Tom Moeller

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The U.S. Treasury Department reported a federal budget deficit of $38.8 billion during January following a surplus of $118.7 during January FY’22. The Action Economics Forecast Survey expected a $110.0 billion surplus for January. For the first four months of the current fiscal year, the federal government ran a budget deficit of $460.2 billion versus a deficit of $259.0 billion over the same period last year.

Overall revenues declined 2.9% so far during FY’23 versus FY’22. Individual income tax receipts fell 7.0% y/y. Corporate tax payments increased 12.4% y/y this fiscal year. Social insurance revenues rose 7.4% y/y and excise taxes grew 1.2% y/y so far in FY’23.

Federal government outlays increased 8.8% y/y so far in FY’23. Social Security outlays increased 9.4% y/y so far in FY’23. National defense outlays grew 4.1% y/y. Interest payments surged 42.6% y/y so far in FY’23. To the downside, income security payments fell 6.8% y/y. Outlays on health programs declined 3.4% y/y while Medicare outlays fell 5.0% y/y so far in FY’23.

Haver's data on Federal Government receipts & outlays are contained in **USECON**. The expectations figure is in the **AS1REPNA** database.

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- Revenues decline with lower personal tax receipts.
- Spending surges as Social Security & interest outlays jump.

U.S. Government Budget Deficit Surprises in January

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**The PCE chain price index** rose 0.3% during December after edging 0.1% higher in November and rising 0.2% in both of the prior two months. These gains were unrevised. The y/y rise increased to 2.6%, its strongest gain since May. The price index excluding food & energy rose 0.2% last month after a 0.1% rise and two months of 0.3% gain. The y/y rise held at 2.8% last month.

**Durable goods prices** weakened 0.4% (-1.1% y/y) in December after holding steady in November. Motor vehicle & prices rose 0.6% (-0.9% y/y) following a 0.7% rise. Recreational product prices declined 1.2% (-0.9% y/y) last month, after falling in each of the prior four months, while home furnishings & appliance costs weakened 1.1% (-2.3% y/y) after holding steady for two straight months.

**Prices of nondurable goods** rose 0.5% (0.6% y/y) last month after holding steady in November. Clothing prices rose 0.2% (1.1% y/y) after a 0.1% gain. The cost of food rose 0.2% (1.6% y/y) for a second straight month and gasoline & oil prices jumped 4.2% (-4.1% y/y) after a 0.5% rise.

**Services prices** increased 0.3% (3.8% y/y) in December, after rising 0.2% in the prior month. Housing & utility prices rose 0.3% (4.6% y/y) after a 0.2% rise, and services prices excluding energy & healthcare increased 0.3% (4.2% y/y) in December after rising a 0.2%. Healthcare prices rose 0.2% (2.5% y/y) after a 0.1% uptick and housing & utilities costs rose 0.3% (4.6% y/y). Transportation prices strengthened 1.7% (4.2% y/y) while hotel & restaurant prices held steady (+3.3% y/y). Recreation services costs rose 0.4% (2.8% y/y) for a second straight month.

**Personal consumption expenditures** (PCE) increased 0.7% (5.7% y/y) in December, after a 0.6% November rise, revised from 0.4%. A 0.5% increase had been expected in the Action Economics Forecast Survey. When adjusted for price changes, PCE increased 0.4% (3.1% y/y) last month, after moving 0.5% higher in November.

**Real spending on durable goods** strengthened 1.1% (6.1% y/y) in December, after a 2.6% November increase. Real spending on motor vehicles increased 0.3% (6.6% y/y), after surging 5.6% in November. Real outlays on furnishings & appliances jumped 1.4% (6.4% y/y) in last month, following a 0.9% November rise, while real spending on recreational goods & vehicles also surged by 1.6% (5.9% y/y) last month, after a 2.2% November increase. Spending on “other” durable goods jumped 1.3% (4.5% y/y) after falling 0.7% in November.

**Nondurable goods** spending in real terms improved 0.5% (2.2% y/y) in December following a 0.2% gain. Real clothing and footwear purchases improved 0.4% (1.5% y/y) last month, following a 0.8% gain in November. Real food & beverage purchases increased 0.5% (1.9% y/y), after easing 0.2%. Real outlays on gasoline & other energy products improved 1.0% (-0.3% y/y), after falling 1.0%. Real spending on “other” nondurable goods rose 0.4% (3.3% y/y) last month, following a 0.7% rise.

