Tom Moeller

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<p><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050128b.jpg" width="353"></p>
<p>The employment cost index for private industry workers rose 0.7% last quarter, in line with Consensus expectations for a 0.8% increase. The y/y gain of 3.8% represented moderation from the 4.0% rates of growth logged during the prior four years.</p>
<p>Moderate wage and salary growth of just 0.4% was less than half the 3Q increase and the y/y gain of 2.4% was nearly half the peak rates of growth seen during 1998 and 2000. Wages account for roughly 70% of the compensation index.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050128c.jpg" width="353"></p>
<p>Benefit costs, on the other hand, shot up last year. The 4Q rise of 1.5% was below increases early in the year but pulled the y/y gain to 6.9%, the strongest in over twenty years. The y/y rise in the cost of health benefits eased to 7.3% after 10.5% growth in 2003.</p>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB08/@EB08.HTM">ECI- Private Industry Workers</a></th>
<th scope="col"><b><u>4Q &#39;04</u></b></th>
<th scope="col"><u><b>3Q &#39;04</b></u></th>
<th scope="col"><b><u>Y/Y</u></b></th>
<th scope="col"><b><u>2004</u></b></th>
<th scope="col"><u><b>2003</b></u></th>
<th scope="col"><b><u>2002</u></b></th>
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<td class="firstcol">Compensation</td>
<td>0.7%</td>
<td>0.9%</td>
<td>3.8%</td>
<td>3.7%</td>
<td>4.1%</td>
<td>3.4%</td>
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<td class="firstcol">&nbsp; Wages &amp; Salaries</td>
<td>0.4%</td>
<td>0.9%</td>
<td>2.4%</td>
<td>2.4%</td>
<td>3.0%</td>
<td>2.7%</td>
</tr>
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<td class="firstcol">&nbsp; Benefit Costs</td>
<td>1.5%</td>
<td>1.0%</td>
<td>6.9%</td>
<td>7.0%</td>
<td>6.5%</td>
<td>4.8%</td>
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The employment cost index for private industry workers rose 0.7% last quarter, in line with Consensus expectations for a 0.8% increase. The y/y gain of 3.8% represented moderation from the 4.0% rates of growth logged during the prior [...]

Employment Cost Index Moderate At 0.7%

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Sales of existing homes increased 4.8% (6.1% y/y) to 4.15 million (SAAR) during November from an unrevised 3.96 million in October. The gain followed a 3.4% October rise and a 1.3% September decline. The rise accompanied an increase in the effective 30-year mortgage interest rate to an average 6.81% from 6.43% in October. The Action Economics Forecast Survey expected November sales of 4.09 million units. The sales figures are based on closings of sales signed over the past couple of months.

The median price of all existing homes (NSA) eased 0.2% (+4.7% y/y) in November to $406,100 from 406,800 in October, revised from $407,200. Prices remained below the 426,900 high this past June. The median price of an existing single-family home slipped 0.2% (+4.8% y/y) to $410,900 in November from $411,700 in October. The median price of condos and co-ops slipped 0.1% (+2.8% y/y) to $359,800 in November from $360,300 in October.

Sales of existing homes rose 8.5% (6.3% y/y) to 510,000 in the Northeast after a 2.2% October gain. Sales in the Midwest jumped 5.3% both m/m and y/y to 	1.00 million after a 6.7% October increase. Sales in the South gained 5.6% (3.3% y/y) to 1.87 million after a 2.9% October gain. Holding steady at 770,000 (+14.9% y/y) were sales in the West, following a 1.3% October increase.

The number of existing homes for sale (NSA) fell 2.9% (+17.7% y/y) to 1.33 million after a 0.7% October increase. The supply of homes on the market at the current selling rate (NSA) fell to 3.8 months from 4.2 months in October. This figure has generally risen since February. The record low in supply of 1.6 months was reached in January 2022. These figures date back to January 1999.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.



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- Sales rise to highest level since March.
- Monthly sales rise in three of four regions of the country.
- Median price edges lower.


U.S. Existing Homes Sales Surge in November

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The Current General Activity Diffusion Index declined to -16.4 during December after falling to -5.5 in November, according to the Manufacturing Business Outlook Survey (MBOS) from the Federal Reserve Bank of Philadelphia, indicating further deterioration in factory sector activity this month. A reading of 2.5 had been expected in the Action Economics Forecast Survey. Sixteen percent of the firms reported increases in general activity in December while 32.7% reported decreases. Responses to this month's survey were collected between December 9 and December 16.

Haver Analytics calculates an ISM-adjusted current activity diffusion index from five key components using the methodology along the lines of the national ISM index. The index declined to 48.6 in this month from 49.2. It was the lowest reading in six months, down from a high of 54.9 in July.

