Charles Steindel

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The Philadelphia Federal Reserve Bank’s estimates of state coincident activity for June continue to show that most states are experiencing reasonably healthy growth. As was the case for May’s first set of numbers, the June results show that over the prior 12 months, 32 states had increases in their indexes in the 2 to 4 percent range. The outliers were also very similar to May’s, with Massachusetts the only big state on the high side, and Illinois and Michigan being the two big states on the low side. As has consistently been the case recently, Nevada was the h leader, with an increase a bit north of 5 percent. No states reported a 12-month decline (Michigan’s increase was the lowest—a meager .1%). In general, Western states appeared stronger than the East.

Over the three months ending in June West Virginia was again the leader, with a big 2.4% rise. Rugged terrain was clearly in favor, since Montana was second, Colorado third, and Vermont fourth! (Rhode Island, which if states were ironed flat would be even smaller compared to the other three just noted, was third). Of the 15 states with 3-month growth higher than 1 percent, 11 were in the west (New Jersey and Maine joined West Virginia and Maine as the fastest-growing Eastern states over this period). This western set included Texas and California. 13 states—mostly east of the Mississippi—had growth under .5% over the last three months, with Michigan’s index falling in that period. New York was in that low-growth group.

As was in the case in May’s initial round, Montana had the largest one-month increase in the initial results for June, well above second-place New Jersey (players of the original Atlantic City version of Monopoly should make note of how appropriate is for New Jersey to win second prize in this beauty contest). Only two states, Wisconsin and Kentucky, registered declines in the fairly erratic monthly results.

The June results continue to show growth appears stronger in the West than in the East. There had been some earlier indications that growth was becoming more uniform across the nation, but the West has apparently regained momentum relative to the East. Parts of the industrial Midwest look soft, most notably Michigan. However, we have reached the time of year that the comparison of this report with other data has become problematic. Data from the payroll employment report are the most important inputs to the coincident indexes. But while we will be getting word of the benchmark revisions in a few weeks, these will not be reflected in the state numbers until next March. Also, the indexes are calibrated to match trends in a state’s real GDP. From now until November, the state real GDP series will not themselves be consistent with the recently revised national GDP series. So the coincident indexes will be built from data whose revisions we have some reasonable expectations, and set to match data that is formally inconsistent with national trends.
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The Philadelphia Federal Reserve Bank’s estimates of state coincident activity for June continue to show that most states are experiencing reasonably healthy growth. As was the case for May’s first set of numbers, the June results [...]

State Coincident Indexes

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Joseph G. Carson

The widely followed employment cost index (ECI) jumped 1.2% in Q1 2024, faster than the 0.9% increase in Q4 2023, raising fears that labor costs are re-accelerating. As big as the jump in the ECI was in Q1, another labor cost measure (ECEC) shows employee costs are rising even faster.

The Bureau of Labor Statistics, the government agency in charge of reporting labor market data, provides two crucial measures of employee costs: the employment cost index (ECI) and employer costs for employee compensation (ECEC). Both measures, with a similar scope covering 5500 to 5600 private industry establishments and 23000 occupational observations, play a pivotal role in labor cost analysis. However, it's important to note that the ECI excludes employment shifts among occupations and industries, while the ECEC does not, making the ECEC an equally important comprehensive measure of total current employment costs.

The two measures are simple to understand: the starting point for both measures is the change in wages, but if people move to higher-paying jobs or shift occupations because of the promise of higher pay, the ECEC measures will grow faster than the ECI. In contrast, if the opposite is true, when the jobless rate is high, job openings are low, and people have to accept lower-paying jobs, the ECI would increase faster than the ECEC.

In the last several years, the labor market has been characterized by a record number of job openings, which have encouraged people to shift industries and occupations in search of higher pay. The labor cost data confirms this did happen. Private industry wage costs in the ECEC have outpaced the increases in the ECI every year, and the increase in 2023 of 6.9% was the largest on record and 270 basis points over the increase in the ECI.

The Q1 2024 report for ECEC is due on June 18. Based on the still high number of job openings and low jobless rate, the Q1 rise in the ECEC index should exceed the ECI increase, adding to current fears of higher labor costs feeding into inflation numbers.

