Charles Steindel

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The March state data provide first firm data on the regional impact of the pandemic. 31 states saw statistically significant drops in their job counts; Tennessee—a state that was quite late to impost shut-downs—was the only state to report an increase (not statistically significant). California lost 99,500 jobs; the counts in both Louisiana and Rhode Island both fell 1.1 percent. Louisiana and Rhode Island. Two large states that were slow to close—Florida and Texas—still saw .4 percent losses. Only a dozen states now report statistically significant job growth over the last 12 months, with Utah up 2.6 percent. But the negatives have started to accumulate, with Vermont down 2.4 percent and West Virginia dropping 1.7 percent (both these states had been soft to weak prior to the pandemic).State labor markets were generally sound in February, prior to the onset of the pandemic.

Household survey results were also dismal. Nevada—a state utterly dependent on travel and tourism—saw its unemployment rate soar 2.7 percentage points, from 3.6 percent to 6.3 percent. Louisiana, not doing well earlier, reports a 6.9 percent jobless rate. West Virginia, Pennsylvania, and the District of Columbia also had unemployment rates of 6.0 percent or higher (Alaska, long the state with the highest unemployment rate, reported a drop from 5.8 to 5.6 percent). In the four largest states (California, Texas, New York, and Florida) noticeable drops in the labor force—at least 1 percent in each--dampened the rise in reported unemployment. Six states, though—scattered across the nation, from New Hampshire to Hawaii—continued to report unemployment rates under 3 percent. Astonishingly, New Jersey—one of the very hardest his states by the virus—reported an unchanged 3.8 percent rate, with increases in the labor force and resident employment (the Garden State’s job count, though, fell 31,800). A good sign of the disarray created by the virus is the omission of household survey data for Puerto Rico—it was just not possible to conduct anything like a normal survey on the island.

As many noted, the March survey period for the labor market reports came before the full force of the pandemic hit; the incredible rise in new claims for unemployment insurance started later in the month. Still, it’s obvious that the national impact is being felt coast to coast.

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The March state data provide first firm data on the regional impact of the pandemic. 31 states saw statistically significant drops in their job counts; Tennessee—a state that was quite late to impost shut-downs—was the only state to [...]

State Labor Markets in March

Joseph G. Carson

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As difficult it was to decide to shut down large segments of the economy in order to contain coronavirus it will be even trickier to decide when to end the lockdown. News that the coronavirus curve (i.e., the number of cases) may be flattening will only intensify
 the pressure on government leaders to relax restrictions on work-life and travel, as well as social and recreational gatherings.

There is a risk in removing government restrictions too early in a war against a virus. History shows it is essential that "the chain of transmission" of the virus is severed as a second wave could prove to be even more damaging.

In 1980, government-imposed credit restrictions to kill the "inflation" virus. At that time, "inflation" was labeled as public enemy number one much like coronavirus is viewed today.

The decision to impose credit controls to attack the "inflation" virus literally "scared people away from the stores" (The Wall Street Journal, May 5, 1980) triggering the sharpest one-quarter decline in consumer spending in the post-war period.

The National Bureau of Economic Research (NBER), the official arbiter of dating economic cycles peaks and trough, viewed the sudden drop in business activity to be so severe it announced that the economy was in recession even before the official GDP data showed
 an actual contraction. That surprising announcement by NBER compelled the federal government and the Federal Reserve to abruptly end the credit-control program, only 90 days after it was first implemented.

Investors will be pleased to learn the removal of government restrictions on credit sparked a quick and powerful rebound in the economy. Real GDP posted back-to-back quarterly gains of nearly 8% annualized in Q4 1980 and Q1 1981. The entire decline in consumer spending
 and output loss of the short 6-month recession was recaptured.

However, investors should be alarmed to learn the chain of transmission of the "inflation" virus was not severed. Instead it was alive and well, ready to resurface once the economy rebounded.

The second wave of the "inflation" virus proved to be more damaging as it forced the Federal Reserve to implement broader and more stringent monetary constraints. A deeper and more protracted recession followed, lasting 18 months from the middle of 1981 to the
 end of 1982.

Looking back on the 1980 experience economic and policy experts voiced concern that not enough was done early on to break the chain of transmission for the "inflation" virus.

