Reading too much into single data points

Something business economists are taught to avoid is reading too much significance into individual data points about the economy.  Seasonal adjustments, measurement problems, weather and a host of other things mean it is very important to look at as many data points as possible before declaring a trend.  It's a lesson that seems to have been forgotten by quite a number of commentators as they looked at some important numbers this week.

On Tuesday the Bureau of Labor Statistics released consumer price index data for October.  The headline number was certainly encouraging: prices were unchanged in the month, which resulted in the year-on-year inflation rate easing to 3.2 percent from the 3.7 percent reported in September. Equity markets rallied hard on hopes that falling inflation would pave the way for the Fed to start cutting rates sooner rather than later.

A look behind the headline suggests that a more cautious interpretation of the data might be in order. The lower-than-expected headline print was largely the result of a 5 percent month-on-month decline in the price of gasoline.  That's not something that Fed policymakers can claim any credit for, and given the highly volatile situation in the Middle East, it's not something that can be counted on in the months ahead, even though a similar outcome now seems likely for November.

Other sub-components of the index were less positive from a policy standpoint. Both shelter and food prices rose 0.3 percent in October, with shelter prices up 6.7 percent higher than they were a year ago. CPI less food and energy stands 4.0 percent above its year-ago level.  Given that Fed Chair Jay Powell always insists that the Fed intends to get CPI all the way back to the 2 percent target, that suggests there is still some way to go before lower rates can be confidently predicted.  

Today the US Commerce Department provided its advance estimate of retail sales for October. The dollar value of retail sales (not adjusted for inflation) edged down by 0.1 percent from September, the first such  decline since March.  However, the monthly decline was actually smaller than markets had expected, given the very robust 0.7 percent increase initially reported for September. What's more, that September increase was actually revised higher to 0.9 percent, which means that the dollar value of retail sales in October was significantly higher than markets had foreseen, even if sales fell marginally in the month.

With the holiday shopping season yet to get fully underway -- Black Friday and Cyber Monday are still a week away -- it would be foolhardy to suggest that one month of not-actually-weak data on CPI and retail spending sets the stage for the Fed to start contemplating early rate cuts. We can be quite sure that that is not how the Fed sees it. 

Softer job growth in October

Both the Federal Reserve and the Bank of Canada have recently signalled that they are prepared to keep rates on hold for the time being, while waiting to assess the effect of their past tightening moves.  Both central banks have indicated that their future rate decisions will be, to use an old cliche, data dependent, with developments in the labour market very much front of mind. Employment data for October, released in both countries today, suggest that both banks may be able to avoid any further tightening. 

In the US, data from the Bureau of Labor Statistics show that the US economy added 150,000 jobs in October. This was below market expectations and marked a sharp fall from the 297,000 jobs added in September.  That September number was revised down from an initial estimate above 330,000.  The October number is also materially below the average monthly gain of 258,000 jobs created over the past twelve months. The unemployment rate ticked higher to stand at 4.9 percent. 

Importantly for the Fed, there is still no evidence of significant upward pressure on wages. Average hourly earnings rose a scant 0.2 percent in October, the same as in September. This brought the year-on-year rise to 4.1 percent, down from 4.2 percent a month earlier.  

In Canada the story is similar in many ways, but with the added complication that the labour force is growing extremely fast because of high immigration. After adding an aggregate of more than 100,000 jobs in August and September, the economy added only 18,000 positions in October.* With the labour force growing by almost 58,000 in the month, this pushed the unemployment rate up by 0.2 percentage points to 5.7 percent, by coincidence identical to its pre-pandemic level. 

The impact of immigration on the size of the labour force shows up even more starkly on a longer view. Since January, employment has grown by an average of 28,000 per month, but the monthly increase in the labour force has been over 80,000. It is thus no surprise to see the unemployment rate moving up steadily from the cyclical low of 4.9 percent reached in mid-2022. It is also worth noting that the Federal government seems to be realizing, however belatedly, that the current situation is unsustainable. It announced this week that it intends to stabilize immigration levels, although not until 2026.

As in the US, wage gains in Canada remain relatively restrained. The year-on-year rise in average hourly earnings slipped to 4.8 percent in October from 5.0 percent in September,  However, in light of numerous high-profile labour disputes in recent weeks (the Big Three auto makers, the St Lawrence Seaway and many others), this is something the Bank of Canada will continue to monitor closely.

All in all, these are Fed-and Bank-friendly numbers.  One month of data is far too little to declare a trend, but things do seem to be moving in the direction policymakers want. 

* Interestingly, the construction sector accounted for all of the net new jobs in the month.  Given well-founded concerns over where all the immigrants are supposed to live, this presumably counts as welcome news. 

Fed does the expected thing

As expected, today's meeting of the FOMC ended with the Fed deciding to keep its Fed funds target range unchanged at 5.25-5.5 percent. The press release starts with a recitation of economic developments that might, in the abstract,  point to the need for higher rates, but then explains why the Fed is content for now to see whether its past tightening moves are enough to get inflation back to the 2 percent target.

