hubbardobrieneconomics

The Amazing Rise of Nvidia

Nvidia’s headquarters in Santa Clara, California. (Photo from nvidia.com)

Nvidia was founded in 1993 by Jensen Huang, Chris Malachowsky, and Curtis Priem, electrical engineers who started the company with the goal of designing computer chips that would increase the realism of images in video games. The firm achieved a key breakthrough in 1999 when it invented the graphics processing unit, or GPU, which it marketed under the name GeForce256. In 2001, Microsoft used a Nvidia chip in its new Xbox video game console, helping Nvidia to become the dominant firm in the market for GPUs.

The technology behind GPUs has turned out to be usable not just for gaming, but also for powering AI—artificial intelligence—software. The market for Nvidia’s chips exploded witth technology giants Google, Microsoft, Facebook and Amazon, as well as many startups ordering large quantites of Nvidia’s chips.

By 2016, Nvidia CEO Jen-Hsun Huang could state in an interview that: “At no time in the history of our company have we been at the center of such large markets. This can be attributed to the fact that we do one thing incredibly well—it’s called GPU computing.” Earlier this year, an article in the Economist noted that: “Access to GPUs, and in particular those made by Nvidia, the leading supplier, is vital for any company that wants to be taken seriously in artificial intelligence (AI).”

Nvidia’s success has been reflected in its stock price. When Nvidia became a public company in 1999 by undertaking an initial public offering (IPO) of stock, a share of the firm’s stock had a price of $0.04, adjusted for later stock splits. The large profits Nvidia has been earning in recent years have caused its stock price to rise to more than $140 dollars a share.

(With a stock split, a firm reduces the price per share of its stock by giving shareholders additional shares while holding the total value of the shares constant. For example, in June of this year Nvidia carried out a 10 for 1 stock split, which gave shareholders nine shares of stock for each share they owned. The total value of the shares was the same, but each share now had a price that was 10 percent of its price before the split. We discuss the stock market in Microeconomics, Chapter 8, Section 8.2, Macroeconomics, Chapter 6, Section 6.2, and Economics, Chapter 8, Section 8.2.)

The following figure from the Wall Street Journal shows the sharp increase in Nvidia’s stock price over the past three years as AI has become an increasingly important part of the economy.

Nvidia’s market capitalization (or market cap)—the total value of all of its outstanding shares of stock—is $3.5 trillion. How large is that? Torsten Sløk, the chief economist at Apollo, an asset management firm, has noted that, as shown in the following figure, Nvidia’s market cap is larger than the total market caps—the total value of all the publicly traded firms—in five large economies.

Can Nvidia’s great success continue? Will it be able to indefinitely dominate the market for AI chips? As we noted in Apply the Concept “Do Large Firms Live Forever?” in Microeconomics Chapter 14, in the long run, even the most successful firms eventually have their positions undermined by competition. That Nvidia has a larger stock market value than the total value of all the public companies in Germany or the United Kingdom is extraordinary and seems impossible to sustain. It may indicate that investors have bid up the price of Nvidia’s stock above the value that can be justified by a reasonable forecast of its future profits.

There are already some significant threats to Nvidia’s dominant position in the market for AI chips. GPUs were originally designed to improve computer displays of graphics rather than to power AI software. So, one way of competing with Nvidia that some startups are trying to exploit is to design chips specifically for use in AI. It’s also possible that larger chips may make it possible to use fewer chips than when using GPUs, possibly reducing the total cost of the chips necessary to run sophisticated AI software. In addition, existing large technology firms, such as Amazon and Microsoft, have been developing chips that may be able to compete with Nvidia.

As with any firm, Nvidia’s continued success requires it to innovate sufficiently to stay ahead of the many competitors that would like to cut into the firm’s colossal profits.

