'24 year-end prices, spending, wages look good

DATA_NOTE: The dogs may bark, but the caravan goes on...for now

There’s a lot of attention-grabbing news right now, but the positive data-flow continues apace.

This AM’s reports show:

• The PCE deflator, the one the Fed watches most closely, came in as expected: 0.3% overall, 0.2% core (0.16%), 2.6% y/y overall, 2.8% y/y core.

• Those yearly numbers are still well above the Fed’s target, and disinflationary progress has definitely slowed, a big reason for the Fed’s pause in the rate-lowering cycle this week. But as a certain Fed chair likes to say, it’s all about the “direction of travel,” which leads us to the 3- and 6-month changes.

• This slide nicely tells the story: core PCE climbed the mountain and came down the other side. The yearly rate shows some bit of stalling but the more timely 3- and 6-month rates are about at the 2% target.

Source: BEA

• The Employment Cost Index, also closely watched by the Fed, reflects some softening in the job market, as nominal compensation has slowed, but, as shown in the BLS charts below, inflation has slowed more, so real private-sector wages and salaries (right-side) are up 0.8% yr/yr.

Source: BLS

• Put these slides together, and you might think easing inflation and rising real comp is supporting real consumer spending. You’d be right: it came in at a healthy 0.4% for December, and a toasty-but-not-too-hot 3.1% yr/yr.

• One less positive indicator is the very low saving rate, 3.8% in December (the pre-pandemic average was ~7%). This suggests less of an income cushion should problems arise, but it also leaves out much wealth accumulation, so it’s probably biased down a bit.

What does it all mean? Forgive me if I get a little policy/political. The U.S. macro economy is really in very good shape. Nothing’s ever perfect, and when I say “macro,” I’m talking overall, and we know that doesn’t apply to everybody. But with low unemployment, strong GDP lifted by solid consumer spending, easing inflation, and rising real pay, the best policy move from the new admin is to love-it-and-leave-it-alone. Not to whack it with ideologically-motived policy lurching and sweeping tariffs.