Good Friday employment data could resurrect inflation concerns

Last week, the data on the United States economy culminating in the good Friday employment report show that the economy remains alive and well. The same, though, could be said of inflation.

The US housing sector has been among the hardest hit in the economy thus far but last week saw some better news for it. The National Association of Realtors' index of pending sales of existing homes rose 0.7 percent. It was still down 8.5 percent from the previous year, though, and with the fallout from the subprime mortgage market still spreading, it still looks like the housing sector will take a while more to stabilise, much less recover.

Last week's reports from the Institute for Supply Management confirm that the economy is still slowing but not near recession levels. The PMI, the ISM's composite manufacturing index, fell to 50.9 in March from 52.3 in February while the ISM's non-manufacturing index fell to 52.4 in March from 54.3 in February.

Meanwhile, the ISM reports show that inflation remains a concern. For manufacturing, the sub-index of prices rose to 65.5 from 59.0 in March while for non-manufacturing, the prices sub-index jumped to 63.3 in March from 53.8 in February.

Friday's employment report showed that the US economy added 180,000 jobs in March. This leaves the average monthly job gain for the first quarter at 152,912, a respectable figure for this stage of the economic cycle.

Indices of leading indicators have been weakening recently but are not pointing to a recession yet. The Organisation for Economic Co-operation and Development last week reported that its composite leading indicator for the US economy decreased by 0.3 point in February. The Economic Cycle Research Institute reported that its weekly leading index inched down to 140.3 in the week to March 30 from 140.5 in the prior week but still showed an annualised growth rate of 3.9 percent.

Indeed, in an interview with Bloomberg Television, Lakshman Achuthan, managing director of the ECRI, said that the latest employment data could be confirming that "the economy is turning".

That would be good news for growth but bad news for inflation. As it is, the major indicators of inflationary pressures in the US economy monitored by the Federal Reserve are still not moving in the right direction. Core inflation in February as measured by the year-on-year change in the personal consumption expenditure price index excluding food and energy was 2.4 percent, practically back at its recent high. The employment report showed that average hourly earnings in March were up 4.0 percent, near its cycle high, while the unemployment rate was at 4.4 percent, revisiting its cycle low.


As I said last week, inflation remains elevated and could take a while to abate. The fixed income market must be thinking the same; the yield on the 10-year Treasury note, which had fallen to around 4.5 percent in early March, is now back up to 4.75 percent.

Nevertheless, this still leaves the real yield at just over 2 percent, not high by historical standards. In fact, it is barely at the recent, below-trend real GDP growth rate.

That should help keep the economy afloat, but at the cost of sustained inflation pressures.