Want a Raise? Get a New Job

Image generated by GTP-4o of someone searching online for a job

It’s become clear during the past few years that most people really, really, really don’t like inflation. Dating as far back as the 1930s, when very high unemployment rates persisted for years, many economists have assumed that unemployment is viewed by most people as a bigger economic problem than inflation. Bu the economic pain from unemployment is concentrated among those people who lose their jobs—and their families—although some people also have their hours reduced by their employers and in severe recessions even people who retain their jobs can be afraid of being laid off.

Although nearly everyone is affected by an increase in the inflation rate, the economic losses are lower than those suffered by people who lose their jobs during a period in which it may difficult to find another one. In addition, as we note in Macroeconomics, Chapter 9, Section 9.7 (Economics, Chapter 19, Section 19.7), that:

“An expected inflation rate of 10 percent will raise the average price of goods and services by 10 percent, but it will also raise average incomes by 10 percent. Goods and services will be as affordable to an average consumer as they would be if there were no inflation.”

In other words, inflation affects nominal variables, but over the long run inflation won’t affect real variables such as the real wage, employment, or the real value of output. The following figure shows movements in real wages from January 2010 through September 2024. Real wages are calculated as nominal average hourly earnings deflated by the consumer price index, with the value for February 2020—the last month before the effects of the Covid pandemic began affecting the United States—set equal to 100. Measured this way, real wages were 2 percent higher in September 2024 than in February 2020. (Although note that real wages were below where they would have been if the trend from 2013 to 2020 had continued.)

Although increases in wages do keep up with increases in prices, many people doubt this point. In Chapter 17, Section 17.1, we discuss a survey Nobel Laurete Rober Shiller of Yale conducted of the general public’s views on inflation. He asked in the survey how “the effect of general inflation on wages or salary relates to your own experience or your own job.” The most populat response was: “The price increase will create extra profifs for my employer, who can now sell output for more; there will be no increase in my pay. My employer will see no reason to raise my pay.”

Recently, Stefanie Stantcheva of Harvard conducted a survey similar to Schiller’s and received similar responses:

“If there is a single and simple answer to the question ‘Why do we dislike inflation,’ it is because many individuals feel that it systematically erodes their purchasing power. Many people do not perceive their wage increases sufficiently to keep up with inflation rates, and they often believe that wages tend to rise at a much slower rate compared to prices.”

A recent working paper by Joao Guerreiro of UCLA, Jonathon Hazell of the London School of Economics, Chen Lian of UC Berkeley, and Christina Patterson of the University of Chicago throws additional light on the reasons that people are skeptical that once the market adjusts, their wages will keep up with inflation. Economists typically think of the real wage as adjusting to clear the labor market. If inflation temporarily reduces the real wage, the nominal wage will increase to restore the market-clearing value of the real wage.

But the authors of thei paper note that, in practice, to receive an increase in your nominal wage you need to either 1)ask your employer to increase your wage, or 2) find another job that pays a higher nominal wage. They note that both of these approachs result in “conflict”: “We argue that workers must take costly actions (‘conflict’) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises.” The results of a survey they undertook revealed that:

“A significant portion of workers say they took costly actions—that is, they engaged in conflict—to achieve higher wage growth than their employer offered. These actions include having tough conversations with employers about pay, partaking in union activity, or soliciting job offers.”

Their result is consistent with data showing that workers who switch jobs receive larger wage increases than do workers who remain in their jobs. The following figure is from the Federal Reserve Bank of Cleveland and shows the increase in the median nominal hourly wage over the previous year for workers who stayed in their job over that period (brown line) and for workers who switched jobs (gray line).

Job switchers consistently earn larger wage increases than do job stayers with the difference being particularly large during the high inflation period of 2022 and 2023. For instance, in July 2022, job switchers earned average wage increases of 8.5 percent compared with average increases of 5.9 percent for job stayers.

The fact that to keep up with inflation workers have to either change jobs or have a potentially contentious negotiation with their employer provides another reason why the recent period of high inflation led to widespread discontent with the state of the U.S. economy.

