inflation have been steadily falling – a sign perhaps that Americans had confidence in the Fed's war on prices. 

Courtenay Brown and Neil Irwin, who say that changed last month, pointed out today that for the first time in six months, median inflation expectations of everyday households in the year ahead rose.

They increased, in fact, by a half-percentage point to 4.7%, according to the New York Fed's latest Survey of Consumer Expectations.

The report comes as expectations for the level of price increases for everyday goods and services — like food, gas, rent and medical care — decreased in March.

After 2023's hotter-than-expected inflation reports, the March data suggest that the public now believes inflation won’t fall quite as much as they have been anticipating.

Brown and Irwin caution, however, that one month of new numbers doesn’t necessarily mean that “inflation expectations are becoming unanchored. But,” they add, “more readings of this kind could worry officials.

Median inflation expectations at the three-year-ahead horizon ticked up by 0.1%, to 2.8%, but they fell slightly (by 0.1 percentage point) to 2.5% at the five-year-look-ahead timeframe.

Consumers also pushed up expectations for household income growth and, for the first time since last fall, how much they plan to spend.

Mean unemployment expectations — or the mean probability that the unemployment rate will be higher one year from now — increased by 1.3 percentage point to 40.7%. 

The average perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. But the average probability of voluntarily leaving one’s job declines by 1.5 percentage points to 19.3%. 

They warned, too, that it was getting harder to get a loan – a point Brown and Irwin say is worth watching in the wake of the recent bank failures and bailouts.

The share of households reporting that it was more difficult to access credit compared to one year ago rose to the highest level in the survey's 10-year history.

Notably, year-ahead expectations about households’ financial situations also improved – with fewer expecting to be worse off and more respondents expecting to be better off a year from now.

Guest Writer | April 11, 2023

By Dave Allen for Discount Gold & Silver

            Over the last several months, consumers’ expectations of future inflation have been steadily falling – a sign perhaps that Americans had confidence in the Fed's war on prices. 

Courtenay Brown and Neil Irwin, who say that changed last month, pointed out today that for the first time in six months, median inflation expectations of everyday households in the year ahead rose.

They increased, in fact, by a half-percentage point to 4.7%, according to the New York Fed's latest Survey of Consumer Expectations.

The report comes as expectations for the level of price increases for everyday goods and services — like food, gas, rent and medical care — decreased in March.

After 2023's hotter-than-expected inflation reports, the March data suggest that the public now believes inflation won’t fall quite as much as they have been anticipating.

Brown and Irwin caution, however, that one month of new numbers doesn’t necessarily mean that “inflation expectations are becoming unanchored. But,” they add, “more readings of this kind could worry officials.

Median inflation expectations at the three-year-ahead horizon ticked up by 0.1%, to 2.8%, but they fell slightly (by 0.1 percentage point) to 2.5% at the five-year-look-ahead timeframe.

Consumers also pushed up expectations for household income growth and, for the first time since last fall, how much they plan to spend.

Mean unemployment expectations — or the mean probability that the unemployment rate will be higher one year from now — increased by 1.3 percentage point to 40.7%. 

The average perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. But the average probability of voluntarily leaving one’s job declines by 1.5 percentage points to 19.3%. 

They warned, too, that it was getting harder to get a loan – a point Brown and Irwin say is worth watching in the wake of the recent bank failures and bailouts.

The share of households reporting that it was more difficult to access credit compared to one year ago rose to the highest level in the survey's 10-year history.

Notably, year-ahead expectations about households’ financial situations also improved – with fewer expecting to be worse off and more respondents expecting to be better off a year from now.

Labor Market Time Machine

Given distortions in the cosmic time warp – thanks to Covid, economic uncertainty and geopolitical volatility, some observers believe the labor market is showing shades of 2019.

But Brown and Irwin say that understanding how now and four years ago are the same and different is key to grasping where things are likely to go from here.

They write that the “high-water mark of the longest expansion in history was 2019,” which included a healthy job market with low inflation. 

The question now, they add, “is whether the remainder of 2023 can keep the former while returning to the latter.”

They note these comparisons of 2019 vs. the first quarter of 2023:

(1) Headline unemployment rate: average of 3.7% in 2019, 3.5% so far in 2023;

(2) Average hourly earnings growth: 2.9% compared to 3.2% annualized rate; and

(3) Average share of 25-54 year olds working: 80.0% then vs. 80.5% now.

Fed chair Jerome Powell "has been dying for the economy to look like it did in 2019 and [Friday's] jobs report is basically like a really strong 2019 one," so said Peachtree Creek Investments' Conor Sen.

But the differences are important, too: Both job growth and labor force participation are a lot stronger today. The labor force has risen by 588,000 people a month so far this year, compared to 125,000 a month in 2019.

In the same vein, job creation has been faster this year, with an average of 345,000 a month vs. 163,000 a month in 2019.

And most importantly, the decent job growth and earnings in 2019 occurred in a synergy of much, much lower inflation, so rising wages translated into rising living standards.

The question for the remainder of 2023, Brown and Irwin say, is “how those differences resolve themselves” – that is, how, if and when inflation comes down and the rate of job creation normalizes.

If you’re a betting man or woman, chances are you like the upcoming scenario.

On one side is high inflation persisting, which would further put a crunch on Americans’ buying power and lead to yet more Fed tightening, with all the future pain that would entail.

Or, some combination of tightening already in the system and a freeze-up in bank credit due to last month's events leads to a sudden downturn, where the early 2023 robust labor market is overtaken by something weaker.

Current Fed projections seem to embrace the latter scenario, with the median policymaker seeing the headline jobless rate rising a full percentage point to 4.5% by year-end (8.5% counting discouraged job seekers).

The CPI for March is due out on Wednesday. Toward the end of the month, the Employment Cost Index promises a more updated look at wage growth and whether it’s slowing the way last Friday’s jobs report suggests.

As Brown and Irwin conclude, it took a pandemic to stop an 11-year bull cycle. So, “If things turn cloudy in 2023, it will likely be a different culprit: the Fed.”