Monday Economic Report: The PCE Deflator Rose 6.4% Year-Over-Year, Most Since January 1982

AICC, through its membership in the Council of Manufacturing Associations, is pleased to present the "Monday Economic Report" from the NATIONAL ASSOCIATION OF MANUFACTURERS (NAM).

By Chad Moutray, Ph.D., CBE – April 1, 2022

NAM Economic Weekly Toplines:

The personal consumption expenditures deflator rose 0.6% in February, with food and energy prices increasing 1.4% and 3.7%, respectively. Overall, the PCE deflator has risen 6.4% year-over-year, the greatest increase since January 1982. Core inflation has increased 5.4% since February 2021, the fastest pace of inflation since April 1983.  Core inflation is likely to remain elevated due to the events in Ukraine and with ongoing supply chain and labor market pressures, although it is still likely to stabilize somewhat over the remainder of the year. The current forecast is for the core PCE deflator to be roughly 3.5% to 4.0% year-over-year by December. The Federal Reserve increased the federal funds rate by 25 basis points at its March 15–16 meeting, and it will likely hike rates by another 50 basis points at its May 3–4 meeting. Last week, the spread between 10-year and 2-year Treasury bond yields inverted for the first time since 2019. This spread can be an important barometer, because it has historically signaled that a recession could begin in 12 to 18 months. The inversion of the yield curve does not necessarily mean that a recession is imminent. The U.S. economy continues to show signs of strength, and other yield curves have not inverted. The current inversion has more to do with worry about whether the Federal Reserve can engineer a soft landing than anything else, and its importance is being openly debated. Indeed, the labor market remains very tight. Manufacturing employment rose by 38,000 in March, adding 102,000 employees in the first quarter of 2022. The manufacturing sector is on-track to return to pre-pandemic levels by the second half of this year, down just 128,000 from February 2020 levels. The average hourly earnings of production and nonsupervisory workers in manufacturing rose 0.6% from $24.56 in February to $24.71 in March, up from $23.40 one year ago. That 5.6% year-over-year increase over the past 12 months marked the fastest wage growth since August 1982.  Nonfarm payroll employment increased by 431,000 in March. The unemployment rate dropped to 3.6%, a post-pandemic low, with the labor force participation rate inching up to 62.4%, the best rate since March 2020. The February survey reported 808,000 job openings in manufacturing. Over the past 11 months, job openings in the sector have averaged 867,000. In the larger economy, nonfarm business job openings edged down from 11,283,000 in January to 11,266,000 in February. There were 6,270,000 unemployed Americans in February, which translated into 55.7 unemployed workers for every 100 job openings in the U.S. economy. In addition, total quits in the manufacturing sector rose to 337,000 in February, a new record. At the same time, the February survey reported 4,352,000 quits in the nonfarm business economy, up from 4,258,000 in January and not far from the record 4,510,000 seen in November. Private manufacturing construction spending rose 0.6% to a record $96.12 billion at the annual rate in February, speaking to the strength of the manufacturing sector and the need to increase capacity to meet demand.   The ISM® Manufacturing Purchasing Managers’ Index® declined to 57.1 in March, the lowest reading since September 2020. Manufacturing activity slowed in March—while continuing to expand modestly—as the sector grappled with challenges related to supply chains, workforce shortages and soaring costs and with uncertainties related to the Russian invasion of Ukraine. Cost pressures continued to be highly elevated, and delivery times remained too long. Likewise, the composite index of general business conditions in the Dallas Federal Reserve Bank’s district declined to 8.7 in March. New orders and shipments expanded at the slowest paces since January 2021 and June 2020, respectively. Cautious optimism remained for the outlook, however, with solid readings for expected wages and capital spending. Personal income rose 0.5% in February, with total manufacturing wages and salaries up 0.8% for the month and 6.6% year-over-year. Meanwhile, personal spending increased 0.2% in February, slowing after jumping 2.7% in January, with reduced durable and nondurable goods spending. The savings rate ticked up to 6.3%. Yet, spending over the past year has soared 13.7%. The U.S. economy jumped 6.9% at the annual rate in the fourth quarter, with 5.7% growth in 2021. The current forecast for 2022 is for 3.5% growth. Over the past two years, real GDP has risen 3.1%, reflecting the rebound in activity seen following the sharp declines resulting from COVID-19 in the first half of 2020.  However, in the first (or current) quarter, growth will be just 1.0%, largely on omicron, supply chain and pricing pressure challenges. The events in Russia and Ukraine pose a notable downside risk to global growth, already subtracting 0.5% in forecasted growth this year in the U.S. The full extent of the threat will hinge on what happens moving forward.

READ FULL REPORT