Acemoglu, Johnson, and Robinson Win the 2024 Nobel Prize in Economics

Daron Acemoglu and Simon Johnson (Credit: Acemoglu, Adam Glanzman; Johnson, courtesy of MIT, from news.mit.edu)

James Robinson (photo from news.uchicago.edu)

Many economic studies have a relatively limited objective. For instance, estimating the price elasticity of demand for soda in order to determine the incidence of a soda tax. Or estimating a Keynesian fiscal policy multiplier in order to determine the effects of a change in federal spending or taxes. (We consider the first topic in Microeconomics, Chapter 6, and the second topic in Macroeconomics, Chapter 16.)

Other economic studies consider much broader questions, such as why are some countries rich and other countries poor? As the late Nobel laureate Robert Lucas once wrote: “The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”

Today, the Royal Swedish Academy of Sciences awarded the 2024 Nobel Prize in Economic Sciences to Daron Acemoglu and Simon Johnson of MIT, and to James Robinson of the University of Chicago for “for studies of how institutions are formed and affect prosperity.” Acemoglu, Johnson, and Robinson (AJR) have published work highlighting the key importance of a country’s institutions in explaining whether the country has experienced sustained economic growth. Their work builds on earlier studies by the late Douglas North of Washington University in St. Louis, who received the Nobel Prize in 1993.

The institutional approach to economic growth differs from other approaches that focus on variables such as temperature, prevalence of disease, ethnic fragmentation, resource endowments, or governments adopting flawed development strategies in explaining differences in growth rates in per capita income across countries.

Two of AJR’s most discussed papers are “The Colonial Origins of Comparative Development: An Empirical Investigation,” which was published in the American Economic Review in 2001 (free download here), “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” which was published in the Quarterly Journal of Economics in 2002 (available here). In these papers, the authors argue that the institutions European countries established in their colonies helped determine economic growth in those countries even decades after colonization.

As with any analysis that covers many countries over long periods of time, AJR’s analysis of the effect of colonialism on economic growth has attracted critiques focused on whether the authors have gathered data properly and whether their data may be better explained with a different approach.

The authors, writing both separately and jointly, have explored many issues beyond the effects of colonialism on economic growth. The wide scope of their research can be seen by reviewing their curricula vitae, which can be found here, here, and here. The announcement by the Nobel committee can be found here.

CPI Inflation Running Slightly Higher than Expected

Image illustrating inflation generated by GTP-4o.

This morning (October 10), the Bureau of Labor Statistics (BLS) released its monthly report on the consumer price index (CPI). As the following figure shows, the inflation rate for September measured by the percentage change in the CPI from the same month in the previous month—headline inflation (the blue line)—was 2.4 percent down from 2.6 percent in August. That was the lowest headline inflation rate since February 2021. Core inflation (the red line)—which excludes the prices of food and energy—was unchanged at 3.3 prcent. Both headline inflation and core inflation were slightly higher than economists surveyed by the Wall Street Journal had expected.

As the following figure shows, if we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year—we see that headline inflation (the blue line) decreased from 2.3 percent in August to 2.2 percent in September. Core inflation (the red line) increased from 3.4 percent in August to 3.8 percent in September.

Overall, we can say that, taking 1-month and 12 month inflation together, the U.S. economy may still be on course for a soft landing—with the annual inflation rate returning to the Fed’s 2 percent target without the economy being pushed into a recession—but the increase in 1-month core inflation is concerning because most economists believe that core inflation is a better indicator of the underlying inflation rate than is headline inflation. Of course, as always, it’s important not to overinterpret the data from a single month, although this is the second month in a row that core inflation has been well above 3 percent. (Note, also, that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI in evaluating whether it is hitting its 2 percent inflation target.)

As we’ve discussed in previous blog posts, Federal Reserve Chair Jerome Powell and his colleagues on the FOMC have been closely following inflation in the price of shelter. The price of “shelter” in the CPI, as explained here, includes both rent paid for an apartment or house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included to account for the value of the services an owner receives from living in an apartment or house.