Federal Reserve Board Vice Chairman Frederick Schultz in testimony before Congress in late 1980 stated, "Now, with the benefit of 20/20 hindsight… I think there is a considerable risk that the underlying problems of the economy will be found to be even more intense
 once the period of credit controls has been ended…the quick-fix or the band-aid policy always looks attractive, but that is a cruel deception". Mr. Schultz was right.

2020 recession like that of the 1980 recession is similar in that both are government-made, linked to a "contagious" virus, and involve a sudden stop in the economy. The difference is that the 1980 recession involved an economic virus versus today's medical one.

As such, investors must realize the timing, scale and sustainability of any business rebound are not forecastable. Recovery depends on the coronavirus curve that has no economic properties and the success of medical science.

At this point, it would be best for the government officials to follow science and let the data determine the timing of the "on" switch for the economy. The last thing anyone wants is to have a medical expert testify before Congress in 6 months (like that of
 Mr. Schultz in 1980) and say "wish we'd done something more in the spring" to break the transmission chain.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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As difficult it was to decide to shut down large segments of the economy in order to contain coronavirus it will be even trickier to decide when to end the lockdown. News that the coronavirus curve (i.e., the number of cases) may be [...]

Lessons from the 1980 "Inflation" Virus: Transmission Chain Needs to Be Broken for Successful Outcome

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for February. This is essentially the last comprehensive snapshot of the distribution of activity prior to the impact of the pandemic. A look at the medium and longer-term developments seems fairly off the point. In the short-term, Arizona and Maine experienced declines from January to February (the fall in Arizona was so modest that in the Bank's report it is chalked up as "unchanged"); Maine was the only state to experience a three-month drop. The coincident indexes depend heavily on labor market data, with some smoothing of current developments. One suspects that bad as the March figures are likely to be, they could well be revised down when the raw information for April gets factored in.

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for February. This is essentially the last comprehensive snapshot of the distribution of activity prior to the impact of the pandemic. A look at [...]

State Coincident Indexes in February

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The March employment report shows massive disruption in the labor market triggered by the coronavirus. And as awful as the payroll job loss numbers appear they pale in comparison to the record loss in household employment and surge in the number of people forced
 to work part-time.

In March, payroll employment fell 701,000, nearly 10 times greater than consensus estimates and far worse than the job loss of 27,000 in ADP employment released earlier in the week. The sharp drop in payroll employment last month was the largest monthly decline
 since the 800,000-job loss recorded in May 2009---near the end of the Great Financial Recession.

The employment statistics from the household survey were far worse. In March, household employment fell nearly 3 million. To put that in context, the drop in household employment in March 2020 was three times larger than any of the monthly job losses recorded during the Great Financial
 Recession.

Household employment is based on a survey of people, whereas payroll employment is a survey of business establishments. In other words, the household survey counts the number of people working, whereas the establishment survey counts the number of jobs (and many people
 hold more than one job).

At cyclical turning points, the household survey tends to flash "red" much sooner than the payroll survey. And that appears to be the case again in the current cycle.

Both surveys are conducted at the same time of each month: the payroll period that includes the 12th of the month. And what is noteworthy about the March household employment survey results is that people were losing jobs in record numbers even before the national
 emergency restrictions on work-life, social gatherings and travel were announced on March 13.

On top of the job loss, the household survey showed that 1.4 million workers in nonagricultural industries were forced to work part-time due to slack work or weak business conditions.

The 0.9 percentage point to 4.4% in the civilian unemployment understates the severity of the disruption in labor markets. That's because of record number 1.6 million dropped out of the workforce. In other words, if all of the people that lost jobs in March remained
 in the labor force the jobless rate would have been nearly one percent higher at 5.3%.

The household employment results for March are a harbinger of what will appear in the payroll data in the coming months.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The March employment report shows massive disruption in the labor market triggered by the coronavirus. And as awful as the payroll job loss numbers appear they pale in comparison to the record loss in household employment and surge in [...]

Massive Disruption in Labor Markets

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for January. These indexes now take into account the annual labor market benchmark revisions. Additionally, movements in proprietors’ income are now assumed to affect a state’s index. Given that today’s release refers to January, and the massive events since then, the actual numbers released should be of little interest (the estimates for February will be released on April 10). For the 12 months ending in January, South Carolina saw the largest increase in activity: 5 percent. Arizona, Utah, Washington (state; the index is not computed for DC), Maryland, and Florida also saw gains about 4 percent. Louisiana and West Virginia experienced declines, and a swath of 15 states, almost entirely in the mid-section of the nation, saw gains of less than 2 percent (Alaska and Vermont were also in that group).

