Charles Steindel

State labor markets in December remained in similar patterns to recent months. The vast majority of states reported statistically insignificant increases in payrolls from November; Missouri and Texas were the only ones showing significant gains. A few states reported insignificant drops.

Eight states had statistically significant changes in their unemployment rates—two down and six up. None of these changes were larger than .2 percentage point. The highest unemployment rates were in Nevada (5.7%), DC (5.5%), California (5.5%), Illinois (5.2%), and Kentucky (5.2%) The number of state with unemployment rates under 3.0% declined, with Nebraska, New Hampshire, North Dakota, South Dakota, and Vermont remaining in that category. South Dakota’s 1.9% was the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.4%, while the island’s job count was essentially stable (the point estimate fell by 100).

State Labor Markets in December 2024

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Joseph G. Carson

With price stability as a key mandate, the Federal Reserve bears a significant responsibility to guarantee that the targeted price statistics accurately reflect people's experiences and are not influenced by political or statistical manipulation. However, the Fed's price targeting regime has become misleading and unbalanced since the price measure it targets has become less relevant to "actual" inflation. The Fed nowadays lacks a "Greenspan," or an individual who is both an expert in economic statistics and methodology and possesses the political power and influence to challenge the accuracy of published statistics or request their review. The matter of accurate price measurement is not just academic; it has real economic and financial effects.

Years ago, the Price Statistic Review Committee (PSRC), a group of academics, economists and statisticians, stated that, “If a satisfactory rent index for units comparable to those that are owner-occupied can be developed" then the committee recommends that BLS to use this approach for house prices and related expenses.

The General Accounting Office (GAO), which released a comprehensive report on how housing costs are measured in inflation metrics, made a similar suggestion. The GAO stated, "Most owner-occupied housing units differ significantly from many rental units. To apply rental equivalence in the CPI, a sufficient number of rental units must be identified that are comparable to owner-occupied units in terms of size, location, and quality, allowing the BLS to create a sample that accurately reflects owner-occupied houses."

In 1983, based on recommendations from the PSRC, GAO and others, the Bureau of Labor Statistics introduced the owners' rental equivalence method to estimate housing costs of owner-occupied homes. This estimation procedure continued until 1998, when the BLS announced that it had to discontinue the owner-sample due to an insufficient sample of owner-housing units. Moving forward, they decided to link the rent estimates for owners' rent to the other rent series. Neither the PSRC nor the GAO provided any comments.

The owners-occupied rent series constitutes roughly fifteen percent of the Fed's preferred price target, the personal consumption expenditure deflator (PCE). Combined with the thirty percent of the PCE that individuals do not buy, nearly half of the PCE deflator reflects an inflation rate derived from administered and non-market prices or imputations. How can this be regarded as a reliable or accurate measure of actual inflation people experience?

Price data should represent "actual" inflation, not a statistical distortion. Considering its essential role in shaping both monetary and fiscal policy, it is crucial for the price data to be accurate, relevant, and objective. The general public benefits from "actual" sustainable low inflation. But who gains when inflation might be understated, or its cyclical fluctuations are dampened or eliminated due to a new statistical method?

Over the past sixteen years, from 1998 to 2024, the average S&P 500 P/E ratio was 26.7. In contrast, during the preceding fifteen years, from 1983 to 1998, it averaged 15. Is this just a coincidence, or could the alteration in inflation estimation for housing costs, combined with the Fed's emphasis on an inflation measure representing only half of the actual inflation rate experienced by people, partly explain this shift? This misleading measure of inflation and policy approach has led to maintaining official rates lower than they might have been otherwise, which benefit finance, especially equity investments.

According to history, "Washington" is unlikely to change it frameworks (price and policy) unless another crisis occurs. The financial press could increase public awareness of this issue, but it has not done so yet. As long as the existing price and policy frameworks remain in place, finance benefits while "Joe Six Pack" loses ground to "actual" inflation.

The Fed Must Target "Actual" Inflation

Mickey D. Levy

The persistently stronger growth of the U.S. economy relative to most other advanced nations has been the driving factor that has resulted in a stronger stock market with higher valuations, higher interest rates and a strong US dollar.  A handful of charts highlight the sizable differences in economic and financial market performance across nations.  Nothing is permanent, and things—particularly shifts in economic policies--can initiate sizable changes in trends.  As we assess shifts in economic policies and central bank monetary policies, it’s important to keep in mind the economic fundamentals that drive financial markets.