As the following figure shows, inflation in the price of shelter has been a significant contributor to headline inflation. The blue line shows 12-month inflation in shelter and the red line shows 1-month inflation in shelter. After rising in August, 12-month inflation in shelter resumed the decline that began in the spring of 2023, falling from 5.2 percent in August to 4.8 percent September. One-month inflation in shelter—which is much more volatile than 12-month inflation in shelter—declined sharply from 6.4 percent in August to 2.7 percent in September. The members of the FOMC are likely to find the decline in inflation in shelter reassuring as they consider another cut to the target for the federal funds rate at the committee’s next meeting on November 6-7. Shelter has a smaller weight of 15 percent in the PCE price index that the Fed uses to gauge whether it is hitting its 2 percent inflation target in contrast with the 33 percent weight that shelter has in the CPI.

Finally, in order to get a better estimate of the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation. Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. Trimmed mean inflation drops the 8 percent of good and services with the higherst inflation rates and the 8 percent of goods and services with the lowest inflation rates.

As the following figure (from the Federal Reserve Bank of Cleveland) shows, median inflation (the orange line) declined slightly from 4.2 percent in August to 4.1 percent in September. Trimmed mean inflation (the blue line) was unchanged at 3.2 percent. These data provide confirmation that core CPI inflation at this point is likely running at least slightly higher than a rate that would be consistent with the Fed achieving its inflation target.

The FOMC cut its target for the federal funds rate by 0.50 percentage point (50 basis points) from 5.50 percent to 5.25 percent to 5.00 percent to 4.75 percent at its last meeting on September 17-18. Some economists and investors believed that the FOMC might cut its target by another 50 basis points at its next meeting on November 6-7. This inflation report makes that outcome less likely. In addition, the release of the minutes from the September 17-18 meeting revealed that a significant number of committee members may have preferred a 25 basis point cut rather than a 50 basis point cut at that meeting:

“However, noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision.”

Investors who buy and sell federal funds futures contracts expect that the FOMC will cut its target for the federal funds rate by 0.25 percentage point at its November meeting. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 80.3 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point and a probability of 19.7 percent to the committee leaving its target unchanged.

CBO Estimates Fiscal 2024 Federal Budget Deficit Was $1.8 trillion

Logo of the Congressional Budget Office from cbo.gov.

The federal government’s fiscal year runs from October 1 to September 30 of the following calendar year. The Congressional Budget Office (CBO) estimates that the federal government’s budget deficit for fiscal 2024, which just ended, was $1.8 trillion. (The Office of Management and Budget (OMB) will release the official data on the budget later this month.)

The federal budget deficit increased by about $100 billion from fiscal 2023, although the comparison of the deficits in the two years is complicated by the question of how to account for the $333 billion in student debt cancellation that President Biden ordered (which would reduce federal revenues by that amount) but which wasn’t implemented because of a decision by the U.S. Supreme Court.

The following table from the CBO report compares federal receipts and outlays for fiscal years 2023 and 2024. Recipts increased by $479 billion from 2023 to 2024, but outlays increased by $617 billion, resulting in an increase of $139 billion in the federal budget deficit.

The following table shows the increases in the major spending categories in the federal budget. Spending on the Social Security, Medicare, and Medicaid programs increased by a total of $135 billion. The large increase in spending on the Department of Education is distorted by accounting for the reversal of the student debt cancellation following a Suprement Court ruling, as previously mentioned. The FDIC is the Federal Deposit Insurance Corporation, which had larger than normal expenditures in 2023 due the failure of several regional banks. (We discuss this episode in several earlier blog posts, including this one.) Interest on the public debt increased by $240 billion because of increases in the debt as a result of persistently high federal deficits and because of increases in the interest rates the Treasury has paid on new issues of bill, notes, and bonds necessary to fund those deficits. (We discuss the federal budget deficit and federal debt in Macroeconomics, Chapter 16, Section 16.6 (Economics, Chapter 26, Section 26.6).)