The new orders index fell to -4.3 this month after declining to 8.9 in November, while the shipments series declined to -1.9 after falling to 4.5. Surging higher, however, was the unfilled orders index to 18.9, its highest level since March 2022. The delivery times reading jumped to 11.6 after weakening to -2.1 and the inventories index declined to -2.3 after rising to 5.4 last month.

The current employment index declined to 6.6 in December after rising to 8.6 in November, suggesting an overall increase in employment. Seventeen percent of respondents reported increases in employment last month while an increased 10.6% reported declines. The average employee workweek index collapsed to -8.2 and reversed most of its rise to 17.4 in November.

Inflation indicators were mixed this month. The prices paid index rose to 31.2 after falling to 26.6 last month. The index is up from a low of 3.7 in March. A higher 34.0% of respondents reported increases in input prices in December while 2.8% reported decreases. To the downside, the prices received index declined to 7.3 after falling to 14.3 in November It was down from a September high of 24.6. A lessened 12.0% of respondents reported increases in prices while an increased 4.7% reported declines.

The future activity index declined to 30.7 in December after surging to 56.6 during November. The reading hit its low of -4.0 in January. Most of the components declined, including new orders, shipments, order backlogs and employment. The expected capital spending measure fell sharply. Inventories and the length of the workweek increased. The expected prices paid series fell from the highest level since April 2022, but prices received increased. 

The Manufacturing Business Outlook Survey (MBOS), conducted by the Federal Reserve Bank of Philadelphia, is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The diffusion indexes in the MBOS represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The series from the survey dating back to May 1968 can be found in Haver's **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.



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- Current General Activity Index is lowest since April 2023.
- New orders, shipments & employment weaken.
- Prices paid index improves but prices received falls sharply.


U.S. Philadelphia Fed Manufacturing Index Declines in December

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined by 22,000 to 220,000, seasonally adjusted, in the week ended December 14, from the previous week’s unrevised level of 242,000.  The Action Economic Forecast Survey had expected claims to be 231,000. The 4-week moving average was 225,500 in the December 14 week, an increase of 1,250 from 224,250 in the previous week. As mentioned last week, weekly claims figures can be distorted by the timing of Thanksgiving and the associated difficulty that presents to seasonally adjusting weekly data.

The total number of unemployment insurance beneficiaries was 1.874 million in the week ended December 7, a decrease of 5,000 from the previous week’s level of 1.879 million, revised from 1.886 million. This total number of beneficiaries is also known as “continuing claims.” The 4-week moving average was 1.880 million in the week ended December 7, down 6,000 from 1.886 million in the previous week. The insured unemployment rate, that is, the total number of beneficiaries as a percent of covered employment, was unchanged at 1.2% in the week ended December 7.

Unemployment rates vary markedly across states. The Labor Department reports that for the week ended November 30, the insured unemployment rate was highest in New Jersey (2.46%), followed by California (2.30%), Washington (2.20%), Minnesota (2.11%), and Alaska (2.05%). The lowest rates were in Florida (0.39%), followed by Virginia (0.40%), South Dakota (0.43%), Alabama (0.46%), and New Hampshire (0.48%). Unemployment rates in other major states include Illinois (1.74%), New York and Massachusetts (both at 1.73%), Pennsylvania (1.70%), Michigan (1.35%), Texas (1.17%), and Ohio (0.95%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.


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- Initial claims were lower than expected in the week ended December 14.
- Continuing claims remained steady.
- The insured unemployment rate remained unchanged at 1.2%.


U.S. Initial Unemployment Claims Declined in Most Recent Week

Andrew Cates

**Stock markets and economic data**
In recent weeks, financial markets have been glued to political developments, with a particular focus on the policy implications of a new US administration. This political backdrop has buoyed US equity markets, which have responded positively to expectations of pro-growth policy shifts. However, beneath the surface, the economic data have told a more nuanced story. While inflation readings have consistently surprised to the upside, incoming growth data have fallen short of expectations (chart 1). Against this backdrop, the recent souring of sentiment in the US equity market seems less surprising, as investors reassess the balance between political optimism and the underlying economic reality.

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**Services inflation and monetary policy**
An additional reason, however, for that souring of sentiment concerns monetary policy. Although the US Fed cut interest rates by 25 bps this week, the commentary and forecasts left investors much more concerned about the scope for looser policy in 2025. These concerns have been amplified as well by incoming inflation data suggesting that service sector inflation has remained elevated (chart 2).