**Real growth comparisons**.  Chart 1 shows the cumulative percent change in real GDP since 2000 in the U.S., UK, Europe and Japan.  In general, the faster growth in the U.S. reflects a combination of healthier gains in labor force and productivity.  Real GDP growth in the UK matched the U.S.’s pace from 2000-2008, while Europe nearly kept pace, benefiting from the boom in global trade fueled by the China super-cycle.  While the decade following the Great Financial Crisis was lackluster in the U.S., it was markedly slower elsewhere, particularly in Europe, which was hampered with ongoing financial crises during 2010-2014.

Chart 2 shows the same data but indexes real GDP to 2019Q4, which highlights the U.S.’s continued healthy growth following the pandemic-related contraction in the first half of 2020, while growth in Japan, the UK and Europe has been particularly weak.  The persistent outperformance of the U.S. economy is sizable.

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The GDP comparison between the U.S. and Canada tells a different story, as shown in Chart 3.  Unlike other advanced nations, Canada’s economy kept pace with the U.S. in the early 2000s, benefiting from its strong growth in its labor force fueled by immigration and the high demand for its exports of natural resources.  Following the GFC, growth in Canada outpaced the U.S’s soft recovery.  Canada’s growth slowed beginning in 2015 with the decline in oil prices and its shift in economic policies that focused on redistribution and social issues and deterred business expansion and economic growth. Canada’s economy has stumbled markedly in the 2020s. To highlight Canada’s weakness and lack of confidence, its business investment as a percent of GDP drifted down prior to the pandemic, plummeted in 2020, and has failed to recover, as shown in Chart 4.

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Calculations of productivity vary for different nations and are not directly comparable. However, the U.S.’s pace of technological innovation and the implementation of new innovations into commerce and society seems significantly more pronounced than in other advanced nations.  These growth and wealth-enhancing characteristics in the U.S. are facilitated and fueled by the structure of its capital markets, along with its higher degree of risk-taking and entrepreneurial spirit. These characteristics in the U.S. attract global innovators and risk-takers. Various nations are encouraging and rewarding innovation and facilitating advances in capital markets, a distinct positive for global grow.  However, at this point, a comparison of pro-growth characteristics in the U.S. and Europe, and Europe’s diminished potential growth, is striking. Note that amid the political turmoil in Europe, its leaders are discussing just about everything except policies that would promote sustainable economic growth.

Labor and employment data are similarly difficult to compare across nations.  The U.S.’s labor force has continued to grow and is very flexible, with significantly higher mobility than in other nations. The U.S.’s policies that influence the supply and demand for labor leave much room for improvement, but in general facilitate labor mobility much more than other nations.  This enhances the efficiency of business production.  The U.S. has also benefited from immigration, and except for Canada, is seemingly more adept than other nations at assimilating immigrants into the workforce and society.  Of note, while Japan now welcomes a large and growing number of foreigners into its workforce that offset the impact of its declining population, many nations in Europe, particularly Germany, have policies that constrain the mobility of labor and reduce economic efficiencies.

**Stock market comparisons**. Charts 5 and 6 show comparisons of the cumulative appreciation of stock markets.  Of note, Chart 5 measures the cumulative percent changes in the stock market indexes since 2000 in local currencies, while Chart 6 measures the percent changes in total stock market returns including dividends, in US$ terms.  Thus, the recent strength in the US dollar compounds the comparative U.S. advantage.

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The outperformance of the U.S. stock market reflects a combination of healthy economic growth, strong profits, growth leaders and high valuations based on favorable expectations.  The higher returns on the U.S. stock market generate expectations that the relative advantage will continue.  In the last decade, the U.S. has benefited significantly from new growth leaders that garner high multiples.  Those stock market leaders have also been the critical drivers of U.S. business investment and growth of the economy.  Certainly, there are periods when other nations’ stock markets outperform, but history shows that those periods are temporary.  Valuations and P/E multiples are higher in U.S. stock markets that in other markets, reflecting favorable expectations of future economic and profit growth.