The first paragraph, quoted here in full, would need very little amendment if the outcome of the meeting had in fact been another rate hike:

Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

However, the release then goes on to list the Committee's rationale(s) for keeping things unchanged for now.  These include:

Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.

and

In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

The FOMC is of course quick to restate its ultimate goal: The Committee is strongly committed to returning inflation to its 2 percent objective. Market participants now seem to have taken on board the message that rates are likely to stay at current levels for much longer than was previously anticipated, with a full return to the 2 percent target not anticipated until 2026. Whether further rate hikes will be needed to meet that goal is still an open question, but today's announcement makes it clear that further upside surprises in growth or employment could yet push the FOMC in that direction. 

As a pancake

Canada's real GDP was virtually unchanged in August from the previous month, according to data released this morning by Statistics Canada. The outcome was slightly below StatsCan's preliminary estimate of 0.1 percent growth.  With the newly-released preliminary estimate for September also showing next to no change, it seems possible that quarterly GDP figures, due for release on November 30,  will show that the economy was on the brink of an "official" recession in Q2 and Q3. No need (I hope) to repeat that the so-called "official" definition is loved by lazy journalists much more than by hard-working bloggers. 

Monthly GDP numbers are generally quite volatile, so it is remarkable to look at the data tables behind today's release and see the lack of any movement in GDP over the past four months.  After growing 0.2 percent in May, the economy edged lower in June, then posted almost no change at all in real terms in July or August.  Want proof?  Here are the actual numbers, in billions of chained C$:   June 2023: 2081.9 -- July 2023: 2081.8 -- August 2023: 2082.5.

Looking behind those very stable aggregate numbers does offer a couple of clues about what's going on in the economy. Goods producing industries have shown a decline in output in each month since April; the weakest sub-sector here is agriculture and forestry, which suggests that the impact of forest fires continues to influence the data. In contrast, service producing sectors grew marginally in July and August after a small decline in June. The growth in August was led by a strong rise in wholesale trade, which is unlikely to be sustained if the economy is indeed now on a much slower growth track. 

Today's data are entirely consistent with the forecasts published by the Bank of Canada in support of its rate decision last week. Indeed, the year-on-year rise in real GDP for August, at 0.9 percent, exactly matches the Bank's updated prediction for the full calendar year. The Bank's next fixed announcement date is December 6, so it will have access to the full Q3 GDP data when it makes its decision. Barring some unexpected bounce in growth in September, it is very hard to see how there will be any case for a rate hike at that time.

Lastly, a quick heads-up to one Benjamin Reitzes, an economist at Bank of Montreal. In this CBC article he is quoted as saying that the weak showing "will cause recession chatter to ramp up quickly".  I'm not sure where Benjamin hangs out, but all the Canadian media outlets I read have been screaming "recession" for the last eighteen months and more. Like the guys carrying "The end of the world is nigh" placards, they were always going to be right eventually. 

Bank of Canada: another hawkish hold

In line with market expectations, the Bank of Canada today kept its target interest rate unchanged at 5 percent, the second straight meeting with no adjustment in policy. However, as was the case at the previous announcement on September 6, the tone of the press release strongly suggested that the Bank may yet find it necessary to resume tightening, given the persistence of inflationary risks.

The media release is slightly longer than usual and largely reflects the analysis and forecasts provided in the quarterly Monetary Policy Report, also released today.  Some key points, with commentary:

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand...... the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. The shift in the composition of growth could prove significant for the Bank going forward. Given that the US accounts for more than 70 percent of Canada's external trade, a stronger US economy in and of itself adds at the margin to inflation risk in Canada. 

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures..... In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance. The tightness in the labour market is evidently contributing to wage pressures. something the Bank is especially anxious about. There is currently a strike on the economically vital St Lawrence Seaway that has seen the employers complain that the workers are looking for the same kind of wage increases that have recently been won by Canadian auto workers.  The Bank will be very watchful for such signs of a wage-price spiral, something that has been avoided so far. 

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand......Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025. This would certainly represent the softest of soft landings. New monthly GDP data for August, due for release on October 31, are likely to suggest that the economy, having shrunk marginally in Q2, narrowly avoided a technical recession in Q3.

Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates.....Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.....CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025.....the near-term path is higher because of energy prices and ongoing persistence in core inflation.  Recent volatility in monthly CPI data has evidently reinforced the Bank's view that progress back toward the 2 percent target will be slow from this point onwards. The forecast combination of negligible growth and sticky inflation over the next twelve months is a particularly tricky scenario for policymakers. 

The press release concludes with a clear warning:Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.  Despite this, commentary from Bay Street analysts suggests that most believe the tightening cycle is over, which is probably not something the Bank will be happy to see.  The Bank's Governing Council may privately think that they are done with tightening, but they surely don't want markets of the public feeling too confident about that just yet. 