**Real spending on services** moved 0.3% higher (2.9% y/y) in December, following a 0.2% increase. Real spending on housing & utilities rose 0.5% (1.6% y/y) last month, after holding steady in November, while real healthcare spending rose 0.2% (5.0% y/y) for the second straight month. Real spending on food services & accommodations weakened 0.2% (unchanged y/y) after falling 0.3% during November. Real spending on financial services & insurance gained 0.1% (2.1% y/y) after a 0.5% improvement. Real spending on transportation services jumped 2.2% (4.5% y/y) in December, after a rise of 0.9% in November. Recreation spending improved 0.1% (1.4% y/y) after rising 1.0% in November. A 0.8% rise (2.8% y/y) in spending on “other” services came after 	0.2% improvement in the prior month.

**Personal income** rose 0.4% (5.3% y/y) in December, after an unrevised rise of 0.3% in November. A 0.4% gain was expected. Wages & salaries rose 0.4% (5.7% y/y) last month, following two straight 0.5% increases. Rental income improved 0.6% (5.9% y/y), after rising 0.2% in November. Proprietors’ income moved 0.5% higher (3.5% y/y), following a 0.2% gain in November. Income from assets rose 0.2% (0.7% y/y), after declining 0.2%, and current transfer receipts rose 0.2% (8.3% y/y) in December, after rising 0.1% in November. Government social benefits rose 0.2% (8.1% y/y) in December, after a 0.1% improvement in the prior month.

**Disposable personal income** increased 0.4% (5.0% y/y) in December, following a rise of 0.3% in November. After adjusting for price changes, disposable income improved 0.1% (2.4% y/y) in December for the second straight month. The y/y increase slowed to 2.4% from 4.7% at the end of 2023.

**The personal saving rate** fell to 3.8% in December, after declining to 4.1% in November. It began the year at 5.5%. Personal saving fell 5.6% (-8.3% y/y) in December, after falling 6.3% in November.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Price index held in check by modest goods & services price gains.
- Real spending growth remains firm.
- Disposable income growth after inflation decelerates.

U.S. Core PCE Price Inflation Stays Low in December; Real Spending Gain Remains Firm

Michael J. Moran

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The employment cost index, arguably the most accurate measure of labor compensation in the United States, rose 0.9 percent in the fourth quarter of 2024. The latest observation was one tick more than the reading in Q3 but in line with other recent results. The year-over-year change totaled 3.8 percent, continuing the downward trend from the peak of 5.1 percent in 2022, when a robust labor market led to brisk advances in labor compensation.

The employment cost index includes the effects of both wages and benefits. In most recent quarters wages have increased at a slightly faster pace than benefits, and that was the case in Q4, as wages rose 0.9 percent versus 0.8 percent for benefits.

A breakdown by sector showed that service-producing industries registered larger gains than goods-producing industries (0.89 percent versus 0.75 percent), a common pattern seen in recent years. Workers in state and local governments outpaced those the private sector for the fifth time in the past six quarters (0.95 percent versus 0.84 percent).

Readings on employment costs could be assessed relative to the Federal Reserve’s inflation target of 2.0 percent. Allowing for an average productivity gain of 1.5 percent, annual labor compensation growth of 3.8 percent would point to an inflation rate of 2.3 percent, only marginally above the Fed’s target. Some observers might argue that advances in artificial intelligence will lead to a jump in productivity, which would dampen the influence of labor compensation on inflation.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.


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- Growth in Q4 was in line with other recent readings.
- Results bode well for the Fed's inflation fight, but perhaps too soon to declare mission accomplished.

Employment Costs: Continued Downward Trend, but Deceleration Beginning to Slow

Robert Brusca

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In the wake of a meeting by the European Central Bank and release preliminary GDP results for the Monetary Union in 2024-Q4 as well as for key countries, we're now getting some early inflation data that puts policy in conflict with economic data. At the meeting, ECB president Christine Lagarde made it clear that the central bank had cut rates and that it sees inflation on a path to come down to target. In the wake of that meeting, an announcement of GDP data for the Monetary Union showed extreme weakness for the union in the fourth quarter with GDP growth essentially at a standstill and with growth slowing quarter-to-quarter in nearly all of the countries that reported GDP on an early basis. However, the economic data for inflation don't seem to be cooperating.