**Interest rate comparisons.** The U.S.’s economic growth and productivity gains raise expected rates of return on capital, which lifts real interest rates.  Following the sustained period of low real rates that accompanied the GFC and subsequent decade of weak growth, real rates have normalized.  They are now similar to (but still below) the high real interest rates that accompanied the strong productivity-driven growth of the second half of the 1990s.  Except for Japan, inflation in all advanced nations has receded, and central banks have raised their policy interest rates above inflation.  The Bank of Japan is now normalizing interest rates as it strives to lift inflationary expectations to 2%. Bond yields have risen in all advanced nations and except in Japan, exceed inflationary expectations. Charts 7 and 8 show an international comparison of central bank policy rates and bond yields.

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**Exchange rates.** In an international context, capital tends to flow to the highest risk-adjusted expected rate of return.  Accordingly, the higher expected rates of return on US dollar-denominated assets are associated with a stronger US dollar.  Charts 9 and 10 show the trade-weighted dollar for advanced foreign economies and the dollar versus the yen and the Euro. The trade-weighted dollar is at high levels similar to levels of the late 1990s and early 2000s before it depreciated significantly and near all-time highs versus the yen.

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It is always important to assess how economic policies in the U.S. and globally influence economic and financial market performance.  Currently, the potential for shifts in policies is high.

Advantage U.S.:  Its Economy, Stock Market, Interest Rates and the Dollar

Has the traditional business cycle become obsolete? Not entirely, but major substantial changes in monetary policies and in the methods for calculating price measurement statistics, have altered the manner in which business cycles end. Business cycles consist of two components: an economic cycle and a financial cycle. Changes in policy and price measurement have shifted the pressures and excesses of the business cycle from the economy to the financial sector. In other words, high P/E ratios have taken the place of high CPI figures.

What Causes the Ups and Downs of a Business Cycles?

Some analysts and academics argue that the traditional business cycle characterized by increasing inflation and interest rates that eventually leads to an end of the cycle no longer exists. This perspective is somewhat supported when comparing business cycles before 1990 with those after.

For instance, since 1990, every business cycle has concluded with relatively low headline and core inflation. In contrast, from 1960 to 1990, business cycles ended with inflation rates of at least 5%, sometimes reaching double digits, with official rates significantly exceeding reported inflation.

However, to assess whether the traditional business cycle is now obsolete, it is crucial to first ascertain if the expansion and recession phases are influenced by government fiscal and monetary policies, developments in financial markets, or an exogenous shock. (Note: The business cycle that ended in 2020 was initiated by an unforeseen event, the pandemic, unlike the recessions of 2000 and 2007. However, in all three instances, both headline and core inflation were relatively low).

Essentially, significant technological advancements and globalization from the mid-1990s and beyond have decreased business cycle volatility, limiting or postponing price pressures that previously would have arisen during a typical business cycle. However, there are other factors at work as well.

During the mid-1990s, the approach to conducting monetary policy shifted from focusing on money and credit growth to targeting real interest rates. Most financial market analysts, myself included, did not initially see this shift in monetary policy as a major transformation. However, it turned into one when the BLS altered its method of measuring consumer prices in 1998.

In the late 1990s, the BLS stopped surveying the owner-occupied housing market to estimate owners' equivalent rent and began using data from the primary rental market, despite the fact that these two housing markets are influenced by different factors and frequently exhibit significantly different supply and demand patterns. At the same time, non-housing financing costs were removed from the CPI, continuing the previous exclusion of housing financing costs in the 1980s.

At that time, participants in the financial market did not consider these changes in price measurement to be significant. However, they were extremely important. During the housing bubble of the early 2000s, while housing prices experienced double-digit increases, the CPI indicated housing cost increases of only 2% to 4%. If the BLS had not implemented the measurement changes in the late 1990s, reported inflation would have been easily double what was reported.

(Note: The BLS excluded housing prices from the CPI in 1983, but continued to survey owner-occupied housing to estimate the implied rent for homeowners, maintaining a direct connection between housing inflation and increases in owners' rent. This connection was severed with the measurement changes in 1998).

The removal of non-mortgage interest costs also had a big impact on reported inflation. A joint research project by economists from Harvard and MIT found that the CPI from 2021 to 2023 would have been twice as high if consumer financing costs for were still included in price measurement.