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for January. These indexes now take into account the annual labor market benchmark revisions. Additionally, movements in proprietors’ income are [...]

State Coincident Indexes in January

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State labor markets were generally sound in February, prior to the onset of the pandemic. Texas led the way, with a 50,400 (.4%) rise in payrolls—tops in the absolute gain and trailing only Alaska in percentage change. Michigan and Massachusetts also had statistically meaningful increases. Eleven states reported minor declines in payrolls; the rest reported small gains.

Over the twelve months ending in January job growth was weaker in the mid-section of the nation than elsewhere, with six states in that zone seeing a loss of jobs (only West Virginia’s drop was statistically significant). Vermont also experienced a statistically insignificant job drop. Once again, job growth tended to be faster in West, with Utah’s 2.9% increase being the largest.

In the household numbers, Alaska’s unemployment rate moved down to 5.8% (North Dakota’s 2.2% was the lowest in the nation), so in February there was no state with an unemployment rate of 6% or higher. At this juncture, one can only speculate when that might again occur.

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State labor markets were generally sound in February, prior to the onset of the pandemic. Texas led the way, with a 50,400 (.4%) rise in payrolls—tops in the absolute gain and trailing only Alaska in percentage change. Michigan and [...]

State Labor Markets in February

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Government restrictions to contain coronavirus have caused tremendous economic damage compelling some to question is it worth "destroying the economy by trying to save it"?

This is not the first time government restrictions triggered a severe slump in the economy. In 1980 government imposed credit restrictions to kill the "inflation" virus. That policy literally tanked the economy within weeks, ultimately forcing Washington to relent.

The 1980 experience clearly shows easing government restrictions on people's mobility and businesses will trigger a substantial rebound in the economy. But will it be sustainable without addressing the core (coronavirus) issue? In 1980 it was not.

Economic Fallout &amp; Political Ramifications 

Since the publication of my article, "Investors Should Brace For A Record Decline in GDP" on March 13, analysts' forecasts the scale of the economic slump have gotten direr day by day. Forecasts of the possible slump in Q2 GDP quickly jumped to -10%, then -20%, and -30%.

It's quite possible that we have now seen the peak of the most pessimistic forecasts. Federal Reserve Bank of St. Louis President James Bullard stated that Q2 GDP could decline as much as 50%, sending the unemployment rate to 30% in the process. Based on the civilian labor force an unemployment rate of 30% would mean a loss of 45 million jobs, pushing the number of unemployed to 50 million.

Now that the severity of the economic slump caused by government restrictions has scared everyone a potential fissure has opened between government health officials and the nation's economic advisors and politicians.

On one side, health officials argue sustained social distancing is necessary to successfully beat coronavirus. On the other side, economic advisors and politicians argue that the economic and financial costs have become too great and a different approach is needed

America had a similar debate four decades ago when the economy faced a different enemy, uncontrollable inflation. At that time, Federal Reserve Chairman Paul Volcker argued, "Inflation was Public Enemy Number One".

The Federal Reserve, following the recommendation of the White House, placed restrictions of the use of credit in order to kill inflation. Initially brushed off as largely symbolic the government restrictions triggered the sharpest decline in consumer spending in the post war period. It was reported that some people felt it "almost unpatriotic to buy items on credit".

In a relatively short period of time the government restrictions were viewed as "overkill" and Washington was forced to undo its credit policy.

Washington is confronting a health and economic crisis today. Undoing or relaxing restrictions on people's mobility and businesses could very well lessen the severity of the economic contraction. But the ability to implement it in a piecemeal way will be most difficult, while never fully eliminating coronavirus.

In 1980, government restrictions on consumer credit were an all-inclusive policy, impacting everyone up and down the income ladder and in every city and state in the US. The decision to impose and remove credit restrictions impacted everyone simultaneously.

Decision on where to relax standards and where not will bring health care and economics together in away never seen before. Allowing some cities and states, or even parts of a state, to recover before others based on a bell-shaped health curve will prove to be unworkable, forcing federal and state governments to adopt a blanket policy approach.