How Fast Are Labor Costs Rising?  Faster Than You Think

Ken Matheny

**The US economy is stronger than suggested by the “soft” 1.6% increase in GDP in the first quarter, while a sharp upturn of inflation puts Fed rate cuts on hold for at least several months.**

**Look to final sales to private domestic purchasers, not GDP, for a better indication of the economy’s underlying strength.**
The initial (“advance”) report of the national accounts for the first quarter of 2024 should be interpreted carefully.  Looking beyond the headline figures, the economy’s underlying growth momentum was notably stronger than the disappointing figure of 1.6% quarterly GDP growth in the first quarter.  GDP growth was held down by declines in components that tend to be more volatile  --- inventories and net exports --- in contrast to solid growth in other components, including consumer spending and private investment.  Personal consumption expenditures (PCE) posted solid growth (of 2.9%).  Business fixed investment also rose 2.9%, while residential investment jumped 13.9%, continuing a recovery that began in the second half of 2024.

A more telling indicator of the US economy’s underlying strength is final sales to private domestic purchasers, which rose at a solid 3.1% annual rate in the first quarter, virtually identical to increases in the third and fourth quarters of 2023 of 3.0% and 3.3%, respectively.  This is a clear if preliminary indication that the economy retains solid momentum for growth.

Together, declines in inventory investment and net exports subtracted 1.2 percentage points from GDP growth in the first quarter, but those components are not likely to continue to subtract large amounts from GDP growth on an ongoing basis, even though quarterly swings could be significant (in either direction) from time to time.  The level of inventory investment ($35 billion in the first quarter) is broadly sustainable, suggesting that repeated large declines are not the most likely outcome.  Net exports have been in a sideways waffle since the second half of 2022.  Future large declines are possible if foreign demand were to collapse or the dollar were to appreciate sharply, but neither of those outcomes appear to be highly likely at this juncture.  In short, the 3.1% growth in final sales to domestic purchasers is a better indicator of underlying strength in demand than the smaller 1.6% increase in GDP in the first quarter.

Of course, GDP and other estimates are subject to revision, so the picture of first-quarter growth could be altered in coming months.

**Inflation surged in the first quarter, nearly eliminating any prospect for a Fed rate cut prior to this fall.**
Another major component in today’s report on the national accounts was a disturbing increase in consumer inflation.  The price index for personal consumption expenditures (PCE) rose at a 3.4% annual rate in the first quarter, the largest increase since the first quarter of 2023.  Meanwhile, the core PCE price index rose at an even higher 3.7% annual rate in the first quarter, far above the increase of 2.0% in the final two quarters of last year.  This is a direct challenge to any hope that the Federal Reserve will begin to lower interest rates in coming months.  As of the first quarter, the annual (four-quarter) increase in the core PCE price index was 2.9%.  It is likely that tomorrow’s report on monthly PCE will show annual (12-month) inflation at or slightly above February’s 2.8% reading.

The Federal Open Market Committee (FOMC) will almost certainly not begin to seriously contemplate rate cuts without clear indications that inflation is easing and well on track to fall to 2% over time.  The latest inflation figures suggest that progress on bringing inflation down has stalled.  It will take more than one or two “good” monthly inflation reports to convince policymakers that it is appropriate to begin cutting interest rates.  This makes any rate cut prior to this fall a low probability outcome and adds to the risk that there might not be any Fed rate cut in 2024.

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First-Quarter 2024 National Accounts

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March showed some moderate variance. Four states were down slightly from February. The largest increase was Arizona’s .8 percent; three other states (Iowa, Delaware, and Vermont) had gains of at least .5 percent. Over the three months since December, Massachusetts was up 1.9 percent, while 8 other states (scattered across the nation) rose more than 1 percent. Over the last 12 months, Massachusetts again led, with an increase of 4.9 percent, while New York’s 3.6 percent was a fairly distant second. 5 states were down over the period, with Montana’s slump continuing, with a loss of 3 percent.

The independently estimated national figures of growth over the last 3 months (.75 percent) may be a touch higher than the state estimates would have suggested, but the 12-month figure (2.9) percent) looks to be roughly in line with the state numbers.

State Coincident Indexes in March 2024

Viewpoints: August 2019

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State Coincident Indexes