Still, altering the methods for measuring prices had notable economic and financial impacts. Indeed, the revised CPI measure exhibits significantly less cyclicality, leading the Fed to aim for lower nominal and real interest rates than it would have if the BLS had not made these adjustments. This has led to considerably higher P/E ratios since 2000.

Economic downturns can stem from asset markets, as shown by the stock market crashes in 2000 and 2007, followed by recessions. The S&P 500 is trading at 22 times the projected earnings for 2025, and even higher compared to free cash flow projections. Other market indicators, such as the price-to-sales ratio, are also exceptionally high.

Therefore, the equity market is susceptible, particularly to an additional increase in market interest rates. Historically, the risk of recession increases when the yield on the 10-year Treasury surpasses the growth in Nominal GDP. According to current figures, there is merely a positive spread of 20 basis points with GDP outpacing the yield on the 10-year Treasury. However, current yields might still be too high given the lofty levels of the equity market.

However, the primary threat to the equity market and the economy lies in the fiscal strategies of the new administration. With the existing budget approaching $2 trillion, it is not financially viable to make the 2017 tax cuts permanent, as they are estimated to cost $4 trillion over the next decade, along with introducing further federal tax cuts. Even if the new Administration succeeds in reducing federal spending, it will not be significant enough to offset both past and new tax cuts, resulting in a budget deficit as large or larger than the current one.

More than three decades ago, President Bill Clinton shifted from his new economic agenda, which featured a middle-class tax cut, to a deficit-reduction strategy in response to the threat of increasing interest rates. At that time, the US was dealing with projected budget deficits ranging from $300 to $400 billion, compared to today's deficits exceeding $2 trillion.

Should the Trump economic team ignore the lessons from 2000, 2007, or even 1993, there is a genuine risk of a significant increase in interest rates. Market interest rates have previously impacted the fiscal strategies of a new president, and they have the potential to do so again, if not, the risk of financial chaos will increase.

Is The Business Cycle Obsolete? Not Completely, But The Way It Ends Has Changed

Sharmila Whelan

A soft landing has been achieved, and the world economy is in the expansion phase of the business cycle.  There will be greater geopolitical and pollical stability. However it is important to understand the headwinds and tailwinds that will shape the global economy in 2025.

**Headwinds**

**Global trade & a strong US dollar:** A strong US dollar is a negative for global trade. Figure 1 which shows movements in the dollar (on a reverse axis) against changes in global exports since 1974 is illustrative. When the US dollar is weak global trade thrives and vice versa. Even today 80% of global trade is settled in US dollars.


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Source: Haver Analytics & Westbourne Research

**Trump’s trade tariff war:** There is no doubt that the US led trade war is set to escalate and there will trade retaliatory measures. A 10% US import tariff on global imports is almost a given. Some countries will be hit harder than others. Overall it will be a drag on global trade while companies incorporate higher market access costs and adjust other production costs and/or accept the profit margin squeeze. Whether the disruption will be short-term or medium term is unclear and depends on how drawn-out America’s negotiations with its trading partners are.

That said Trump sees America’s trade deficit as a leverage tool to be used to negotiate better terms for the country. Permanently raising tariffs to levels that hurt American consumers and companies directly contradicts Trump’s Make America Great Again mantra and are unlikely. So no 60%tariff rates.

**Inflation and monetary policy:** From here on monetary policy decisions will become more complicated. Headline inflation rates remain elevated compared with pre-Covid and is creeping up in the US, UK, Euro-area and in Japan (Figure 2). The exception is Asia.

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The headwind is the pace at which the US Fed, European Central Bank and Bank of England can continue to cut policy interest rates.  The market is now discounting only two 25bps Fed Fund rate cuts this year. The BoE too will be slow to cut. The ECB is the exception and the expectation is that the central bank will continue to ease monetary policy as growth concerns take precedence over price stability.

