You’d be forgiven for saying that last week wasn’t a great week in terms of what US auto sales and the March jobs number signaled about the underlying health of the US economy.
Indeed, as we wrote on Sunday evening, the “surprising” trials and tribulations of the auto market and the “surprisingly” weak NFP print would certainly seem to underscore the contention that the “hard” data reality doesn’t even come close to approximating the “soft” data euphoria we’ve seen since the start of the year and that Donald Trump is so quick to retweet.
So in short, that chart seems to suggest that hell will freeze over before the economy “gets hard” – so to speak.
It’s against that backdrop that we present a few excerpts from Goldman’s Jan Hatzius who on Monday decided that 3:43 a.m. EST was just the time to remind investors that despite frozen weather conditions denting the employment report, this economy is in fact still at risk of overheating.
1. The uncertainty about the true pace of US growth is relatively large right now. Our real GDP tracking estimate for Q1 has edged down further to just 1.4%, and other estimates are even lower. By contrast, even after Friday’s partly weather-driven slowdown in nonfarm payroll growth to 98k, our current activity indicator (CAI) for March is 3.6%, down from the February reading of 4.2% but still strong in absolute terms. In averaging these numbers, we would put most of the weight on the CAI, partly because we think it is generally more stable and partly because GDP in the first quarter suffers from a downward seasonal bias of about 1pp. So we think that true growth is well above the US economy’s underlying trend of around 1¾%.
2. This assessment is also consistent with the further decline in labor market slack. At 4.5%, the unemployment rate stands about ¼pp below our and the FOMC’s estimate of the structural rate. Other signals such as the fall in the broader underemployment rate U6 to a cycle low of 8.9% and the increase in the net share of households describing jobs as “plentiful” vs. “hard to get” to the highest level since 2001 are also consistent with a further increase in labor market utilization. We think the labor market is at full employment, with a risk of overheating over the next 1-2 years given our forecast for growth.
3. Admittedly, the wage signals are not yet quite consistent with full employment. Average hourly earnings have risen at fairly subdued rates in recent months and our wage tracker has stagnated at 2.8% year-on-year over the past few quarters, a pace that is still ½pp below the rate we would expect at full employment. But we think this stagnation is probably temporary. Some of it may reflect the lagged impact of the weakness in headline inflation, which has now reversed. In addition, business surveys such as the NFIB report an ongoing pickup in wage pressures, which seems more consistent with the labor demand picture and might portend renewed acceleration in the official numbers in coming quarters.
4. Core price inflation has reaccelerated in recent months, following the weakness late last year. We expect core PCE inflation to rise from 1.8% now to 2% late this year and 2¼% in 2018-2019. A temporary overshooting of inflation above 2% is clearly acceptable because the target is symmetric, as the committee made clear in its latest statement. In fact, one can argue that the committee ought to target inflation slightly above 2% in normal times in order to compensate for the inevitable periods below 2% in weaker periods. Nevertheless, rising core inflation will reinforce the Fed’s determination to bring the economy down to a trend growth rate.