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Job Market Bounces Back from Weak Start to the Year

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This morning (April 3), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for March. The report showed a stronger than expected increase in employment.

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 Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 178,000 nonfarm jobs during March. Economists surveyed by the Wall Street Journal had forecast an increase of only 59,000 jobs. Economists surveyed by FactSet had a similar forecast of a net increase of 60,000 jobs. The BLS revised downward its previous estimates of employment in January and February by a combined 7,000 jobs. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure shows an unusual pattern in the job market since the middle of 2025 in which months of declining employment and months of increasing employment alternate.

These fluctuations of net employment gains around zero are consistent with a recent analysis from economists at the Federal Reserve Bank of Dallas that estimates the break-even rate of employment growth—the rate of employment growth at which the unemployment rate remains constant. They note that “continued net outflows of unauthorized immigrants, together with shifts in labor force participation, have pushed the monthly break-even employment growth lower than previously thought.” They conclude that: “The break-even rate [of employment growth] peaked at about 250,000 jobs per month in 2023, fell to roughly 10,000 by July 2025, and declined to near zero thereafter, averaging about –3,000 jobs per month from August to December 2025, indicating, if anything, a modest net jobs loss over this period.” In other words, in the current labor market, the break-even rate of employment growth may actually be negative.

The unemployment rate, which is calculated from data in the household survey, declined from 4.4 percent in February for 4.3 percent in March. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 64,000 in March. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, the establishment survey shows a strong increase in net employment, while the household survey shows a decline. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In March the ratio was 80.7 percent, unchanged from February. The prime-age population ratio remains above its value for most of the period since 2001. The continued high levels of the prime-age employment-population ratio indicate some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline in federal government employment of 166,000 in October, with additional declines in the following five months. The total decline in federal government employment since the beginning of February 2025 is 352,000. But the decline has been slowing, with a net decrease of 18,000 jobs in March. So, the effect of layoffs of federal government workers is no longer a major factor in month-to-month changes in total employment.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.5 percent in March, down from 3.8 percent in February.

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. In March, the 1-month rate of wage inflation was 2.9 percent, down from 4.6 percen in February. So both 12-month and 1-month wage inflation show wages increasing slowing.

What effect is this jobs report likely to have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee at its next meeting on April 28–29? Although employment growth has been slow in recent months, as noted earlier, even that slow rate may be close to the break-even rate of employment growth. So, it’s unlikely that the FOMC will see current conditions in the job market as warranting a cut in the committee’s target range for the federal funds rate. In addition, disruptions to the world oil market as a result of the conflict in Iran have caused oil prices to rise, putting upward pressure on the price level. These factors make it likely that the committee will keep its target range for the federal funds rate unchanged at its next meeting.

The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its April meeting was 99.5 percent this afternoon, only a slight decrease from 100.0 percent yesterday.

FOMC Holds Its Target for the Federal Funds Rate Steady at Powell’s Next-to-Last Meeting

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Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) had the expected result with the committee deciding to leave unchanged its target for the federal funds rate at its current range of 3.50 percent to 3.75 percent. The members of the committee voted 11 to in favor of the decision. Fed Governor Stephen Miran voted against the decision, preferring to lower the target range for the federal funds rate by 0.25 percentage point (25 basis points).

The following figure shows for the period since January 2010, the upper bound (the blue line) and the lower bound (the green line) for the FOMC’s target range for the federal funds rate, as well as the actual values for the federal funds rate (the red line). Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate within its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does after its March, June, September, and December meetings. The SEP presents median values of the 19 committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release. (Note that only 5 of the district bank presidents vote at FOMC meetings, although all 12 presidents participate in the discussions and prepare forecasts for the SEP.)

There are several aspects of these forecasts worth noting:

Compared with December, the committee members increased their forecasts of real GDP growth for each year from 2025 through 2027. The committee members also increased their forecast of long-run growth in real GDP to 2.0 percent from 1.8 percent in December. Although that increase may seem small, as we discuss in Macroeconomics, Chapter 10, Section 10.1 (Economics, Chapter 20, Section 20.1), over time, small increases in growth rates in real GDP can result in substantial increases in the standard of living. Despite increasing their forecast of growth in real GDP, committee members left their forecasts of the unemployment rate unchanged.
Committee members reduced their forecast for 2026 of personal consumption expenditures (PCE) price inflation significantly to 2.7 percent from 2.4 percent in December. They raised their forecast for inflation in 2027 slightly and continued to forecast that PCE inflation will decline to the Fed’s 2.0 percent annual target in 2028.
The committee’s forecasts of the federal funds rate at the end of each year from 2026 through 2028 were unchanged but the forecast for the long-run federal funds rate was increased to 3.1 percent from 3.0 percent in December.