**Is a bird in the hand really worth two in the bush? Economists say No…**
There is an old expression that economists seem to turn on its head that expression is this: “a bird in the hand is worth two in the bush.” Translating this into economic data, we have actual economic data, and we also have forecasts for the future. Economists always want to make policy not based on the data in hand but on the forecast for the future (those ‘in the bush’). However, like the hunter who thinks that there are still two in the bush, the ECB, thinking it they can rely on forecasts of inflation may cause it to come home with nothing to eat. However, economic theory is pretty clear that monetary policy works with a lag and therefore it is beneficial to look at forecasts for inflation to make policy today. But that only works if the economist can forecast well, and we know that we can't forecast GDP well or inflation that well and that poses a dilemma for policy.

Despite the ECB forecast that inflation is coming to path, this is an uncomfortable PPI report released in December. It has the core PPI up by only 0.3% compared to a 0.1% rise in November. The inflation progression moves from 2.8% year-over-year to 2.4% at an annual rate over six months, to 2.7% at an annual rate over three months. That's a relatively mild and not entirely clear pattern toward acceleration. On the month, inflation has broken lower with 10 early reporting European countries all showing an inflation in December with a smaller gain month-to-month than what it showed in November. However, encouraging that might be, November brought sizable gains for a number of these countries where 79% of them saw inflation accelerating in November; a deceleration in December isn't quite as impressive, accounting for that. Moreover, if we look at countries reporting data over 12 months, six months and three months, we see that over 12 months compared to a year-ago inflation is accelerating in all of these countries. For six months compared to 12-months, inflation is accelerating in about 56% of them. For 3-months compared to 6-months, it's accelerating in all of them. Over three months, six of these ten reporting countries are showing annualized PPI inflation in double digits! This does not seem to be something we should take lightly even though the headline increase for the period for the euro area is only 2.7% annualized.

**HICP inflation for January is mixed**
In addition, HICP data for January has been released on a preliminary basis for three of the larger the monetary union economies: Germany, France, and Spain. In each case, inflation is accelerating over three months to a higher pace than over six months. For Germany, the 3-month pace is 4.4%, for France it's 2.4%, and for Spain it's 7.1%. These accelerations have brought the year-over-year pace for Germany to 2.8%, for France to a still moderate 1.8%, and for Spain to 2.9%. Germany’s ex-energy inflation is still relatively flat at 2.4%, over three months lower than its 2.8% 12-month pace. For Spain corn inflation at 2.1% over 3-months is moderate and lower than its 12-month pace of 2.4%.

**Core inflation is solid, as far as it goes**
The inflation picture in the core available for two countries is relatively benign, although the inflation rate for the headline for the three early reporting countries is not reassuring. In addition to that, we have PPI data that are showing some very intense pressure on a more widespread basis than we should be comfortable with.

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**ECB sees the right path ahead...is it right?**
So, the ECB has recently met and reaffirmed that it thinks inflation is on the right path and so this is going to be something to watch. There's still a great deal of weakness in the euro area; if the weakness is going to remain that severe, it's highly likely that inflation will find it hard to get a toehold. However, at the same time, the recently reported unemployment statistics revealed only the smallest bump up of unemployment at the end of the fourth quarter. Unemployment in the EMU is only one-tenth of one percent above its all-time low. Across the various members of the Monetary Union, unemployment remains at extremely low levels. That raises the question of whether inflation pressures are building or not since the tight labor market can be a problem for inflation even if growth is weak.

**Summing up**
We are clearly looking at atypical macroeconomic developments in the wake of COVID and the presence of a hot shooting war on Europe's doorstep. All this comes after a period in which inflation has flared sharply, after a long period of inflation being tepid. Because there has been a recent flare up in inflation, central banks should be wary that transactors could again become quickly sensitized to the presence of inflation and regain expectations for rising prices more easily than they did in the pre-COVID period. It seems to be a time that central bankers should be vigilant about inflation and less confident that they know what the future will bring and making policy based upon forecasts that we know to be tenuous.

Europe

EMU PPI Shows Flashes of Heat in December

Andrew Cates

**Fed funds futures**
With the Fed now adopting a more cautious approach the Fed Funds futures market has scaled back its expectations of rate cuts during 2025 over the past several weeks. The market specifically looks for only 19 bps of rate cuts during the first quarter of this year; 17 bps of cuts in the second quarter; and 28 bps of cuts in the second half of this year for a total of 63 bps in 2025. The futures market is additionally pricing in a 82% chance of no change at the March FOMC meeting and 57% of no change in May.

