From the Terminal: Economic Print

May 2, 2025 – Labor market head fake?

The labour market showed no signs of weakness in April, despite volatile political inputs, which we believe was most likely as front-loaded activity supported labour demand. Non-farm payrolls surprised to the upside, rising by 177,000, with the private sector adding 167,000 jobs. Retail hiring was weaker, but business services and leisure & hospitality remained robust. Government hiring rose by 10,000, with federal government jobs falling by 9,000. The unemployment rate was unchanged at 4.2%, while the participation rate rose from 62.5% to 62.6%. 

The latest reports are likely to keep the U.S. Federal Reserve on the sidelines and central bankers are likely to continue to focus on inflation at the upcoming meeting. Looking ahead, however, we forecast labour markets to soften as the temporary support from front-loaded activity fades and tariffs "start to bite."

May 1, 2025 – A GDP Drop

First quarter Gross Domestic Product (GDP) fell 0.3% quarter-on-quarter (q/q), a bit more than forecast, as net exports dragged on growth as imports surged 41.3% q/q. This was to some extent expected as imports, especially of goods, were brought forward to avoid looming tariffs. Net exports therefore subtracted nearly 5% from the headline change, which was somewhat mitigated by inventory accumulation, which added 2.3% to growth, and IT and industrial equipment investment, which added 1% each. 

Private consumption was slightly better than forecast at 1.8% q/q annualized, but slowed sharply from 4.0% q/q in the fourth-quarter 2024--an indication that consumers have most likely acted much earlier than importers in anticipation of potential tariffs. In particular, goods consumption fell from a strong 6.2% q/q in 4Q2024 to 0.5% q/q in 1Q2025, with durable goods declining by as much as 3.4% q/q. Final sales for private domestic purchases also remained fairly steady at 3% q/q from 2.9% q/q in 4Q2024, a sign that economic activity remained fairly robust despite the volatility in the data. 

Looking ahead, we forecast growth to moderate further and anticipate more volatility as the interplay between inventories and trade may reverse in the second quarter. Consumers, on the other hand, may likely show further weakness as higher prices weigh on purchasing power.

May 1, 2025 – An income and spending surprise in March

Personal income and spending surprised somewhat in March, coming in at 0.5% month-on-month (m/m) and 0.7% m/m, respectively. With spending outpacing income, it appears that consumers used March to increase consumption again in the face of looming tariffs. The savings rate dipped slightly from 4.4% to 3.9%, but remains above the averages we saw in the fourth quarter of 2014, when consumers appeared to begin significantly front-loading purchases. 

Consumers once again focused on durable goods (+3.2% m/m), while keeping pace on services (+0.5% m/m); the latter could be an indication that households are still doing well financially. For what it is worth, as a "blast from the past," Personal Consumption Expenditures (PCE) inflation surprised to the downside on both the headline and core, posting no gain for the month. This brings core PCE inflation down from 3.0% year-on-year (y/y) to 2.6% y/y, which might have called for further rate cuts if there were no tariff-induced inflationary pressures in the pipeline.

April 10, 2025 – March CPI came in better than expected

In a blast from the past, March Consumer Price Index (CPI) data actually came in better than expected, with the headline figure cooling to 2.4% year-over-over (y/y) from 2.8% y/y, mainly due to a drop in energy goods prices. The core measure, which excludes volatile food and energy prices, was also friendlier, easing to 2.8% y/y from 3.1% y/y. 

However, the details show that durable goods prices stopped deflating as demand was likely brought forward in anticipation of tariffs. Services prices also moderated somewhat as volatile transportation services fell on weak airfares. Shelter also moderated as hotel prices eased. It remains to be seen whether this is a case of consumers substituting some discretionary spending for front-loading durable goods in anticipation of tariffs, or whether we are already seeing a broader pullback. Either way, the current report likely shows little to no impact from the initial 20% tariffs on China. 