Prior to the meeting there was much discussion in the business press and among investment analysts about the dot plot, shown below. Each dot in the plot represents the projection of an individual committee member. (The committee doesn’t disclose which member is associated with which dot.) Note that there are 19 dots, representing the 7 members of the Fed’s Board of Governors and all 12 presidents of the Fed’s district banks.

The plots on the far left of the figure represent the projections by the 19 members of the value of the federal funds rate at the end of 2026. The plots indicate that at this point there is majority support on the committee for one 25 basis point cut by the end of the year in the federal funds rate from its current range of 3.50 percent to 3.25 percent to a range of 3.25 percent to 3.00 percent. The plots on the far right of the figure indicate that there is substantial disagreement among committee members as to what the long-run value of the federal funds rate—the so-called neutral rate—should be. Of course, the plots only represent the forecasts of the committee members and individual committee members are likely to adjust their forecasts as additional macroeconomic data become available in the coming months.

During his press conference following the meeting, Powell indicated that the effects of the conflict in Iran on the U.S. economy were uncertain. He noted that traditionally central banks “look through” increases in oil prices because they result in only a one-time increase in the price level rather than in sustained inflation. He noted, though, that the committee might take steps to offset the effect of higher oil prices if there were an indication that the price increases were affecting long-run expectations of inflation.

He noted that the increase in inflation in recent months was largely due to the effects of the increase in tariffs on goods prices. Powell indicated that committee members expect that the tariff increases will have largely passed through the economy by the middle of the year. Powell attributed committee members increasing their forecast of long-run growth in real GDP to their expectation that recent increases in productivity growth would be sustained.

Finally, Powell discussed the end of his term as chair on May 15. (Powell will be chair for one more meeting of the FOMC on April 28–29.) He stated that if the Senate doesn’t confirm Kevin Warsh as his replacement as chair by May 15, he would follow the law and Fed tradition by continuing to serve as chair in a temporary capacity. Powell’s term as a member of the Board of Governors doesn’t end until January 31, 2028. He indicated that he will only step down from his position on the Board if the legal case the Department of Justice has opened against him for having given allegedly false testimony to Congress is “well and truly over, with transparency and finality.”

Real GDP Growth Revised Downward as PCE Inflation Is Slightly Lower than Expected

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The Burea of Economic Analysis (BEA) released two reports this morning. One report included a revision of estimated growth in real GDP during the fourth quarter of 2025 from an advance estimate of 1.4 percent—which was already lower than had been expected—to 0.7 percent. Economists surveyed by the Wall Street Journal had expected that fourth quarter growth would be revised upward to 1.5 percent. The BEA’s “Personal Income and Outlays, January 2026” report indicated that the personal consumption expenditures (PCE) price index had increased 2.8 percent over the past year, slightly below the 2.9 percent that economists had expected.

The following figure shows the estimated rates of GDP growth in each quarter beginning with the first quarter of 2021.

As the following figure—taken from the BEA report—shows, consumer spending, investment spending, government spending, and net exports were all revised downward from the original advance estimates. The decline in real government expenditures of –1.0 percent at an annual rate—revised downward from –0.9 percent—was the most important factor contributing to the slowing growth in real GDP during the fourth quarter. The decline in government expenditures is largely attributable to the federal government shutdown, which lasted from October 1, 2025 to November 12, 2025.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased by 1.9 percent in the fourth quarter at an annual rate—revised downward from the advance estimate of 2.4 percent—which was well above the 0.9 percent increase in real GDP and slightly above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable and likely is a better indicator of the underlying growth rate in the economy than is growth in real GDP.

The second BEA report this morning included monthly data on the personal consumption expenditures (PCE) price index for January 2026. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2.0 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices— with inflation measured as the percentage change in the PCE from the same month in the previous year. In January 2026, headline PCE inflation was 2.8 percent, down slightly from 2.9 percent in December 2025 (which was also the inflation rate economists had expected for January 2026). Core PCE inflation in January was 3.1 percent, up slightly from 3.0 in December. Both headline PCE inflation and core PCE inflation remained above the Fed’s 2.0 percent annual inflation target.

