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The Hires-Exceed-Fires Economy
The strength of May’s employment report surprised many, debunking the notion that the US labor market is mired in “low-hire, low-fire” stagnation. But it confirmed the views of Ed and Elias. They expect demand for labor to continue to improve and supply to remain structurally constrained. This should keep unemployment low, boost productivity, and sustain wage growth. That shouldn’t cause an inflationary wage-price spiral over the long term; the AI-sparked productivity boom should keep unit labor costs in check, in line with our longer-term Roaring 2020s hypothesis. But near-term risks remain: The AI buildout is inflationary, and higher wage growth could add price pressure before offsetting productivity gains materialize. … Also: Elias discusses five economic impacts of AI.
ECONOMIC WEEK AHEAD: June 8-12
The week ahead is dominated by inflation prints. The May CPI (Wed) and PPI (Thu) top the calendar. From a consumer perspective, we will also see the NY Fed's consumer inflation expectations survey (Mon) and the University of Michigan’s preliminary sentiment release (Fri). The “Federal Open Mouth Committee” is in the blackout period ahead of next week's committee meeting—i.e., the talking Fed heads won't be talking. The Bank of Canada meets on Wednesday and is expected to hold its overnight rate steady at 2.25%. Most importantly, the SpaceX IPO will continue to dominate headlines, with the company's stock set to begin trading on Friday. The S&P 500 closed Friday at 7,383.74, 7.7% above its 200-day moving average (chart). The equal-weight index closed at 8,398.26, also well above its 200-dma. Friday's session retreated after a much stronger-than-expected May payrolls gain of 172,000, which increased the odds of a Fed rate hike in coming months. The broad uptrend in stock prices remains intact across both market-cap and equal-weight measures. Here are the key economic releases most likely to shape investors' thinking this week: (1) Inflation. The Cleveland Fed Inflation Nowcasting model has May's headline CPI (Wed) rising 0.46% m/m, enough to push the annual rate to 4.18% y/y, up from 3.8% in April. The core CPI looks more benign, rising 0.23% m/m, with the annual rate edging up to 2.82% y/y from 2.80% in April (chart). The model's June preliminary nowcast points to headline inflation easing back to 4.05% y/y, reflecting the recent drop in nearby gasoline futures to $3.05 on June 5 from above $3.70 earlier this year. April's PPI Final Demand rose 6.0% y/y. The composite ISM Prices-Paid Index, a six-month forward inflation signal, eased to 153.4 in May from 155.3 in April but remains elevated (chart). (2) Inflation expectations. The NY Fed's Survey of Consumer Expectations (Mon) covers May. April's release showed the median one-year-ahead inflation expectation at 3.6%, with three-year expectations at 3.2% and five-year at 3.0% (chart). Long-term inflation expectations remain well anchored. (3) Unemployment. Friday's 172,000 May payrolls increase is consistent with the subdued trajectory of initial jobless claims (Thu). Initial unemployment insurance claims printed at 225,000 for the week of May 29, with the four-week moving average ticking up to 214,800 (chart). The drift higher remains well below levels that would signal labor-market stress. Continuing claims are trending down. The labor market continues to add jobs without meaningfully shedding them. (4) Consumer sentiment. May’s final University of Michigan sentiment dropped to 44.8, an all-time low (chart). Current conditions printed at 45.8, with expectations a touch below the headline at 44.1. The June preliminary release (Fri) will test whether the strong May payrolls print has lifted sentiment off these depressed levels. The one-year-ahead inflation expectations stood at 4.8% in May, tracking the trajectory of retail gasoline prices, which printed at $4.44 per gallon on June 1 (chart). Easing nearby gasoline futures should pull this expectation lower in the coming months. (5) Global inflation. April data showed China's CPI rising 1.2% y/y while the PPI climbed to 2.8%, the first sustained positive PPI reading after a long stretch of deflation (chart). May's release (Wed) is expected to show the CPI ticking up slightly. Japan's PPI (Tue) accelerated to 4.9% y/y in April and is expected to push above 5.0% in May (chart). Markets are pricing an 82% probability of a rate hike at the Bank of Japan’s June 16 meeting. A hot print would tip those odds close to certainty.
