FOMC Checklist 6-15-21

The FOMC meets on Tuesday and Wednesday of this week and will issue its post-meeting statement at 2:00 PM ET on Wednesday. The markets will be tuned in to any indication of timing for the next Fed policy shift with respect to quantitative easing, or whether the median dot plot estimate will now show a tightening by the end of the 2023 forecast horizon. Policymakers will address the heightened prospect for 2021 chain price gains since the last meeting, though the official position will likely remain that the price updraft is transitory.

The SEP will be updated at this week’s meeting, and the market will expect a narrowing in the GDP estimates around the current optimistic path, boosts in the near term inflation estimates to account for recent robust inflation reports, a boost in the jobless rate path given a diminished pace of improvement in recent months, and a potentially higher trajectory for the federal funds rate.

The median 2021 GDP estimate was boosted to 6.5% in March from 4.2% in December and 4.0% in September, and the risk is that this hike will be trimmed somewhat in June, with a narrower range of near-term forecasts.

The PCE chain price medians for 2021 were revised up to 2.4% for the headline and 2.2% for the core, after December medians of 1.8% for both, September medians of 1.7% for both, and respective June medians of 1.6% and 1.5%. Outsized CPI and PPI gains since March suggest a further round of big hikes.

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The median jobless rate estimate for 2021 was trimmed to 4.5% in March from 5.0% in December, 5.5% in September, and 6.5% in June, and this trimming may be reversed somewhat in June, given that the reported rate has fallen at a more modest pace since the March meeting, from 6.2% February to 5.8% in May.

See our policy outlook page for a table of assumptions for the Fed’s revised forecasts.

In the following, we summarize economic developments that have occurred since the last FOMC meeting in April regarding the labor market, inflation and consumption.

The Labor Market

Payroll gains began 2021 on a stronger footing after the -306k December drop that reflected the virus resurgence and subsequent lockdowns, and seasonal factors that expected a normal holiday period. We’ve seen an average payroll gain of 478k through the first five months of 2021, after a 2020 average payroll drop of -785k. The unemployment rate sat at a 3.5% cycle-low in February of 2020, before climbing to a 14.7% peak by April of 2020. The rate has since eased to 5.8% in May, down from 6.1% in April. The participation rate tumbled from a 5-year high of 63.3% in January and February of 2020 to a 48-year low of 60.2% in April of 2020, before climbing back to 61.6% through May of this year.

The y/y average hourly earnings gauge was lifted sharply in April of 2020 by the shift in the compositional mix of jobs with the shutdowns, as layoffs were heavily concentrated among low-wage employees. This measure rose from what was a cycle-high of 3.4% in March of 2020 to 8.0% last April, before falling back to 4.4% by November. The y/y gauge bounced again to 5.5% in December and has since eased to 2.0% y/y in May due to easy comparison, though big monthly increases suggest that the underlying growth path is gaining steam.

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Employment in the goods sector edged up in May after two-way gyrations through the first four months of 2021, but steady improvement through the second half of 2020. Monthly goods-based employment changes are averaging 20k thus far in 2021, from -69k in 2020, versus averages of 8k in 2019 and 52k in 2018.

Service sector employment has improved every month of this year, after a -356k December drop that capped a string of big gains. Service sector changes are averaging 416k thus far in 2021 from -609k in 2020, versus 141k in 2019 and 131k in 2018.

The two-digit unemployment rate (U-3) fell to a cycle-low 5.79% in May, down from 6.09% in April and well under the 14.77% peak in April of 2020. The rate remains well above the prior cycle’s low of 3.48% in February of 2020. The Fed’s median projection for the long-run jobless rate was revised down to 4.0% from 4.1% with the March SEP, but will likely be revised higher in June.

The broader U-6 rate continued to improve through May, dipping to 10.2% from 10.4 in April, and 10.7% in March. We saw an April 2020 spike to 22.9% from 8.8% in March of 2020, versus December ’19’s all-time low of 6.8%. The rate was above 17% in late-2009 and early-2010, before an ensuing cyclical downtrend.

Other measures of labor under-utilization include those marginally attached to the labor force, discouraged workers, and part-time workers for economic reasons. In May, the number of people marginally attached to the labor force rose to 1.9 mln from 1.8 mln in April and 1.8 mln in March, versus the 2.2 mln figure from April of 2020. The current figure is well above the 1.3 mln reading at the start of the 2008-09 recession, but still well below the 2.8 mln peak recorded in January of 2012.

In May, there were 551k discouraged workers, down from 573k in April, 488k in March, and 529k in January. This compares to 514k from March of 2020. The total is still significantly lower than the 1.3 mln such workers in December of 2010.

In May, the number of people working part-time for economic reasons was 5.3 mln, an uptick from 5.2 mln in March. The figure is down 5.3 mln from May of 2020, and up to 367k from March 2008 reading. As a comparison, this number swelled to 9.2 mln in September 2010, at the height of the last recession. That high was exceeded by the 10.9 mln figure in April of 2020.

Wage growth settled into a sustained rate at or just above 3% between 2018 and early-2020, before the spike starting in March of 2020 from the mass layoffs of low-paid workers that changed the mix of employment. A 3.0% y/y rise for wages in February of 2020 was followed by gains of 3.5% last March and 8.2% last April, before the drop-back to 2.0% as of this May.

The latest data on unit labor costs (ULC) and the employment cost index (ECI) revealed quarterly gains of 4.1% SAAR for the ULC in Q1, and an 2.6% y/y for the ECI in Q1.

The y/y Q1 rate of 4.1% for ULC followed y/y gains of 6.1% in Q4 and 3.1% in Q3. The y/y gain for ECI total compensation of 2.6% in Q1 followed 2.5% in Q4 and 2.4% y/y Q3.

Inflation

We’ve seen a powerful updraft in commodity and construction material prices in 2021 that is lifting inflation prospects for the year. We saw y/y CPI gains of 5.0% in May and 4.2% in April, after a 1.2% recent-trough in October and November. The Fed’s favored inflation gauge, the PCE chain price measure, posted April y/y gains of 3.6% for the headline and 3.1% for the core, after respective March increases of 2.4% and 1.9%. Last April marked a trough for the inflation measures. The FOMC will need to incorporate hefty early-2021 price gains into their inflation forecast adjustments at the June meeting, though they will likely again low-ball estimates for the second half of 2021, and will highlight the temporary base effects driving the y/y inflation spike in Q2.

Consumption

Real PCE is poised for further strength in Q2, despite an emerging retail sales pullback, as we unwind stimulus boosts via direct deposits to individuals in Q1. Real consumption growth should sit near 9.6% in Q2, following an 11.3% clip in Q2, 2.3% in Q4, and last year’s big zigzag that left a Q3 growth clip of 41.0% after a -33.2% contraction rate in Q2. GDP looks poised for growth near 7.8% in Q2, after reported rates of 6.4% in Q1, 4.3% in Q4, and 33.4% in Q3.

There is little likelihood of any policy changes at the June FOMC. Markets will be focused on the Fed’s verbiage in the press conference about prospects for tapering later in the year, or early in 2022. The markets will continue to monitor how sensitive policymakers will be to inflation rates above the 2% objective, and hence how committed some members are to the Fed’s shift to average inflation targeting regime.

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