The following figure shows headline 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 the figure below shows 1-month inflation.) Measured this way, headline PCE inflation declined to 3.4 percent in January, from to 4.4 percent in December. Core PCE inflation fell to 4.4 percent in January from 4.5 percent in December. Measured this way, both core and headline PCE inflation were well above the Fed’s target.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.6 percent in January, down from 2.7 percent in December. Core market-based PCE inflation was 2.8 percent in January, up from 2.7 in December. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation was 3.3 percent in January, down from 4.3 percent in December. One-month core market-based inflation increased to 4.6 percent in January from 4.4 percent in December. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

Today’s data arrive against the backdrop of the conflict in Iran. According to the AAA, gasoline prices have risen to an average of $3.63 per gallon from $2.94 a month ago. Assuming that the conflict is resolved relatively soon, that increase should have only a transitory effect on inflation. Chair Powell as indicated that he believes that the upward pressure of tariffs on the price level is also still working its way through the economy.

Recent macroeconomic data, along with the effects of tariffs and the conflict in Iran, make it unlikely that members of the Fed’s policymaking Federal Open Market Committee (FOMC) will reduce their target range for the federal funds rate any time soon. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its March 17–18 meeting decreased only slightly this afternoon to 99.1 percent from rom 99.9 percent yesterday. Investors don’t assign a greater than 50 percent probability to the FOMC cutting its federal funds rate target at any meeting before the meeting on October 27–28.

CPI Inflation Comes in about as Expected

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The news this morning on inflation was ho-hum. The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for February. Inflation was about as expected and remained moderately above the Federal Reserve’s 2 percent annual inflation target. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months.

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in February, unchanged from January.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in February, also unchanged from January.

Headline and core inflation were both equal to the forecasts of economists surveyed by the Wall Street Journal.

In the following figure, 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. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 3.2 percent in February, up from 2.1 percent in January. Core inflation (the red line) decreased to 2.6 percent in February from 3.6 percent in January.

The 1-month and 12-month headline and core inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running somewhat above the Fed’s 2 percent inflation target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target. February data on the PCE will be released on Friday.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures rose in February. Food at home increased 5.4 percent in February, up from 2.3 percent in January. Food away from home increased 3.9 percent in February, up from 1.8 percent in January. Again, 1-month inflation rates can be volatile.

Gasoline prices, which bounce around a lot from month to month, were up in February. The following figure shows 1-month inflation in gasoline prices. In February the price of gasoline increase at an annual rate of 10.1 percent, after having fallen at an annual rate of 32.2 percent in January. These data were gathered before the increase in gasoline prices caused by the conflict in Iran. The increase in food and gasoline prices helped push headline inflation above core inflation in February.

The affordability discussion has also focused on the cost of housing. The price of shelter in the CPI, as explained here, includes both rent paid for an apartment or a 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 in the CPI to account for the value of the services an owner receives from living in an apartment or house. The following figure shows 1-month inflation in shelter.

One-month inflation in shelter, which has been trending down since early 2023, increased slightly to 2.8 percent in February from 2.7 in January.

It’s unlikely that this inflation report will have much effect on the views of the members of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC). The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting increased only slightly from 98.4 percent yesterday to 99.4 percent this afternoon.

Surprising Decline in Employment in the February Jobs Report

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This morning (March 6), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for February. The jobs report for January showed a much stronger than expected increase in employment. Today’s report was a surprise in the opposite direction with employment unexpectedly declining.

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 Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net decrease of 92,000 nonfarm jobs during February. Economists surveyed by the Wall Street Journal had forecast an increase of 50,000 jobs. Economists surveyed by FactSet had a higher forecast of a net increase of 70,000 jobs. The BLS revised downward its previous estimates of employment in December and January by a combined 69,000 jobs. The revised estimate indicates that employment fell in December by 17,000 rather than increasing by 48,000 as in the previous estimate. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The current estimates show a net decrease in employment during five of the last nine months.

The unemployment rate, which is calculated from data in the household survey, increased to 4.4 percent in February for 4.3 percent in January. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 185,000 in February. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, both surveys indicate a net decline in employment. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In February the ratio was 80.7 percent, down slightly from 80.8 percent in January. The prime-age population ratio remains above its value for most of the period since 2001. The continued high levels of the prime-age employment-population ratio indicate some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline in federal government employment of 166,000 in October, with additional declines in the following four months. The total decline in federal government employment since the beginning of February 2025 is 327,000. But the decline has been slowing, with a net decrease of 10,000 jobs in February.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.8 percent in February, up slightly from 3.7 percent in January.