**Europe:**  Subpar economic performance will persist. Germany is barely growing, while economic activity is slowing in France and Italy. The problem is the reluctance of European households to spend and take on leverage, despite falling interest rates and rising real incomes. This was the reason last year the corporate sector led profit and investment spending upcycles failed to translate into a broader economic recovery. Real retail sales growth remains lacklustre. The credit cycle is in a downswing, and household savings rates are rising as precautionary demand for rainy-day buffers grows. The other major headwind for Europe is Trump. The greatest cost will stem not from higher U.S. tariffs—only 8% of total EU exports in the twelve months to September 2024 went to the U.S.—or even from weaker exports, but rather from rising defence spending and mounting fiscal pressures.

**China:** Turning East, the biggest drag on global growth and financial markets in 2025 will be China. Figure 3 gives a gauge of the health of the economy and the success of the central banks and government’s monetary and fiscal policy stimulus measures. The chart shows that although Asia ex-Japan exports to China are still rising in absolute terms, the rate of growth is decelerating rather than accelerating which is what one would expect to see if the Chinese economy had turned around decisively.

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**US equity market valuations:** The final headwind for international financial markets is the lofty valuation levels of U.S. equity markets, which heightens the risk of both healthy and unhealthy corrections. Figure 4 shows on a price-to-earnings the S&P500 is expensive. The market on other measures, including price to book and price to sales ratios is extremely elevated.

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Source: National Sources and Haver Analytics

Now with all the gloom out of the way, let’s turn to the tailwinds.

**Tailwinds**

**US economy:** Within the developed world, the US will once again be the best performing economy in 2025, and the rest of the world stands to benefit from a strongly growing American economy. The US corporate profit cycle is in full upswing. US private sector balance sheet fundamentals are strong. Both corporate and household debt measured as percentages of GDP and disposable income, respectively have trended down since 2020.

Pro-business deregulation will be the cornerstone of Trump’s second-term domestic policies.  This should give a significant multi-year boost to the US economy, and corporate earnings. The U.S. corporate tax rate is set to drop from 21% to 20%, with a likely further reduction to 15% for domestic producers. Financial services, traditional energy sectors and pharmaceuticals are positioned to benefit the most, though companies across industries can expect reduced regulatory and compliance burdens.

Meanwhile employment growth is stable at around 1.4% YoY is more or less in line with the pre-pandemic average, and the unemployment rate well below. Hourly earnings are rising by 4% YoY while retail sales have been strengthening, growing by 3.8% YoY in November (Figure 5).

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**Global crude prices:** Stable to declining oil prices is another positive tailwind for global economy, The International Energy Agency (IEA) forecasts that global oil demand will increase from 840,000 barrels per day (b/d) in 2024 to 1.1 million b/d in 2025, bringing total consumption to 103.9 million b/d. On the supply side there is  considerable uncertainty around when OPEC + will begin to unwind production cuts. Cuts, at the earliest are expected to be phased out from end March 2025 and to last through September 2026. However, despite stronger demand and slower cuts the IEA does not anticipate severe supply-demand balances that would push up crude prices. Their current market estimates still indicate a 950k b/d supply overhang in 2025.

**Government finances:** In 2022 five sovereigns defaulted on debt and another six the following year. In 2024 Argentina went through a major debt restructuring as did Sri Lanka. However, with interest rates falling the risk of debt defaults is declining. The health of Asian public finances stands out in particular (Figure 6). In most Asian countries there is scope to loosen fiscal policy to support growth, if need be.

We are also less pessimistic than consensus and the IMF about US public finances and expect significant fiscal spending consolidation in the second term of the Trump administration. The end of support to Ukraine, Israel and the Inflation Reduction Act will  also take pressure off government finances.

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**Global election cycle:**  The final tailwind is the global election cycle. Currently attention is focused on Germany’s elections on February 27, political uncertainty persists in France, where the government remains in limbo, and in Canada, following the resignation of long-serving Prime Minister Justin Trudeau. However, 2025 will see far fewer elections globally, suggesting reduced political upheaval and greater domestic stability. So far, at least 12 national elections are confirmed, with only a few expected to be pivotal- Germany, Australia, Canada, and potentially Egypt.

State Labor Markets in December 2024

Charles Steindel

More Viewpoints

The Fed Must Target "Actual" Inflation

Advantage U.S.: Its Economy, Stock Market, Interest Rates and the Dollar

Is The Business Cycle Obsolete? Not Completely, But The Way It Ends Has Changed

Headwinds and Tailwinds in 2025