Canada September CPI -- cause for a pause

Canada's headline CPI came in slightly below market expectations in September, with a 0.1 percent monthly decline (not seasonally adjusted) resulting in a year-on-year increase of 3.8 percent, down from 4.0 percent in August. That is still well above the Bank of Canada's 2 percent target, but in light of the Bank's recent rhetoric about the lags with which monetary policy operates, it looks safe to say that the Bank will keep its rate target unchanged at 5.0 percent at its Governing Council meeting on October 25. 

The slowdown in the year-on-year headline figure was broad-based, but the most eye-catching number is the deceleration in grocery price rises. This sub-component rose 5.8 percent in September, down from 6.9 percent in August and little more than half the peak of 11 percent posted a year ago.  So far, and so surprisingly, neither PM Trudeau nor Finance Minister Freeland has tried to claim credit for this.  Their little woodshed chat with the grocery store CEOs last month cannot possibly have affected this latest number, and it still seems possible that the politicians only called that meeting because they knew grocery price inflation was about to slow anyway. 

Looking briefly at the major special aggregates, it appears that CPI ex food rose 3.4 percent in the year to September, while CPI ex food and energy rose 3.2 percent.  All three of the Bank of Canada's preferred measures of core inflation slowed noticeably in the month: their mean value is now down to 4 percent. 

These numbers, though still way above the 2 percent target, suggest that the Bank is on the right track to get there eventually.  Given signs that higher mortgage rates are starting to take a severe toll on the housing market, there is no doubt that the Bank will keep rates unchanged next week.  However, it can be expected to reaffirm its willingness to raise rates again if the slow downward trend in inflation stalls or reverse. 

There is no bottom

Back in July 2019, when Boris Johnson was about to take up residence at 10 Downing Street, the excellent London blogger known as Diamond Geezer wrote that "Britain's worst-ever Prime Minister, who took over from Britain's worst-ever Prime Minister, will shortly be replaced by Britain's worst ever Prime Minister".  It's a good line, but it turns out that DG didn't know the half of it.  The UK has had two more worst-evers since Johnson left the scene, and the Tory party assembly line keeps throwing up ever more unsuitable candidates for the job.

Let's take them in order, starting with those DG was referring to:

First, from 2010 to 2018, was David Cameron.  He began his tenure by imposing austerity in response to the global financial crisis, which was, of course, exactly the wrong policy response.  Then, to appease his right-wing fringe, he promised a referendum om "Brexit".  He never thought the UK would vote to leave the EU and campaigned in a very desultory fashion for a "remain" vote.  When the leave side won the day, Cameron hightailed it out of office.

Cameron was succeeded by Theresa May, the UK's second female PM.  She held office from July 2015 to July 2019.  With the die cast for Brexit, she struggled mightily to appease the party's right wing while negotiating a deal that might actually work.  Two no-confidence votes later, she resigned after a draft agreement with the EU was rejected by Parliament.

Up next was Boris Johnson, who had worked hard behind the scenes to oust Theresa May. Once in office, he managed to ram through a Brexit deal he described as "oven ready", even though it has since proved to be nothing of the sort. He held office from July 2019 to September 2022.  The last two-and-a-half years were dominated by the COVID crisis, which was hardly Johnson's fault but did eventually trigger his demise.  He was ousted after it was shown that he had misled Parliament about a series of boozy parties held by his staff on Government premises while the whole UK was supposedly under a COVID lockdown. 

Here we move beyond DG's little list, to find Liz Truss replacing BoJo.  The less said of her tenure the better, and it's easy not to say much because she was only around for seven weeks.  An ideologically-committed  right-winger who seemed incapable of listening to advice, she nearly wrecked the UK's financial markets and resigned after losing an endurance test against a lettuce.

Next up was the current incumbent, Rishi Sunak, who is just coming up on a full year in office. Sunak is the UK's first Hindu PM, which is doubtless not a bad thing, but also the richest person to hold the office in modern times, which is probably not a good thing. In truth, Sunak has not pulled any of the dumb moves that characterized his predecessors on this list, but he has never won the full support of the more right-wing members of his party, and trails badly in opinion polls despite the lackluster performance of Labour leader Sir Keir Starmer. 

As and when the party decides to oust Sunak -- most likely after he loses a general election late next year -- the most likely replacement is Suella Braverman, current Home Secretary.  The anti-immigration crowd's favourite immigrant, the strident Braverman is the brains, if that's the word, behind the Government's bizarre and probably illegal scheme to relocate illegal migrants to the tiny, landlocked African nation of Rwanda. 

And lurking behind Suella is the worst of them all, the irrepressible, bibulous populist Nigel Farage. Despite not actually being a member of the Tory party, Farage contrived to dominate its recent annual conference, spouting the usual river of bile about...well, mostly about immigrants, actually, as is always the case when someone puts a microphone in front of his leering face.  It's hard to spot anyone worse than Farage looking to take over the party after him, but given the Tories' recent track record in selecting leaders, you wouldn't put it past them to find someone even worse when the time comes.