Kritika Jain

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The latest raft of UK labor market data offered some welcome news for the Bank of England. Most gauges of activity, for example, suggested that a lot of heat is now coming out of the labor market. And the same can be said of most of the gauges for wage pressures as well. 

The key highlights from this month’s report included the following:

The unemployment rate rose to 3.9% in the three months to March from 3.8% in the previous three months. Unemployment has now risen steadily over the last few months from a low of 3.5% last August. 

The number of payroll employees fell by 136k between March and April – the first monthly decline since the start of 2021. The consensus had expected a rise of 25k.

Average total pay (including bonuses) increased by 5.8% in the three months to March while regular pay grew by 6.7%. Both estimates were also lower than economists’ expectations. They suggest a slower pace of wage growth compared to last year. In the meantime and when adjusted for headline inflation, real wage growth continued to remain in deep negative territory (see chart above). 

Inactivity – which had risen sharply over recent years – continues to show signs of
recovery. Over the past quarter, the number of people saying they were inactive fell by
156k or 1.8%, with almost two-thirds of that improvement coming from students.

In conclusion, this is an inflation-friendly report, and will buttress expectations that the Bank of England is close to completing its tightening cycle. 


United Kingdom

UK Labor Market Cooling Off 

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Tom Moeller

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Import prices for all goods rose 0.4% (NSA) in March after a 0.3% February gain and a 0.7% January increase, according to the Bureau of Labor Statistics. A 0.3% March gain had been expected in the Action Economics Forecast Survey. These gains followed three consecutive monthly declines. The year-on-year change turned to a positive 0.4% after having reached a 6.1% rate of decline in June of 2023.

Export prices increased an expected 0.3% in March after rising 0.7% in February (revised from 0.8%) and 0.8% in January. These gains also followed three straight monthly declines. The 1.4% y/y decline compared to a sizable 11.8% y/y drop in June of last year.

The monthly rise in March import prices was led by a 6.0% increase (7.5% y/y) in imported petroleum prices after a 1.9% rise in February. The March increase was the third consecutive monthly gain following three straight m/m declines. The increase in imported petroleum costs occurred as natural gas prices declined sharply, bringing them down by one-half y/y. Nonfuel import prices rose 0.1% and were unchanged y/y. The reading followed four straight monthly increases. Import prices for foods, feeds & beverages surged 1.6% (4.5% y/y), up for the third consecutive month. Motor vehicle & parts costs increased 0.2% (2.4% y/y) after a 0.1% rise. Working lower, capital goods prices fell 0.3% both m/m and y/y after a 0.2% rise while nonauto consumer goods prices weakened 0.3% (+0.5% y/y) after two straight monthly increases.

The smaller gain in March export prices included a 0.7% decline (-8.1% y/y) in agricultural export prices, which reversed February’s increase, and a 0.4% gain (-0.6% y/y) in nonagricultural export prices, the third straight monthly gain. Export prices for industrial supplies & materials rose 0.7% (-3.2% y/y), the third straight month of firm gain. A 0.5% rise (-0.8% y/y) in nonauto consumer goods prices came after an unchanged reading in February. Foods, feeds & beverage prices weakened 1.2% (-8.9% y/y) after rising 0.5% in February, but capital goods prices rose 0.2% (1.9% y/y) after a 0.3% rise. Meanwhile, export prices for consumer goods excluding autos rose 0.5% (-0.8% y/y) after holding steady in February. Automotive vehicles & parts export prices were unchanged (+2.9% y/y) for the second straight month.
		
The import and export price series can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Import prices rise for third consecutive month.
- Excluding fuels, import prices edge up for fifth straight month.
- Export price gain moderates m/m, and y/y decline shrinks.

U.S. Import & Export Prices Continue to Increase in March

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The National Association of Realtors’ Fixed Rate Mortgage Housing Affordability Index fell 2.6% in February (-5.8% y/y) to 103.0, reversing a 3.4% January increase. The index remained down 42.5% from its recent peak of 179.0 in April 2020. Its all-time high of 213.3 occurred in January 2013. The Housing Affordability Index (HAI) equals 100 when borrowers’ median income qualifies for an 80% mortgage on a median-priced existing single-family home.

The average mortgage payment of principal & interest in February rose 3.0% (11.5% y/y) to $2,040 from $1,981 in January. The monthly payment represented an increased 24.3% of median family income, down from a high of 27.4% in October. The monthly mortgage rate rose to 6.86% from 6.72% in January. It remained below a high of 7.70% in October. The median price of an existing single-family home increased 1.5% (5.6% y/y) to $388,700 in February.

The Housing Affordability Index fell throughout most the country in February. In the Midwest, affordability declined 3.5% (-6.7% y/y) to an index level of 139.5. In the South, the February index fell 3.8% (-4.1% y/y) to 102.5. In the West, the affordability index was off 3.8% (-8.6% y/y) to 72.6. Moving the other way, the Home Affordability Index in the Northeast improved 2.4% (-11.4% y/y) to 104.5.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY** and **DAILY**.

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- Principal & interest payments increase.
- Mortgage rates edge higher.
- Median sales price of single-family home increases.

U.S. Housing Affordability Declines in February

Robert Brusca

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Japanese economic data have been soft. However, industrial production has been weaker than many of the other reports, and weaker than the softness indicated by the manufacturing PMI. This month the preliminary report on Japanese industrial production has been revised to show even more weakness. Japan's industrial sector shows an extremely weak progression looking at its pattern of growth over 12 months to six-months to three-months. The downturn in manufacturing is intensifying.