Employment Is Heating Up, But So Is Inflation
As we've been predicting in recent months, labor market conditions are improving, while inflationary pressures remain elevated. We expect the FOMC will shift to a tightening bias at the June meeting of the Fed's policy-setting committee and will probably hike the federal funds rate in July if current trends persist. Don't get us wrong, we expect inflationary pressures to ease later this year, assuming, as we do, that the price of crude oil will settle between $75-$85 a barrel once the war in the Middle East has been resolved, opening the Strait of Hormuz to free maritime passage again. Oil tankers are reportedly already passing through the strait if their owners pay Iran's "toll." We are also counting on productivity growth to keep a lid on unit labor costs inflation (ULC). So far, so good. Today's revisions for Q1 reduced the growth rates of both productivity and hourly compensation. Productivity is still up nicely at 2.8% y/y, while hourly compensation increased 3.3%. So ULC inflation is now down to just 0.5% y/y during Q1 (chart). This measure of the underlying inflation rate in the labor market is providing a strong disinflationary offset to the inflationary energy shock from the war. ULC inflation rose sharply during 2021 and 2022. The FOMC should pivot toward tightening monetary policy to avert a renewed wage-price spiral and to cool speculative excesses in the stock market. Now, let's review the multiple data points that confirm the labor market and economy are doing well: (1) ADP. The US private sector added 122,000 jobs in May, the strongest monthly pace since January 2025, according to ADP. The gain was broadly based, with eight of the 10 sectors posting gains (chart). ADP chief economist Nela Richardson noted that "hiring was more broadly based in May than we have seen in the last few years," adding that "the labor market continues to show sustained momentum going into the summer hiring season." (2) Revelio Labs. The ADP reading is corroborated by Revelio Labs, which reported that the US economy added 123,700 jobs in May, the strongest monthly pace since July 2024 (chart). (3) Challenger Report. US employers announced 97,006 job cuts in May. However, this series is inherently volatile and remains relatively low (chart). (4) Initial Claims. Initial unemployment insurance claims rose slightly to 225,000 last week (which included Memorial Day) but remains low and consistent with very subdued layoff activity (chart). Continuing claims ticked down to 1,777,000, remaining near its lowest level since January 2024. (5) ISM PMIs. The ISM NM-PMI edged up to 54.5 in May, its 23rd consecutive month of expansion (chart). The ISM M-PMI rose to 54.0 in May, its fifth consecutive month of expansion and the highest reading since 2022. Both sectors of the economy are now expanding simultaneously at solid paces. The prices-paid component of the NM-PMI survey rose to 71.3 in May, the highest since August 2022. The prices-paid index for the M-PMI was even higher at 82.1 last month (chart). Both confirm that inflationary pressures remain significant due to the energy shock, supply chain disruptions, and tariffs. (6) Weekly Economic Index. The Weekly Economic Index, which aggregates 10 high-frequency daily and weekly data series to track real-time US economic activity, rose to 3.2% for the week of May 29, its highest reading since August 2022. This suggests that real GDP is growing around 3% y/y. (7) Beige Book. The Fed's Beige Book, covering data collected on or just before May 27, confirms that inflation risks are higher than unemployment risks. Economic activity. Ten of 12 Fed district banks reported slight to moderate economic growth, up from eight in April. Nine of 12 districts reported modest to strong manufacturing growth, a clear improvement from April's mixed picture. Consumer spending was bifurcated, with higher-income households resilient and middle- and lower-income households showing signs of stress. Modest to moderate wage growth persisted across all districts, and 11 districts reported little to no change in employment. Inflation. Multiple districts reported rapid price increases, with the energy shock now the primary driver, generating spillovers into shipping, food, fertilizer, and packaging costs. The Beige Book is consistent with our view that the economy remains in solid shape, but inflation risks have increased for the next few months.
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