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**Broad money growth versus house price inflation**
There are, in addition, some forward-looking indicators that suggest inflation could pick up in the coming months. The recent lowering of policy rates across most major economies has been mirrored by an uptick in growth of broader measures of the money supply. As shown in chart 3, M2 growth in several major economies has gained momentum. This, in turn, has begun to translate—albeit with a lag—into stronger house price inflation. Against a backdrop where consumer price inflation has been above target and sticky this will potentially concern many policymakers. 

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**Supply chain pressures and inflation surprises**
These inflation concerns could be further amplified in the coming months by a potential shift in US policy toward greater trade protectionism. As chart 4 illustrates, global supply chain pressures have played a pivotal role in shaping inflation dynamics—first by driving inflation higher during the pandemic and the war in Ukraine, and more recently by easing inflation as those pressures subsided. However, a resurgence of supply-side disruptions driven by renewed protectionist measures could trigger another inflationary spike. Such a scenario would likely force central banks to maintain a more restrictive monetary stance for longer, delaying anticipated interest rate cuts and adding to the challenges facing the global economy.

Supply chain.jpg

**The Bank of Japan**
Standing in contrast to these broad global concerns was the Bank of Japan’s decision this week to signal patience regarding further interest rate hikes. Policymakers specifically opted to keep the policy rate unchanged. This decision appears justified, as inflation in Japan is currently holding just above the 2% target, with no significant upward pressure on prices to warrant additional tightening. Moreover, Japan's economic growth remains relatively weak, although nominal wage growth continues to be positive. Looking ahead, market-based inflation expectations have steadily risen in recent years, specifically with the 5-year breakeven inflation rate recently surpassing the 2% threshold (see chart below). If these expectations materialize, a more stable inflationary environment could provide the BoJ with a stronger case for further increases in its policy interest rate next year.

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**China**
Turning to the situation in China, the week’s economic data releases were underwhelming, as the economy’s regular monthly data failed to meet expectations. This is reflected in the Citigroup Economic Surprise Index, which reversed from a period of positive surprises and took a downturn. Specifically, retail sales growth slowed to 3% y/y in November, down from the 4.8% seen in October. Furthermore, China’s property sector remained in a dire state, with existing house prices falling by an additional 8.4% y/y (chart 6). These disappointing figures have reinforced expectations of further monetary easing by Chinese authorities and continued weakness in demand-driven consumer inflation. Additionally, producer prices have continued to decline, partly driven by excess capacity issues. This outlook has also solidified expectations of a prolonged period of low interest rates in China, contributing to a rally in the country’s bond markets and pushing yields to record lows.

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Investors have shifted their attention back to the economic data and monetary policy over the past few days, marking a shift from recent weeks when political developments took centre stage in shaping financial market sentiment (chart 1). While this week’s decision by the US Fed to cut policy rates by 25 bps was widely anticipated, the accompanying commentary and forecasts have heightened concerns that US monetary policy will remain tighter for longer in the months ahead. Similarly, the BoE’s likely decision to leave rates unchanged this week has stoked comparable concerns about the UK’s policy trajectory. The key driver behind these concerns is inflation. Persistent inflation in the services sector (chart 2) and ongoing wage pressures are leaving policymakers in the US and UK reluctant to ease monetary policy further. This hesitancy has been amplified by financial conditions that have arguably been looser in recent months than central banks would prefer (chart 3). Additionally, a potential shift toward a more protectionist global trade environment next year could exacerbate price pressures in traded goods sectors, further complicating efforts to bring inflation back toward target levels (chart 4). Meanwhile, in Japan, the BoJ’s decision to maintain its accommodative monetary policy highlights a contrasting challenge: low inflation and a fragile economy. These dynamics stand in stark contrast to the issues confronting the US Fed (chart 5). Further complicating the global picture is China (chart 6), where recent data point to an economy weighed down by weak consumer demand, excess industrial capacity, and tepid inflation. This also underlines the increasingly divergent challenges faced by policymakers across the world’s major economies as they navigate a highly complex and uncertain macroeconomic landscape.

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Employment Cost Index Moderate At 0.7%

Summary

Tom Moeller

More Economy in Brief

U.S. Existing Homes Sales Surge in November

U.S. Philadelphia Fed Manufacturing Index Declines in December

U.S. Initial Unemployment Claims Declined in Most Recent Week

Charts of the Week: Inflated expectations

ECI- Private Industry Workers	4Q '04	3Q '04	Y/Y	2004	2003	2002
Compensation	0.7%	0.9%	3.8%	3.7%	4.1%	3.4%
Wages & Salaries	0.4%	0.9%	2.4%	2.4%	3.0%	2.7%
Benefit Costs	1.5%	1.0%	6.9%	7.0%	6.5%	4.8%