Economic watchers know from the last trade war that it typically takes up to 2 months for tariffs to show up in inflation. Looking ahead, we forecast inflation to accelerate despite the recent announcement of a 90-day delay, as the 125% levies on China and other measures do not change the overall math much. The question that remains is whether the tariffs will be a one-time price level effect or whether second-round effects will generate further price pressures.

April 4, 2025 – Non-Farm Payrolls to keep Fed on Sidelines?

The March Non-Farm Payrolls report was a decent positive surprise, suggesting no pre-emptive action by companies ahead of the announcement of the new tariff regime. 

Non-farm payrolls rebounded strongly from 117k to 228k and even the government added 19k jobs. In the private sector, hiring in consumer-oriented industries such as leisure/hospitality and retail, as well as health care and education, pushed total private payrolls from 116k to 209k. This can be seen as a sign that the softening in consumption so far in the first-quarter may be less of a drag than the data so far suggests. 

The unemployment rate ticked up from 4.1% to 4.2% due to rounding, and overall wages still show no signs of rising price pressures from reduced migration. That said, it is worth noting that wages in lower-income sectors, such as those that hired the most in March, showed some elevated wage growth on a month-to-month basis. 

Looking ahead, recent sentiment data suggests that tariff fears could lead to less robust labor markets going forward. For now, however, the current report is likely to keep the U.S. Federal Reserve on the sidelines as there are still many uncertainties about the impact of trade policy on the economy.

February 3, 2025 – Trade War 2.0

Trade war 2.0 is likely to be the dominant theme this week. On Saturday (Feb. 1), U.S. President Donald Trump signed an order imposing 25% tariffs on imports from Mexico and Canada (10% on energy imports), and an additional 10 percentage point tariff on China as early as Tuesday (Feb. 4). The orders include automatic escalation if the targeted countries retaliate.

Canadian Prime Minister Justin Trudeau announced that he will impose the 25% tariffs on up to $155 billion of U.S. imports. China and Mexico have said they will take countermeasures without providing details at the time of writing. Depending on how long the tariffs remain in place, as well as the final scope and retaliation, the announced tariffs could potentially shave 1.0-1.5% off U.S. GDP growth in 2025 and add up to 1% to core inflation. Of course, such calculations are subject to a high degree of uncertainty, as is the potential reaction of central banks.

If tariff-induced price increases do not lead to wage pressures in the labor market, central bankers are likely to want to see through temporary higher inflation rates. However, if demand becomes skewed toward domestic capacity in a way that triggers a potential wage-price spiral, central banks will likely be ready to act by raising policy rates. However, the impact of higher prices on consumer purchasing power limits demand, reducing the risk of such a scenario in the very short term.

Given that it will take some time for tariffs to feed through to inflation and other hard data, we think the U.S. Federal Reserve will remain on hold at least as long as the tariffs are in place. Still, it remains to be seen whether the trade war will escalate or whether the situation will be resolved through negotiations. The latest development has certainly cast a shadow over the economic outlook, and otherwise important data this week has somewhat lots its appeal.

January 31, 2025 – U.S. GDP not as robust but still strong

U.S. GDP growth disappointed at the margin in the final quarter of 2024, coming in at 2.3% quarter-over-quarter (q/q) annualized instead of the 2.6% q/q expected by the markets. However, consumption was very strong at 4.2% q/q as consumers picked up the pace from the third-quarter, likely also due to the expected policy impact on incomes and prices.

Investment and inventories each subtracted while net trade was neutral. Government consumption slowed somewhat in the final quarter, but still added slightly to growth. Final sales to private domestic purchasers slowed slightly to 3.2% q/q from 3.4% q/q, suggesting that underlying demand remains robust.

The quarterly core Personal Consumption Expenditures (PCE) price deflator rose a bit to 2.5% q/q from 2.2% q/q, but this was expected and reflects the already known slowdown in disinflation. The reading would appear to set a solid foundation for 2025, although it remains to be seen how a potential reversal of the front-loaded activity plays out.