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**Now-Casting estimates of US growth and inflation**
The trajectory of incoming growth and inflation data will be critical in shaping the Fed’s approach to monetary policy going forward. Chart 2 below highlights the strong relationship between Now-Casting Economics' real-time estimates for US GDP growth and CPI inflation and movements in the US 10-Year Treasury yield. Notably, while many analysts have attributed recent fluctuations in the Treasury market to uncertainty surrounding the policy direction of the new US administration, it has been the ebb and flow of economic data—particularly growth and inflation indicators—that have arguably played a more decisive role in driving market dynamics.

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**Global growth**
The latest composite flash PMIs for January 2025 suggest that global growth remains uneven across major developed and developing economies. India leads the pack with a robust PMI reading close to 57.9, indicating strong expansion in business activity. But among the advanced economies, the US continued to outperform, albeit with the divergence lately narrowing. Elsewhere, Japan, the UK, Australia, and the euro area exhibited signs of modest expansion although within the latter, France, and to a lesser extent Germany, underperformed.

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**China’s inflation** 
As for China, the economy continues to struggle with weak domestic demand, excess industrial capacity, and a property sector downturn, all of which have contributed to deflationary pressure. The evidence for this is shown in the chart below which illustrates the year-on-year change in the Nowcast for China's consumer price index from Now-casting Economics. Although there have been brief rebounds, the data signal that inflation has remained extremely subdued over the past 18 months.

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**Conditions in the euro area banking sector**
Notwithstanding the signals from the latest flash PMI surveys, other data from the euro area this week have been signalling that growth momentum is weak. The flash estimates for GDP in both France and Germany, for example, contracted in Q4 2024 while the broader euro area stagnated. That chimes too with the latest signals from this week’s Q1 Bank Lending survey from the ECB. This revealed that lending standards tightened for the corporate sector and remained restrictive for the household sector (chart 5). Against a backdrop where private sector financial balances have remained elevated compared to pre-pandemic norms, indicating continued risk aversion and subdued credit demand, these tightening signals could place further downward pressure on economic growth in the period ahead.

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**India’s aircraft movements**
Finally, high frequency indicators for India continue to suggest the economy is performing well. That’s more specifically the suggestion from latest data for aircraft movements (the total number of take-offs and landings) from a selection of its major airports (chart 6 below). Many of these airports faced some of the steepest declines in absolute numbers during the pandemic but have revealed a much stronger post-pandemic recovery compared to other regions. Both Bengaluru and Hyderabad, for example, are now surpassing pre-pandemic highs.

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Several key themes have been driving financial market fluctuations in recent weeks, including the resilience of the US economy, the policy direction of the new US administration, geopolitical instability, and the productivity potential of AI. The trajectory of central bank policy has also taken centre stage, particularly following this week’s widely expected decisions by the ECB and the BoC to cut their respective policy rates by 25bps, while the Fed opted to leave its policy rate on hold (see chart 1 and 2). Despite the recent wave of optimism pervading financial markets, several factors continue to warrant caution. Chief among them is the uncertainty surrounding the policy direction of the new US administration, which could have far-reaching implications for global growth (chart 3). China's outlook more specifically remains fragile—not only due to potential shifts in US policy but also because of persistent stress in its property sector (chart 4). Additionally, weaker-than-expected economic data from the euro area this week, particularly the flat reading for Q4 GDP, further underscores concerns about the region’s sluggish growth momentum (chart 5).  Meanwhile, central banks continue to face a delicate balancing act, as the resilience of the US labour market risks reigniting inflationary pressures, complicating the calibration of monetary policy. Lastly, while artificial intelligence is widely seen as a long-term driver of growth and productivity, growing competitive pressures within the tech sector have recently sparked concerns about the profitability of firms supplying AI infrastructure, highlighting the risks to one of the market’s most celebrated growth narratives. Still, there are bright spots that help offset some of these downside risks. One such example is India’s economy, which continues to show resilience amid incoming data that point to strong domestic demand, sustained investment flows, and policy measures aimed at bolstering growth (chart 3 and 6).

Charts of the Week: Looking at the Here and Now