Drawing on the 1980, investors should welcome the government to relax these restrictions on travel, work life and non-essential businesses since it trigger an economic rebound---maybe a V-shaped. Yet, would easing these restrictions give a false sense of security to the American people? Can the medical industry contain this virus and ultimately find a permanent cure? In 1980 recurrence of inflation one year later proved even more difficult to defeat triggering a deeper and more protracted recession.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Government restrictions to contain coronavirus have caused tremendous economic damage compelling some to question is it worth "destroying the economy by trying to save it"? This is not the first time government restrictions triggered [...]

"Déjŕ Vu"--"Destroying the Economy By Trying to Save It"

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BEA has released the first estimates of state personal income for the fourth quarter of 2019 and for 2019 as a whole. Right now interest in these figures may be mostly antiquarian. For 2019 as a whole, the fastest-growing states were in the West, with Colorado's 6.1 percent increase the nation's largest. South Carolina was the only state in the eastern half of the nation to be in the top 10 for growth—and it was 10th. The Great Lakes was the slowest-growing region, with Wisconsin's 4.0% gain (29th in the nation) noticeably under the nation's 4.4% pace. West Virginia's 2.8% growth was the nation's lowest (West Virginia is classified as a Southeastern state).

In the fourth quarter, much of the West was still strong, with the Southwest seeing the highest growth rate of any region. The Great Lakes states did experience a marked rebound, most likely reflecting the end of the GM strike (Michigan's 4.7 percent rate of growth was the nation's highest). North Dakota, after seeing income grow at an 11.1 percent rate in the third quarter, was last in the fourth quarter, with a 1.1 percent rate of growth.

Of course, the first quarter is likely to see very different results, with outright declines possible. It may be that small energy-producing states will be unusually hard-hit, as will, of course, the states now largely sheltering in place. Presumably, the new legislation will greatly expand federal transfer payments, but those effects will not be seen until the second quarter. Some may be looking at the state income figures to get a sense of the vulnerability of revenues to the virus event, but the potential for major federal aid is arguably the key element in assessing public finances.

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BEA has released the first estimates of state personal income for the fourth quarter of 2019 and for 2019 as a whole. Right now interest in these figures may be mostly antiquarian. For 2019 as a whole, the fastest-growing states were [...]

State Personal Income

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

With escalation of Israel/Iran conflict, geopolitical risk has recently surged while US trade policy uncertainty has ebbed

Renewed supply chain pressures point to a rebound in global inflation ahead

Apart from Japan, Blue Chip forecasters look for further significant monetary policy easing

Apart from the US, productivity is moribund

Financial market concerns ebb even though policy uncertainty continues to soar

US tariff revenues nearly doubled in April

Even with expected tariff-induced increases in inflation, BCFF forecasters look for a more aggressive round of monetary easing

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

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Mickey D. Levy

The Case Shiller Home Price Index fell 0.3% in June, its 4th consecutive monthly decline, lowering its yr/yr increase to 1.9% from 6.6% in February 2024 (Charts 1 and 2).

The flattening of home prices reflects slower demand for home sales and a moderation of transactions.  This has resulted from the surge in home prices--the Case Shiller Home Price Index surged 38.9% from mid-2020-mid-2022 and until recently it has continued to rise--combined with higher mortgage rates. The home affordability index hovers near an all-time high. The current fundamentals in housing suggest that the Case Shiller Home Price Index will continue to be flat-to-down in the next year.

**_The recent consecutive monthly declines in home prices have potentially important implications for overall inflation._** Rental costs and OER (Owners’ equivalent rent of residences) are the largest combined components of the CPI and PCE Price Index.  OER and rental costs comprise 33.6% of the CPI (OER, 26.2%; rental costs, 7.4%) and somewhat less in the PCE price index. PCE inflation (the PCE inflation reflects the prices of all goods and services consumed, while the CPI excludes consumption that is financed by third party payers, including Medicare, Medicaid and employer-financed health insurance), which results in a higher weight for health care costs and a lower weight for the shelter components.

Through July, rental costs were up 3.5% yr/yr, down from 5.1% a year earlier and OER is up 4.0% yr/yr, down from 5.3% yr/yr. (Chart 3).  Both OER and rental costs are derived by the Bureau of Labor Statistics from the trend in home values.  A historical note:  prior to May 1983, the CPI included direct measures of mortgage rates.  This measurement presumed that homeowners bought their homes at current mortgage rates each month. Beginning win May 1983, the BLS shifted its measure of inflation and replaced the mortgage rate with measures of OER and rental costs.  Since then, there have been modest modifications.