We continue to forecast growth to remain robust in 2025, although perhaps somewhat lower than in 2024.

January 30, 2025 – January FOMC meeting reflections

More progress on disinflation appears needed.

As the market expected, the Federal Reserve Board held rates steady at its January FOMC meeting. The small changes in the press statement, such as the removal of further progress on disinflation, were described by Fed Chair Jerome Powell in the press conference as a "clean-up" rather than a "signal." He also reiterated that inflation has made significant progress and that labor markets are not currently a source of price pressures.

However, the Fed appears to be in no hurry to adjust monetary policy, there is no predetermined path and ready to react either way. Further rate cuts still require further progress on inflation or a sustained weakening of labor market conditions.

For the time being, Powell continues to believe that monetary policy remains meaningfully restrictive and well-positioned. Regarding the potential impact of politics, he replied that they would need to see "articulated outcomes" before they could make judgments about the implications for monetary policy.

Central bankers, to DWS, seem to be "playing for time". We have long thought that the last mile of disinflation would take time, and incoming data on inflation and labor markets already support a more gradual pace of easing. Political uncertainties over issues such as tariffs, spending and immigration, all of which have the potential to support higher prices, make an even more cautious and data-dependent approach reasonable. Central bankers now appear to be in the position of waiting for further input from politics to calibrate monetary policy, which in turn limits forward guidance.

Looking ahead, we forecast inflation data to be supportive, at least in the first quarter. This keeps the door open for another cut in March and perhaps June, but of course the risk is currently tilted towards less easing rather than more. However, the Fed itself seems to be in a comfortable position to react either way, having already cut rates by 100 basis points. Nevertheless, we think the case for a rate hike remains rather unlikely at the moment. 

January 10, 2025 – Labor Markets in December Strong Again Means No Jan. Rate Cut?

The labor market again proved very robust, with 256,000 jobs added in December, much more than expected. A rebound in retail boosted hiring, while other sectors maintained a solid pace. The goods-producing sector was negative, in line with current sentiment, which may also be affected by fears of renewed trade tensions. 

On the back of strong hiring, with the participation rate holding steady at 62.5%, the unemployment rate fell back to 4.1%. Despite robust demand, wages did not respond to the increased labor market activity as they rose 0.3% mom, the same as in November, and the year-over-year measure even ticked down to 3.9% y/y from 4.0% y/y. This is in line with the central bankers' assessment of no additional inflationary pressures from the labor markets at the moment and is unlikely to intensify their recent more hawkish communication.

The latest report suggests that a January rate cut is very likely off the table, and markets have even begun to shift expectations for further cuts to the second half of the year. It remains to be seen whether the robustness of hiring is sentiment driven by the election results or not. But if the robustness continues, it certainly makes the case for the Federal Reserve to keep rates higher for a bit longer than was expected just a few months ago.

January 7, 2025 – A JOLT Surprise

JOLTS (Job Openings and Labor Turnover Survey) job openings surprised by jumping back above 8 million in November, the highest level since mid-2024.

In the details we see a slight shift in demand toward higher-skilled workers, which may not necessarily support hiring going forward due to shortages of these workers, but could support higher wage levels in the future. The hiring rate has already eased slightly to 3.3% from 3.4%, and the job openings to unemployed ratio has risen slightly to 1.11 from 1.08, suggesting a much tighter labor market.

The quit rate-a measure of workers' confidence in finding a new job-continued to fall, further pointing to structural gaps in labor markets.

December 20, 2024   – November PCE more dovish

Personal Consumption Expenditures (PCE) index inflation for November was indeed a bit more dovish than the markets had feared following the Federal Reserve's hawkish interest rate cut in December, which put the spotlight back on inflation. 

Headline PCE prices rose 0.1% month-over-month (m/m) or "only" 2.4% year-over-year (y/y) from 2.3% y/y, similar to the 0.1% m/m increase in core inflation, which remained at 2.8% y/y. Lower price pressures in housing and volatile transportation were the drivers, while durable and non-durable goods were essentially flat. There was another dovish element as personal income came in a bit below expectations at 0.3% m/m and personal spending also missed expectations at 0.4% m/m.