A troubling aspect of the large federal budget deficits is that they are occurring during a time of economic expansion when the economy is at full employment. The following figure, using data from the Bureau of Economic Analysis (BEA), shows that at an annual rate, the federal budget deficit has beening running between $1.9 trillion and $2.1 trillion each quarter since the first quarter of 2023, well after most of the federal spending increases to meet the Covid pandemic ended.

The following figure from the CBO shows trends in federal revenue and spending. From 1974 to 2023, federal spending averaged 21.o percent of GDP, but is forecast to rise to 24.9 percent of GDP by 2023. Federal revenue averaged 17.3 percent of GDP from 1974 to 2023 and is forecast to rise to 18.0 percent of GDP in 2034. As a result, the federal budget deficit, which had averaged 3.7 percent of GDP between 1974 and 2023 (already high in a longer historical context) will nearly double to 6.9 percent of GDP in 2034.

Slowing the growth of federal spending may prove difficult politically because the majority of spending increases are from manadatory spending on Social Security and Medicare, and from interest on the debt. Discretionary outlays are scheduled to decline in future years according to current law, but may well also increase if Congress and future presidents increase defense spending to meet the foreign challenges the country faces.

One possible course of future policy that would result in smaller future federal deficits is outlined in this post and the material at the included links.

(Probably) the Final Word on the Non-Recession of 2022

Image generated by GTP-4o to illustrate GDP.

About one month after a calendar quarter ends, the Bureau of Economic Analyis (BEA) releases its advanced estimate of real GDP. In July 2022, the BEA’s advance estimates indicated that real GDP had declined in both the first and second quarters. A common definition of a recession is two consecutive quarters of declining real GDP. Accordingly, in mid-2022 there were a number of articles in the media suggesting that the U.S. economy was in a recession.

But, as we discussed at the time in this blog post, most economists don’t follow the popular definition of a recession as being two consecutive quarters of declining real GDP. Instead, as we discuss in Macroeconomics, Chapter 10, Section 10.3 (Economics, Chapter 20, Section 20.3), economists typically follow the definition of a recession used by the National Bureau of Economic Research (NBER): “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

During the first half of 2022, the other data that the NBER tracks were all expanding rather than contracting. So, it seemed safe to conclude that despite the declines in real GDP in those quarters, the U.S. economy was not, in fact, in a recession.

That conclusion was confirmed by the BEA in September 2024 when it released its most recent revisions of real GDP . As the following table shows, although the BEA still estimates that real GDP fell during the first quarter of 2022, it now estimates that it increased during the second quarter.

In the earlier post from 2022, we also noted that the BEA publishes data on gross domestic income (GDI), as well as on GDP. As we discuss in Chapter 8, Section 8.1, when considering the circular-flow diagram, the value of every final good and service produced in the economy (GDP) should equal the value of all the income in the economy resulting from that production (GDI). The BEA has designed the two measures to be identical by including in GDI some non-income items, such as sales taxes and depreciation. But as we discuss in the Apply the Concept, “Should We Pay More Attention to Gross Domestic Income?” GDP and GDI are compiled by the BEA from different data sources and can sometimes significantly diverge.

We noted that although, according to the BEA’s advance estimates, real GDP declined during the first two quarters of 2022, real GDI increased. The following figure shows movements in real GDP and real GDI using the current estimates from the BEA. The revised estimates now show real GDP falling the first quarter of 2021 and increasing in the second quarter while real GDI is still estimated as rising in both quarters. The revisions closed some of the gap between real GDP and real GDI during this period by increasing the estimate for real GDP, which indicates that the advance estimate of real GDI was giving a more accurate measure of what was happening in the U.S. economy.

