US Recession Monitor – Seasonal noise masks positive trend

Our business cycle indicator implies that the economy is losing momentum, but there are some caveats. Some of the data has been negatively affected by weather and aggressive seasonal adjustment factors, so could reflect noise rather than signal.

What you will learn:

• Seasonal adjustment (SA) is a difficult task, so we pay attention to the non-seasonally adjusted (NSA) data as well. The difference between y/y growth rates in the SA and NSA control retail sales are the widest in 15 years. The y/y NSA and SA data should be close, but the former is far stronger than the latter. We still think the outlook for consumer spending is solid this year because of the strength of the labor market and household balance sheets.
• Consumer prices aren’t immune to seasonality issues. Our previous work has shown the annual rate of core cpi inflation in January is meaningfully higher than in all other months. While the February rate remained elevated, we believe Fed officials will look past seasonal issues and conclude that enough disinflation is in the pipeline to begin rate cuts soon. Risks are more weighted to the Fed erring on the side of waiting too long, however.
• Key to our outlook for inflation is further deceleration in nominal wage growth. Recent research has shown that if net migration levels are higher than projected by the Census Bureau, labor force growth could be higher than currently shown. A larger labor force would help rebalance the market, keeping a soft landing alive. Also, stronger labor force growth would suggest that the breakeven level of job growth – or that consistent with a stable unemployment rate – is higher than we previously estimated.