Overall, the print suggests that price pressures were less than the Consumer Price Index and Producer Price Index suggested and that households continued to spend at a healthy pace. If repeated, this also implies that the Fed can continue to cut rates, but at a slightly slower pace. We continue to forecast the next rate cuts in March and June 2025, before the Fed may want to take a break.

December 18, 2024 – December FOMC meeting…a hawkish cut

Central bankers delivered on expectations at their last meeting in 2024, cutting policy rates by 25 basis points to a new target range of 4.25-4.50 percent. The updated (median) economic projections point to two more cuts in 2025, down from four, and now in-line with DWS' most recent estimates. This reflects expectations of somewhat higher inflation next year, as core Personal Consumption Expenditures (PCE) inflation is now projected to be 2.5 percent next year, up from 2.2 percent, with growth and unemployment little changed--also very close to our expectations. Additionally, the neutral or longer-run interest rate is now estimated at 3.0 percent, which is within our estimates of a neutral range of 3-3.5 percent. 

In terms of near-term guidance, the statement accordingly reads a bit more hawkish, dropping the word "additional" and adding a reference to "the magnitude and timing" in determining the next move, which is essentially consistent with a slower pace of cuts going forward. We are forecasting the next move to come in March, as central bankers will likely want to skip the January meeting due to policy uncertainties. It is worth noting that the decision was not unanimous, as the Cleveland Federal Reserve's Beth Hammack dissented, preferring to keep rates on hold.

Regarding the potential impact of tariffs, Powell cited an analysis conducted in 2018 as a good starting point and mentioned a scenario in which central bankers ignore one-time price changes in certain circumstances. However, without details and with the economy in a different place than it was then, the monetary policy implications of tariffs could be different, he added. With all these uncertainties, Powell was nonetheless confident that their narrative of cooling inflation remains intact, not least because labor markets are cooling and not a source of rising price pressures.

Overall, we are confident in our view that the Fed will take longer to lower rates to neutral. However, with all the political uncertainties ahead, we remain vigilant. Tariffs are generally a one-time price change that disappears from inflation rates after 12 months. However, some models suggest that they could have adverse effects on demand and labor markets. On the other hand, we know from the past that fiscal stimulus and reduced labor supply--perhaps due to lower migration--can add to price pressures. It remains highly uncertain, at least for the time being, how these competing effects will ultimately play out.

December 11, 2024 – November CPI

November's Consumer Price Index was in-line with market expectations, with both the headline and core figures rising 0.3% moneth-over-month. As a result, the policy-relevant core inflation rate (excluding volatile energy and food prices) remained at 3.3% year-over-year, suggesting that disinflation has stalled again. 

There was again a robust contribution from weather-related effects in automobiles, which may prove to be temporary. Volatile transportation prices rose less in November than in October, as did housing prices.

Overall, the reading supports DWS' call for another 25 basis point cut at the upcoming December Federal Open Market Committee meeting, after which central bankers may consider slowing their normalization efforts due to uncertainty about future policy and less progress on disinflation. Most likely, the upcoming update of the economic projections may show expectations for slightly higher inflation and higher policy rates in 2025 and beyond than previously communicated.

Such an outcome might be seen as a "hawkish cut," but current market pricing already appears to be somewhat anticipating such a move. We continue to forecast two more cuts in 2025 before the Fed might pause, leaving rates slightly above their neutral level, which we estimate to be between 3.0% and 3.5%.  

November 1, 2024 – Jobs report...what a disappointment?

Only 12,000 new jobs were created in October and the private sector actually lost 28,000 jobs. But what looks very frustrating may not be as bad as it first appears. Hurricanes Helene and Milton are most likely to blame for the bitter result, as the BLS (Bureau of Labor Supply) explains in a note to the usual press release. In particular, the timing and length of the data collection period seem to be responsible for the miss. While this seems reasonable, the BLS adds that it is not possible to isolate weather-related effects. 