**_Model-based predictions of rental costs and OER._**  By summer 2021, the Fed had lowered rates to zero and engaged in massive purchases of Treasuries and MBS, and the government had increased deficit spending by a whopping 25% of GDP.  Inflation had just begun to accelerate, and Case Shiller Home Price index was soaring. Along with my former colleague Mahmoud AbuGhzalah, I estimated a model that predicted changes of OER and rental costs based on the Case Shiller Hole Price Index.  The model proved prescient, as described below.  Based on that model, I now predict the OER + rental costs will continue to moderate sharply in the next year to yr/yr increases close to one-half their current pace. And if the Case Shiller Home Price Index continues to be flat-to-down a touch—which seems likely based on their current lofty prices and soft housing demand, the monthly changes in rental costs and OER will **_subtract_** from inflation, and their yr/yr increases will head toward zero in 2027.  
Our model was a VAR (vector auto regression) with three variables, the Case Shiller Home Price Index, rental costs and OER in which all variables are regressed on their lagged values. This allows the model to estimate the impacts of a shock to one of the variables.  Most importantly, it estimates the lagged impacts of a change in the Case Shiller Home Price Index on OER and rental costs.  We estimated the model using monthly data going back to 1983 when the BLS changed its method of calculating the CPI to include OER and rental costs.

The model provided a robust statistic fit, with percentage changes in OER and rental costs optimally following the Case Shiller Home Price Index by 12 months and more.  In Summer 2021, the model predicted that OER and rental costs, which at the time were rising 3.25%-3.5% yr/yr, would soar and contribute to very high inflation.  That’s exactly what happened. This increase in housing inflation somehow came as a surprise to the Fed.  When inflation and the shelter component soared in the second half of 2021 and 2022, the Fed began measuring inflation excluding this important sector.  When OER and rental cost increases reached 7.5% while the increases in Case Shiller had begun to ebb, we re-estimated the model and it predicted OER and rental costs would recede. They did.

The four recent consecutive monthly declines in Case Shiller (April-July 2025, when its monthly change averaged -0.3%) and its rapidly declining yr/yr increases now predict a continued deceleration in OER and rental costs.  Based on the moderating increases  of the Case Shiller Home Price Index to date, the monthly and yr/yr increases in OER and rental costs should continue to decelerate significantly further, and subtract from inflation. **_I expect the Case Shiller index to remain negative to flat for many months to come, and for its yr/yr to eventually decline toward zero.  This will contribute to lower inflation, more so in the CPI than the PCE, and will likely be reflected in lower inflationary expectations._**  As that unfolds, the Fed can be expected to drop its measure of inflation that excludes the housing component.

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Home Prices, OER and Rental Costs:  Positive News for Inflation in 2026-2027

Joel Prakken

...was the reaction in financial markets after the latest employment report showed that, including revisions, growth of establishment employment slowed to a crawl over the last three months. Investors, who before that report were convinced the Fed will maintain its policy rate in the range of 4¼% - 4½% at the September meeting of the FOMC, are now equally convinced the Committee will cut the rate by ¼ percentage point, a shift in sentiment re-enforced by dovish remarks delivered by Chair Powell at the Fed’s annual shindig in Jackson Hole.

While not religious about it, I do find the Taylor rule a useful framework for contemplating the short-run dilemma facing the Fed as it attempts to satisfy the dual mandate of low inflation and high employment. For a given “neutral” real (i.e., inflation-adjusted) federal funds rate – today we call it real “r-star” – the original rule showed the Fed: (1) raising (lowering) the nominal policy rate by 50 basis points for each percentage point that real GDP exceeds (falls short of) potential GDP; (2) raising (lowering) the policy rate by 150 basis points for each percentage point that inflation exceeds (falls short of) 2%. The value of real r-star itself is not observed directly, only inferred from empirical models. However, the Fed’s Summary of Economic Projections (SEP) reveals policymakers’ views on the matter. For example, the June SEP shows, in the long-run, inflation of 2% and a nominal funds rate of 3%, implying a value of real r-star of 1% - unchanged from December’s SEP.