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. In February, the 1-month rate of wage inflation was 5.0 percent, unchanged from January. This high rate of wage growth is surprising given the decline in employment. But two month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect is this weak jobs report likely to have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee at its next meeting on March 17–18? Taken by itself, employment having fallen in five of the last nine months might be expected to cause the committee to cut its target range for the federal funds rate. But disruptions to the world oil market as a result of the U.S. and Israeli bombing campaign in Iraq have caused oil prices to rise, putting upward pressure on the price level. In addition, wage growth in the United States appears higher than is consistent with price inflation returning to the Fed’s 2 percent annual target. These factors make it likely that the committee will keep its target range for the federal funds rate unchanged at its next meeting.

The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its March meeting was largely unchanged this morning at 95.6 percent, only a slight decrease from 96.3 percent yesterday.

New Real GDP Data Shows that Growth Slowed Substantially in the Fourth Quarter … or Did It?

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Recent macro data had been showing relatively strong growth in output and steady growth in employment. This morning’s release of the initial estimate of real GDP growth for the fourth quarter of 2025 from the Bureau of Economic Analysis (BEA) was expected to show continuing solid growth. (The report can be found here.) Instead, the BEA estimates that real GDP increased in the fourth quarter by only 1.4 percent measured at an annual rate. Growth was down sharply from the 4.4 percent increase in the third quarter of 2025. Economists surveyed by the Wall Street Journal had forecast a 2.5 percent increase. The following figure shows the estimated rates of GDP growth in each quarter beginning with the first quarter of 2021.

As the following figure—taken from the BEA report—shows, the decline in real government expenditures of –0.90 percent at an annual rate was the most important factor contributing to the slowing growth in real GDP during the fourth quarter. The decline in government expenditures is largely attributable to the federal government shutdown, which lasted from October 1, 2025 to November 12, 2025.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased by 2.4 percent at an annual rate in the fourth quarter, which was well above the 1.4 percent increase in real GDP and also above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable and likely is a better indicator of the underlying growth rate in the economy than is growth in real GDP.

The BEA report this morning also included quarterly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since the first quarter of 2019, with inflation measured as the percentage change in the PCE from the same quarter in the previous year. In the fourth quarter of 2025, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in the third quarter. Core PCE inflation in the third quarter was 2.9 percent, unchanged from the third quarter. Both headline PCE inflation and core PCE inflation remained above the Fed’s 2 percent annual inflation target.

The following figure shows quarterly PCE inflation and quarterly core PCE inflation calculated by compounding the current quarter’s rate over an entire year. Measured this way, headline PCE inflation increased to 2.9 percent in the fourth quarter of 2025, up from to 2.8 percent in the third quarter. Core PCE inflation fell to 2.7 percent in the fourth quarter of 2025 from 2.9 percent in the third quarter. Measured this way, both core and headline PCE inflation were also above the Fed’s target.

Today was also notable for a decision from the U.S. Supreme Court that invalidated some of the Trump administration’s tariff increases that began to be implemented in April 2025. President Trump announced this afternoon that he would impose a new 10 percent across-the-board tariff, relying on Section 122 of the Trade Act of 1974, rather than on the International Emergency Economic Powers Act (IEEPA), which the Supreme Court ruled today did not authorize presidents to unilaterally impose tariffs.

Today’s developments appeared unlikely to have much effect on the views of the members of the Fed’s policymaking Federal Open Market Committee (FOMC). The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting increased only slightly from 94.6 percent yesterday to 96.0 percent this afternoon.

CPI Inflation Comes in Lower than Expected

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There was good news this morning on inflation. (Although maybe not quite good enough to justify the exuberance of the people in the AI-generated image above!) The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for January. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months. (Today’s report was delayed two days by the recent brief government shutdown.)

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in January, down from 2.7 percent in December.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in January, down from 2.6 percent in December.

Headline inflation was lower than the forecast of economists surveyed by FactSet, while core inflation was at the forecast rate.

In the following figure, 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. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 2.1 percent in January, down from 3.6 percent in December. Core inflation (the red line) increased to 3.6 percent in January from 2.8 percent in December.

The 1-month and 12-month headline inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running slightly above the Fed’s 2 percent inflation target. The 1-month core inflation rate shows inflation running well above the Fed’s target.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. These concerns are thought to have contributed to Zohran Mamdani’s victory in New York City mayoral race. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures fell in January from the very high leves of December. Food at home increased 2.3 percent in January, down sharply from up from 7.8 percent in December. Food away from home increased 1.8 percent in January, also down sharply from 8.7 percent in December. Again, 1-month inflation rates can be volatile, but the deceleration in inflation in food prices would be a welcome development if it can be sustained in future months.

There was also good news in the falling price of gasoline. The following figure shows 1-month inflation in gasoline prices. In January the price of gasoline fell at an annual rate of 32.2 percent, after having fallen at an annual rate of 4.0 percent in December. As those values imply, 1-month inflation rates in gasoline are quite volatile.