For DWS, the read-across from the household survey keeps us relaxed. The unemployment rate was unchanged at 4.1% and the participation rate fell only slightly from 62.7% to 62.6%. Total employment fell by 368k, but most of these people actually left the labor force (218k), suggesting that they may return once the hurricane effects fade. This view is also supported by the small change in insurance claims over the same period. The more interesting takeaway from the October report may be wage developments. Here we see some continued rigidities, with average hourly earnings rising by 0.4% month-over-month. This in itself should not be a cause for concern, but it certainly suggests that labor markets remain a little tighter than markets may have thought a few months ago.

All in all, once the weather is taken into account, the report suggests that labor markets are still in equilibrium and that some marginal price pressures remain...nothing that should prevent the Federal Reserve from cutting rates at the upcoming November meeting.  

October 10, 2024 – Was the Federal Reserve too quick to give inflation a pass?

The Consumer Price Index (CPI) surprised to the upside in September, supporting DWS' view that it may have been a bit premature to turn a blind eye to this part of the Fed's reaction function. Both headline and core inflation were a touch higher than expected, coming in at 0.2% month-over-month (mm) (headline) and 0.3%mm (core) respectively. In other words, disinflation stalled in September. 

Details suggest that much of the disappointment in core inflation came from notoriously volatile transportation services, but a jump in medical services combined with a weaker print in housing could have implications. The labour market-sensitive core services ex-shelter component is proving uncomfortably resilient after a better-than-expected jobs report for the same month.

Whether we get a repeat of the fourth-quarter 2023, where elevated rate cut expectations stalled the disinflationary process in the first-quarter 2024, remains to be seen, but certainly the odds of a 50 basis point (bp) cut in November are fading; we even foresee an upcoming discussion on a potential skip.

For now, DWS remains in the 25bps camp for the November meeting, as translating today's input into core Personal Consumption Expenditures index prices could lead to less disappointment.

September 27, 2024 – Headline and Core PCE update

Headline and core PCE inflation were slightly better than expected, at 0.1% m/m and 0.13% m/m respectively. Personal income and spending both disappointed, with real private consumption decelerating from 0.4% m/m to 0.1% m/m. There was a significant upward revision to the savings rate. Most likely, a cooling labour market could be supporting households' precautionary motive to hold higher levels of reserves. Excess savings, including the new figures, still seem to have been used up, but by a much smaller margin than before. Overall, the current figures still point to a slowing economy, but a more resilient consumer in the future should labour markets continue to weaken. Disinflation is progressing, but not without caveats - core services inflation excluding housing remains elevated. For the Fed, the implications are somewhat more robust demand and still no complete victory over inflation - we stick to a 25bp cut in November as a baseline and wait for more data.  

September 11, 2024 – CPI was a Mixed Bag

The August Consumer Price Index report was mixed as the monthly increase in the core measure was reported at 0.3% (0.281% unrounded), which was disappointing but kept the year-on-year (y/y) increase at 3.2%y/y as in the previous month.

Together with the latest employment report, where we saw a slight increase in wages, this report is a reminder that inflation is still a relevant factor in setting monetary policy and that central bankers have not yet won the battle. Shelter prices remain a wild card and are back as a potential source of uncertainty looking ahead.

Our view remains that policy rates can still be reduced from very high levels, but perhaps at a slower pace than the market expects. A reassessment of perhaps elevated expectations may be warranted anyway, as they could prove counterproductive again, as they most likely did at the end of last year. We maintain our call for three 25-basis point cuts this year.

For the upcoming Personal Consumption Expenditures price index--the U.S. Federal Reserve's preferred measure--we should keep in mind that housing and transportation have a lower weight, while the relatively higher-weighted health care still deflated by 0.1% in August. This points to keeping price pressures in-check and could point to a 0.2% month-over-month outcome for core PCE.  