Another familiar rule in macro is Okun’s law relating changes in the unemployment gap to changes in the output gap. Using a typical textbook version of Okun’s law, the Taylor rule can be restated to show the Fed lowering (raising) the funds rate by 100 basis points for every percentage point that the unemployment rate exceeds (falls short of) the full-employment rate. The current unemployment rate is 4.2%, slightly below CBO’s estimate (= 4.3%) of the “non-cyclical” unemployment rate, while the 12-month change in the core PCE price index is 2.8%. If real r-star is 1%, then current values of the unemployment rate and inflation imply an appropriate policy rate of 4.3%, exactly equal to the funds rate in July.

From this perspective the Fed should be in no hurry to ease policy and, by cutting rates, risks perpetuating inflation above the 2% objective. The argument _for_ a rate cut is that continued slow growth of employment will soon lead to rising unemployment that, through the Phillips Curve, will reduce inflation risks associated with a one-off increase in tariffs, allowing the Fed preemptively to shift its focus to the employment half of the dual mandate.

This is a demand-side narrative that may prove out, but there is a supply-side story to tell here as well. With each employment report the BLS publishes monthly data on the labor force that tautologically is the product of population and the labor force participation rate. In Chart 1, the orange line depicts the recent 12-month percent change of this series. Unfortunately, it is contaminated by “population controls” introduced by the BLS each January. Fortunately, the BLS publishes alternative monthly estimates of employment by age and gender that smooth through the population controls. By multiplying the reported participation rate into this alternative series for population, I calculated a smoother version of the labor force (blue line). Over the last year, but especially in 2025, its growth has slowed from 1½% to zero as the participation rate has fallen, especially among foreign-born workers – the consequence of fear engendered by the Trump Administration’s policies on immigration. And this surely understates the actual deceleration in the labor force because estimates of recent population growth do not yet reflect the sharp reduction in immigration – especially border crossings - over the last year.

Why does this matter? Firstly, addressing the current clamor for a rate cut: growth of employment that is lethargic because it is constrained by slow secular growth of the labor force does not necessarily imply a cyclical rise in unemployment requiring rate cuts under the Taylor rule. Indeed, along a steady-state path with no growth in the labor force, I would expect monthly changes of employment to be zero with a constant unemployment rate. Secondly, however, it is standard macro that, all else equal, slower growth of the labor force is associated with a lower equilibrium real interest rate – i.e., a lower real r-star. The logic is that a deceleration in the labor force results in a relative excess of capital the puts downward pressure on the rate of return.

To get an empirical feel for this I fired up my macro system - which, on its supply side, is a Solow growth model – and calibrated it to the current economy assuming the real r-star of 1% shown in the recent SEPs. Then I reduced the annual growth rate of the labor force to zero from a baseline value of 0.7% (the most recent 10-year average) and held it there through 2028 before allowing a gradual recovery. With the Taylor rule maintaining the economy close to full employment, the system kicks out the inferred change in the real r-star. The results of this experiment are shown in Chart 2. They show the deceleration in the labor force is associated with a decline in real r-star that averages about ¼ percentage point through 2028. This could justify the Fed cutting the nominal policy rate even with the economy near full employment and inflation running above target.

None of this is precise. There are unobservable considerations and _ceteris_ that may not be _paribus_. While in the minority, there are Fed watchers worried that by cutting rates now, the FOMC may validate inflation above 2%. It is a legitimate concern but, thinking about it from a supply-side perspective on the economy, I find that risk a little less concerning.

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**A PDF version** of this commentary is available [here](https://static.haver.com/Haver_Commentary_Holy_Rate_Cut_082725_c394d9425e.pdf).

Holy Rate Cut Batman...

The Federal Reserve Bank of Philadelphia’s state coincident indexes in July continued their recent mediocre performance. In the one-month changes, while Alabama was up .88 percent, no other state had an increase as large as .5 percent, and ten saw declines, with Minnesota off .49 percent. Over the three months ending in July, Alabama was again on top in economic performance, as well as alphabetically, with an increase of 1.39 percent. While seven other states had gains of at least 1 percent, eight were down, with, as was the case for the one-month changes, Minnesota at the bottom , with a loss of .49 percent. Over the last twelve months, Massachusetts and Iowa were down, and five others saw increases of less than one percent. South Carolina was again the only state with an increase higher than four percent (Idaho was up 3.62 percent), and five others were at or higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .47 and 2.36 percent. Both measures appear to be a bit lower than what the state numbers would have suggested.