The figure shows that the revised estimates indicate that real GDP and real GDI moved closely together during 2021, differed somewhat during 2022—with real GDI being greater than real GDP—and differed more substantially during 2023 and 2024—with real GDP now being greater than real GDI. Because the two measures should be the same, we can expect that further revisions by the BEA will bring the two measures closer together.

It’s even possible, but unlikely, that further revisions of the data for 2022 could again present us with the paradox of real GDP declining for two quarters despite other measures of economic activity expanding.

Surprisingly Strong Jobs Report

The “Employment Situation” report (often referred to as the “jobs report”), released monthly by the Bureau of Labor Statistics (BLS), is always closely followed by economists and policymakers because it provides important insight in the current state of the U.S. economy. The jobs report for August, which was released in early September, showed signs that the labor market was cooling. The report played a role in the decision by the Fed’s policy-making Federal Open Market Committee to cut its target for the federal funds rate by 0.50 percentage point (50 basis points) at its meeting on September 17-18. A 0.25 percentage point (25 basis points) cut would have been more typical.

In a press conference following the meeting, Fed Chair Jerome Powell explained that one reason that the Fed’s policy-making Federal Open Market Committee (FOMC) cut its for the federal funds rate by 50 basis points rather than by 25 basis points was the state of the labor market: “In the labor market, conditions have continued to cool. Payroll job gains averaged 116,000 per month over the past three months, a notable step-down from the pace seen earlier in the year.”

The September jobs report released this morning (October 4) indicates that conditions in the labor market appear to have turned around. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Economists surveyed by the Wall Street Journal and by Bloomberg had forecast a net increase in payroll employment of 150,000 and an unchanged unemployment rate of 4.2 percent. The BLS reported a higher net increase of 250,000 jobs and a tick down of the unemployment rate to 4.1 percent. In addition, the BLS revised upward its estimates of the employment increases in July and August by a total of 72,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had seemed from the BLS’s initial estimates to be slow growth in employment from April to June has been partly reversed by revisions. With the current estimates, employment has been increasing since July at a pace that should reduce any concerns that U.S. economy is on the brink of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey increased from 168,000 in August to 430,000 in September. So, in this case the direction of change in the two surveys was the same, with both showing strong increases in the net number of jobs created in September.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly for the second month in a row. It declined from 4.2 percent in August to 4.1 percent in September.

The household survey also provides data on the employment-population ratio. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. It’s been unchanged since July at 80.9 percent, the higest level since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in September, up from a 3.9 percent increase in August.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic.

The 1-month rate of wage inflation of 4.5 percent in September is a decrease from the 5.6 percent rate in August. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

What effect will this jobs report likely have on the FOMC’s actions at its final two meetings of the year on November 6-7 and December 17-18? Some investors were expecting that the FOMC would cut its target for the federal funds rate by 50 basis points at its next meeting, matching the cut at its September meeting. This jobs report makes it seem more likely that the FOMC will cut its target by 25 basis points.

One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.4 percent to the FOMC cutting its target for the federal funds rate by 25 basis points percentage point at its next meeting and a probability of 2.6 percent to the FOMC leaving its target unchanged at a range of 4.75 percent to 5.00 percent. Investors see effectively no chance of a 50 basis point cut at the next meeting.

Latest PCE Report Shows Inflation Continuing to Fall

On September 27, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for August, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by annual changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, PCE inflation (the blue line) was 2.2 percent in August, down from 2.7 percent in July. Core PCE inflation (the red line) ticked up in August to 2.7 percent from 2.6 percent in July.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined from 1.9 percent in July to 1.1 percent in August, well below the Fed’s 2 percent inflation target. Core PCE inflation declined from 1.9 percent in July to 1.6 percent in August. Calculating inflation this way focuses only on the most recent data, and so reinforces the conclusion that inflation has slowed significantly from the higher rates seen at the beginning of this year.

The following figure shows other ways of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in August (calculated as a 12-month inflation rate), down only slightly from 2.6 percent in July—still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in August at 3.7 percent, the same as in July.