September 6, 2024 – August Employment Report

The August employment report was probably one of the most eagerly awaited economic releases of the year. As we expected, fears of another massive deterioration from a very weak July report did not materialize, but the current data certainly points to a continued cooling of labor market conditions. August hiring rebounded slightly to 142,000, which was still below expectations. In addition, a downward revision of 86,000 to the previous two months tilts the number further into dovish territory.

The good news in the report was a tick back in the unemployment rate to 4.2% from 4.3% as hiring increased, which also offset a small increase in the labor force that did not show up on a rounded basis in a steady participation rate at 62.7%. On the wage side, the U.S. Federal Reserve appears to be getting some less dovish signals; wage growth firmed a bit with the gains concentrated in the service sector, which is consistent with the pickup in hiring.

Overall, the August numbers were weak, but certainly not as weak as markets may have feared given the amount of rate cuts priced into federal funds futures. We think the Fed remains on track for a first 25 basis point cut in September; the economy appears to be slowing, and a soft landing remains a plausible base case. That said, experience suggests that self-sustaining forces can take over once labor markets begin to move toward weakness. DWS believes it is up to the Fed to counteract this, which is why we have revised our view for the central bank to make three cuts this year and three next year...in 25 basis point increments, of course.  

August 30, 2024 – PCE for July

The release of the Personal Consumption Expenditure Price Index would support a September interest rate cut, but consumer budgets remain stretched as consumption outpaces income.

July income and spending data suggest that consumers are still in good shape at the start of the third quarter. Personal spending rose 0.5% month-over-month, supported by a robust 0.3% month-over-month increase in disposable income. As a result, however, consumers are saving less; the savings rate fell to 2.9%, the lowest since mid-2002.

According to our U.S. Economist Christian Scherrmann, the report underscores two facts. First, inflation continues to support the Fed's case for an interest rate cut in September. Second, while consumption is doing well, the "slowdown clock" appears to be ticking as income gains, especially from wages and salaries, fail to keep pace with spending. This puts the spotlight even more squarely on the labor market, as any further deterioration means that consumers' budgets will be stretched even further.

All in all, the report once again seems to confirm the "when" of a rate cut (September), but still leaves room for the "how much" going forward. The next stop for further insight will be the upcoming employment report, where we remain slightly on the optimistic side.

August 23, 2024 – Thoughts on Jackson Hole

As we expected, Fed Chair Jay Powell cleared the way for a September rate cut in his speech at the Jackson Hole Economic Symposium, but stopped short of definitive forward guidance on the path of interest rates--data-dependency remains the modus operandi. At the same time, he appeared to be more dovish on labor market conditions than at the July FOMC meeting, saying that they "do not seek or welcome further cooling in labor market conditions." 

Furthermore, after reflecting on past decisions where the Fed has been criticized for potentially waiting too long to raise rates, Powell indicated that they have learned their lessons...perhaps a soft hint that the Fed is ready to cut rates by more than 25 basis points if economic conditions warrant.

From DWS' perspective, this does not seem necessary at the moment, but it certainly gives the markets a bit of what they have been asking for.

August 20, 2024 – 2Q GDP Had Some Surprises

DWS still expects inflation to be on the right track towards 2%, but do not think that the solid growth figures of 2024's second quarter will be repeated in the third quarter. Looking ahead, however, the numbers remain a "blast from the past," implying a higher base for consumption gains and a slightly lower base for prices.

The first update on Q2 Gross Domestic Product was full of positive surprises, as overall growth was revised up by 0.2 to 3.0% annualized quarter-over-quarter. Not only did consumers buy more goods than initially thought, but the deceleration in services consumption growth was slightly less than previously reported. Together, these more than offset downward revisions to other components such as government spending, investment and exports.

Along with the good news of a healthy consumer in Q2, core Personal Consumption Expenditures prices for the same period were revised down a bit to 2.8% year-over-year from 2.9% year-over-year. Taken together, the report suggests a robust economy and somewhat less price pressure than initially thought.