The Business News Week In Review

Economic milestones are being made all the time for a labor market where available labor is increasingly scarce. Whether the lack of hands and feet will begin to limit business expansion is one question to ask and another (actually the eternal question which we'll pursue in this report) is if this scarcity will trigger a rush higher in wages. We'll look at the strength of the latest employment indications and the absence of strength in the latest inflation data.

The economy

The blue line of the graph tracks job openings, starting at 4.7 million in December 2000 then falling to low of 2.2 million in mid-2009 and ending at 6.6 million in March this year. The green line is the number of unemployed actively looking for a job, starting at 5.6 million then peaking at 15.4 million in mid-2009 and ending at 6.6 million. It's the comparison of the March results -- 6.6 million openings against the 6.6 million unemployed -- that makes the history books: the first one-to-one correspondence on record. Usually there are many more people looking for work than jobs available, peaking at a 2.75 ratio in 2009. The ongoing shrinkage means employers are having fewer and fewer candidates to choose from, and this naturally raises the risk that employers, by necessity, will increasingly raid the staffs of their competitors using the lure of higher pay and better benefits also by necessity. Are we getting to the point that there are more openings than people available to fill them? We may in fact have already passed that point based on April's employment report where the number of unemployed fell to 6.4 million. Job openings are part of the JOLTS report which stands for job openings and labor turnover survey and where data lag by a month.

The most up-to-date indications on the labor market come from weekly unemployment claims and the data for May are very favorable. Initial claims held unchanged at 211,000 in the May 5 week to pull the 4-week average, tracked in the blue line, down 5,500 to 216,000, which is a 49-year low. Continuing claims, which is tracked in green and where data lag by a week, are likewise moving lower with this 4-week average at a 48-year low of 1.813 million. With labor scarce, employers simply can't afford to lay off their workers. All these signs of course should gracefully lead into the theme of inflation but, in what is the story of our 9-year expansion, inflation is hard to find.

The week's other big news is the year-on-year rate of the core consumer price index which, as tracked in the blue line, held at 2.1 percent and failed to advance. This reading is closely shadowed by the core PCE price index which is the Federal Reserve's policy measure and which back in late April spiked 3 tenths to 1.9 percent and was closely followed by an inflation upgrade at the May FOMC meeting. But the latest CPI results do not point to a repeat of another PCE spike, at least not for April which for the stock market is good news, at least good short-term news.

And the news may prove good for more than the short term. There are very few indications of pressure in consumer prices and the direction of two key components -- housing and medical costs -- are only marginally higher at most. Housing costs have been struggling at the 3 percent line for the past year with components for rent and owners' equivalent rent flat to only slightly higher, at respective rates of 3.7 and 3.4 percent. Medical care has been struggling at the 2 percent line with April's 2.2 percent rate not indicative of runaway costs. These two components by themselves make up just more than half of the CPI -- at 42 percent for housing and 9 percent for medical care -- and unless they begin to pick up speed, runaway inflation won't be much of a risk for the Federal Reserve or anybody else.

Producer prices were also released in the week and there's little indication here of much trouble down the inflation pipeline. The ex-food ex-energy core index, at a year-on-year 2.1 percent in April, has been unable to make much headway over the past year while the total index, at 2.7 percent, has been unable to move past the 3 percent line despite the recent rise underway in oil. Tariffs are another risk for producer prices and a real one as wholesale prices for steel products rose a steep 3.2 percent in April with aluminum up 1.8 percent. And year-on-year rates are very elevated: up 7.4 percent for steel and 11.9 percent for aluminum. Yet personal consumption measures in the report, which offer further hints on what to expect for PCE prices, are very subdued, down 0.1 percent in the month overall and up only 0.1 percent on the core.

Import prices were billed last year as a positive for the consumer price outlook but they never panned out much. The red line tracks year-on-year change in import prices which have leveled this year at just over 3 percent, at 3.3 percent in April's data. This is running ahead of the 2.4 percent rate for total consumer prices but there's no increasing lift underway. The steady rise for import prices in the prior couple of years reflected easing strength for the dollar which, so far this year at least, has stabilized.

Import prices never did match the promise from the decline in the dollar. The green line of the trade-weighted dollar has fallen very sharply, from a 15.7 percent year-on-year peak in mid-2015 to a decline of 4.9 percent in April. Import prices in contrast have failed to move to the same degree which suggests that foreign sellers are discounting prices to protect their U.S. market share. And it doesn't look like foreigners will have to increase their discounting since the dollar the past couple of months has been improving. The window for the import-price effect may be closing.

Even if imports don't give much of a boost, inflation does look like it's safely moving higher. The blue line is inflation expectations as measured by the consumer sentiment survey and at 2.8 percent they are up 1 tenth so far this month and follow April's jump in business inflation expectations which are at 2.3 percent. Behind all this is the pink line for total consumer prices which is at 2.5 percent and pointing up. It's notable that the 2.8 percent consumer rate, though matched recently in March, has not been surpassed since March 2015 while the 2.3 percent business rate is the highest in seven years of records.

Markets: Lifeless inflation, lively gains

The run of soft numbers in the week has lowered the risk that the Fed will need to beat back inflation with accelerated rate hikes and is inviting a run up for the stock market. The Dow moved from a year-to-date decline in the week to a year-to-date gain, rising a weekly 2.3 percent for a 0.5 percent rise for 2018. Soft inflation isn't raising demand for bonds as it often might but bonds did hold steady, at least the 10-year Treasury note whose yield, now testing 3.0 percent for the first time in five years, inched only 2 basis points higher to 2.97 percent. But there was a little more selling pressure on the 2-year whose yield rose 4 basis points to 2.55 percent consistent perhaps with a little bit of caution over Fed hikes. An increasing wildcard for everybody, however, is the price of oil which topped $70 for West Texas Intermediate and which may move yet higher should troubles in the Middle East escalate.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2017	4-May-18	11-May-18	Change	Change
DJIA	24,719.22	24,262.51	24,831.17	0.5%	2.3%
S&P 500	2,673.61	2,663.42	2,727.72	2.0%	2.4%
Nasdaq Composite	6,903.39	7,209.62	7,402.88	7.2%	2.7%
Crude Oil, WTI ($/barrel)	$60.15	$69.78	$70.56	17.3%	1.1%
Gold (COMEX) ($/ounce)	$1,305.50	$1,314.80	$1,319.40	1.1%	0.3%
Fed Funds Target	1.25 to 1.50%	1.50 to 1.75%	1.50 to 1.75%	25 bp	25 bp
2-Year Treasury Yield	1.89%	2.51%	2.55%	66 bp	4 bp
10-Year Treasury Yield	2.41%	2.95%	2.97%	56 bp	2 bp
Dollar Index	92.29	92.61	92.54	0.3%	-0.1%

The bottom line

There are hints here and there, whether tariff effects or inflation expectations, that price pressures may be building but the pressures don't appear very great. Subdued rates of inflation are in line with FOMC expectations and confirm the outlook, at least for now, for a gradual pace of incremental rate hikes. Yet if inflation does take off we can look back at mid-2018 as a time of stress in the labor market, specifically a time when rising demand for labor found a dwindling pool of supply.