Today’s data indicate that the economy is still on a path for a soft landing in which the inflation rate returns to the Fed’s 2 percent target without the economy slipping into a recession. Looking forward, both the Federal Bank of Atlanta’s GDPNow forecast and the Federal Reserve Bank of New York’s GDP Nowcast project that real GDP will increase at annual rate of more than 3 percent in the third quarter (which ends in three days). So, at this point there is no indication that the economy is slipping into a recession. The next Employment Situation report will be released on October 4 and will provide more information on the state of the labor market.

Glenn Joins other Economists Who Have Served on the CEA in Calling for More Funding for the BLS

Image generated by GTP-4o of the U.S. Department of Labor building

The Census Bureau and the Bureau of Labor Statistics (BLS) jointly conduct the monthly Current Population Survey (CPS). As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), the BLS uses the data gathered by the CPS to calculate a number of important labor market statistics including the unemployment rate, the labor force participation rate, and the employment-population ratio.

Unfortunately, over the years Congress has not increased its appropriations for the BLS enough to cover the increasing costs of surveying 60,000 households each month. As a result, the BLS has announced that beginning in January 2025, it will be surveying fewer households in each month’s CPS.

Glenn has joined 120 other economists who have served over the years on the President’s Council of Economic Advisers (CEA) in writing a letter to Congress urging that the BLS be given sufficient funds to maintain the current size of the CPS sample and to begin steps to modernize the collection of the sample.

The letter notes that: “Reducing the CPS sample size will make its statistics less reliable…. will also hinder accurate analysis of states and local areas and subpopulations, including teenagers, seniors, veterans, people with disabilities, the self-employed, people who identify as Asian, Hispanic or Latino ethnicity, and Black or African Americans.”

The whole text of the letter can be read here.

Solved Problem: Did Caitlin Clark Break the Law of Demand?

Supports: Macroeconomics, Microeconomics, Economics, and Essentials of Economics, Chapter 3, Section 3.1.

Photo from theathletic.com

Caitlin Clark had a sensational college career at the University of Iowa, being named National Player of the Year in her junior and senior years. She was chosen first by the Indiana Fever in the 2024 Women’s National Basketball Association (WNBA) draft of college players. Her popularity drew large crowds to both her home and away games during the 2024 season.

In 2023, the Indiana Fever sold an average of 4,067 tickets to its home games. In 2024, with Clark on the team, the Fever sold an average of 17,036 to its home games. The average price the Fever charged per ticket increased from $60 in 2023 to $110 in 2024. As an article on theathletic.com put it: “Despite the higher price point, even more tickets were sold [by the Fever] this year.”

Can we conclude from this information that Caitlin Clark is so popular that the demance curve for Fever tickets is upward sloping? Briefly explain.

Solving the Problem
Step 1: Review the chapter material. This problem is about the effect of a price change on the quantity demand of a good or service, so you may want to review Chapter 3, Section 3.1, “The Demand Side of the Market.”

Step 2: Answer the question by explaining whether it’s likely that the demand curve for tickets to Fever games is upward sloping. It’s unlikely that the demand curve for tickets to Fever games is upward sloping. The law of demand states that, holding everything else constant, when the price of a product rises, the quantity demanded of the product will decrease. When the Fever raised ticket prices from $60 in 2023 to $100 in 2024, we would expect the result to be a movement up the demand curve for tickets, resulting in fewer tickets sold, provided that everything else that would affect the demand for tickets was constant between 2023 and 2024. But everything wasn’t constant because the Fever had Clark on the team in 2024 but not in 2023. Her popularity increased the demand for tickets, shifting the demand curve to the right. In other words, the shift in demand allowed the Fever to sell more tickets at a higher price—moving from a price of $60 and a quantity of 4,067 on the 2023 demand curve to a price of $110 and a quantity of 17,036 on the 2024 demand curve.