The weakness in manufacturing is generally weaker than what we see in other reports as well. While there's been softness in surveys like the economy watchers report, and in Japanese retail sales, the industrial sector is showing sharply weaker conditions, and this is occurring even at a time when the yen exchange rate is weakening and improving Japan's competitiveness.

The weakness in industrial production does track the weakness in Japan’s core orders that have been showing contraction for all of 2023 and into 2024. Japan’s production was down by 1.6% over the previous 12 months; now it is falling by 6.7% over the most recent 12 months. Sequential growth rates tell us that the drop in production is accelerating across major manufacturing categories. This weakness is not an isolated result.

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This is a bad development for an economy whose industrial sector is generally considered a bellwether for the entire economy. Real GDP has been weakening, led lower by weakness in final demand. Net exports have provided some counterpoint to soften the blow. Quarterly GDP has been erratic (as always), but year-on-year GDP growth has not been negative since Q1 2021. Domestic demand continues to run weak with vehicle registrations having plunged in the most recent release. PMI readings show an ongoing below-50 reading for manufacturing and an accelerating service sector. But the strength in services has not been able to countermand the weakness in manufacturing.

Japan’s core inflation has risen then flattened out at growth rates below those for core inflation in the U.S. and in Europe. But in Japan, inflation expectations are firming. This is likely to provide support for an upcoming BOJ rate hike as Japan prepares to get its policy metrics back to the normal zone.

Still, for now, the economy is weak with weak demand, and a housing sector that is under downward pressure. The weak yen may have helped net exports to better performance blunting the impact of demand weakness on GDP. But the industrial sector, viewed in isolation, remains extremely weak with all industries under stress and little sign that a weak yen is providing support. Japan’s composite leading indicator from the OECD is pointing higher. But, for now, there is little in the way of strength or rebound in sight.

Japan

Japan's IP Weakens Further 

Andrew Cates

**The Blue Chip Growth Consensus**
The latest Blue Chip survey of economic forecasters revealed heightened optimism about the US economy in the year ahead but lingering pessimism about the outlook for several other major economies. The consensus forecast for US GDP growth in 2024 now stands at 2.4%, up from 2.3% in the March survey, and up more sharply from a low of 0.7% in the July survey from last year. GDP growth forecasts for Japan, the euro area and the UK, however, now respectively stand at 0.6%, 0.5% and 0.3%, little-changed from March, and much lower than where they stood last July (see chart 1).

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**The Blue Chip Inflation Consensus**
The evolution of US and European inflation forecasts for 2024 have equally now started to decouple from one another (chart 2). The consensus forecast for CPI inflation in the US, for example, now stands at 2.9%, up from 2.8% in March and compares with a low point of 2.3% in January 2023. Inflation forecasts for 2024 for the euro area and the UK, in contrast, now stand at respectively 2.3% and 2.4% and have, on the whole, drifted down from their highs reached in October last year.

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**Oil prices and inflation surprises**
With oil prices climbing in recent weeks there are arguably some upside risks to the global inflation outlook in the period ahead. The positive surprises in this week’s US CPI data for March, for example, can partly be traced to a bigger contribution from energy prices. But, as chart 3 below equally suggests, inflation surprises more generally are typically accompanied by large energy price swings. That’s partly because energy prices are a critical element of most companies’ costs.

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**Oil prices and global growth**
Another reason, however, why energy price swings often generate inflation surprises is because they can be symptomatic of broader demand shifts in the world economy. To be sure, oil prices have been climbing in recent week for a number of reasons, including escalating tensions in the Middle East, and particularly due to the Israel-Hamas war. But it is arguably no surprise either that prices have been rising at the same time as incoming global growth data have surprised on the upside (chart 4). A positive demand shock, in other words, is another reason why oil prices have spiked higher.

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**The global business cycle**
This week’s sentix surveys of investor sentiment certainly chime with the idea that global growth is perking up. All of the forward-looking expectations components in the April surveys for Asia, the euro area and the US were in positive territory, and for the first time since February 2022 (chart 5). Synchronized shifts of this nature would ordinarily coincide with an upswing in the global business cycle.

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**Euro area bank lending conditions**
Finally, this week’s latest ECB bank lending survey arguably suggests that monetary policy in the euro area remains quite restrictive. Banks reported a further substantial decrease in demand for corporate lending and a small decline in demand for housing loans (chart 6). As has been the case in recent quarters, higher interest rates coupled with lower fixed investment plans and weak consumer confidence are exerting downward pressure on the demand for lending.

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This week’s stronger-than-expected US inflation data have further dampened hopes that the Fed would swiftly lower interest rates in coming months. And this has led to increased anxiety in financial markets about the outlook for the US and broader world economy. In our charts this week we explore recent shifts in the consensus view toward global growth and inflation as revealed by the latest Blue Chip survey of Economic Forecasters (charts 1 and 2). Then, staying with inflation, we assess the big role that higher oil prices may have played in igniting interest rate concerns over the past few weeks (charts 3 and 4). One of the possible reasons for the recent run-up in oil prices is an improving global economy, some survey evidence for which we examine next (chart 5). Finally, and ahead of this week’s ECB meeting, we delve into some of the key messages from the latest bank lending survey from the euro area (chart 6).

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UK Labor Market Cooling Off

Kritika Jain

More Economy in Brief

U.S. Import & Export Prices Continue to Increase in March

U.S. Housing Affordability Declines in February

Japan's IP Weakens Further

Charts of the Week: Oil in the Price