One-month inflation in shelter decreased to 2.7 percent in January from 4.7 in December, which is also good news if it can be sustained.

What effect have the tariffs that the Trump administration announced on April 2 had on inflation? (Note that many of the tariff increases announced on April 2 have since been reduced.) There has been a debate among policymakers and economists as to whether the full effects of tariff increases have already shown up in prices of final goods. In his press conference following the last meeing of the Fed’s Federal Open Market Committee (FOMC), Fed Chair Jerome Powell indicated that he believed that tariffs would cause further price increases later in the year:

“The U.S. economy has pushed right through [the tariff increases]. Partly that is—that the way that what was implemented was significantly less than what was announced at the beginning. In addition, other countries didn’t retaliate, and, in addition, a good part of it hasn’t been passed through to consumers yet. It’s being—it’s being taken by companies that stand between the consumer and the exporter.”

The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and 12-month inflation in services, which are less likely to be affected by tariffs. In January, inflation in durable goods was 0.4 percent, down from 1.2 percent in December. Inflation in services was 3.2 percent in January, down slightly from 3.3 percent in December. So to this point, upward pressure on goods prices from the tariffs is not reflected in the most recent data.

It’s unlikely that this inflation report will have much effect on the views of the members of the FOMC. The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting declined only slightly from 91.6 percent yesterday to 90.2 percent after the release of today’s inflation report.

Surprisingly Strong Jobs Report Accompanied by a Large Downward Annual Benchmark Revision

Image created by ChatGPT

This morning (February 11), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for January. The report was originally scheduled to be released last Friday but was postponed by the brief federal government shutdown. The data in the report show that the labor market was much stronger than expected in January.

According to the establishment survey, there was a net increase of 130,000 nonfarm jobs during January. This increase was well above the increase of 55,000 that economists surveyed by the Wall Street Journal had forecast. Economists surveyed by Bloomberg had a higher forecast of 65,000 net jobs. The BLS revised downward its previous estimates of employment in November and December by a combined 17,000 jobs. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The increase in net jobs in January was the largest since December 2024.

The unemployment rate, which is calculated from data in the household survey, fell from 4.4 percent in December to 4.3 percent in January. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 528,000 in January, far above the increase in jobs from the payroll survey. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, both surveys indicate unexpectedly strong job growth, with the increase in household employment being particularly strong. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In January the ratio was 80.9 percent, the highest since September 2024. In addition to matching the recent highs reached in mid-2024, the prime-age employment-population ratio is above what the ratio was in any month since April 2001. The continued high levels of the prime-age employment-population ratio indicates some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline federal government employment of 166,000 in October, with additional declines in the following three months. The total decline in federal government employment since the beginning of February 2025 is 324,000.

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. In January, the 1-month rate of wage inflation was 5.0 percent, up from 0.7 percent in December. This increase in wage growth may be an indication of a strengthening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

In today’s jobs report, the BLS also included its final annual benchmark revision to the establishment employment data. (We discussed the preliminary annual revision in this blog post last September.) The following table from the jobs report indicates that the revision was quite substantial. The revised estimate of payroll employment is 1,029,000 jobs lower than the original estimate. The increase in total nonfarm employment in 2025 was revised down to only 181,000 from the original estimate of 584,000. Leaving aside the collapse in employment in 2020 during the Covid pandemic, job growth in 2025 was the slowest since 2010 in the immediate aftermath of the Great Recession of 2007–2009.

Despite the large downward revision to job growth in 2025, the strong job growth for January in today’s jobs report makes it unlikely that the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) will lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting jumped from 79.9 percent yesterday to 92.1 percent after the release of today’s jobs report.

December JOLTS Report Shows Possible Labor Market Weakening

Image created by ChatGPT

Today (February 5), the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for December 2025. The report indicated that labor market conditions may be weakening. The following figure shows that the rate of job openings fell to 3.9 percent in December from 4.2 percent in November. The rate was 4.5 percent in October. The job openings rate is the lowest since April 2020, at the start of the Covid pandemic. We should note the usual caveat that the monthly JOLTS data is subject to potentially large revisions as the BLS receives more complete data.

(The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The rate of job openings is the number of job openings divided by the number of job openings plus the number employed workers, multiplied by 100.)

In the following figure, we show a measure of the state of the labor market that economists frequently use: the total number of job openings to the total number of people unemployed. In December there were 0.87 job openings per unemployed person, the lowest value for that measure since March 2021, during the recovery from the pandemic. The value was 1.0 in September. (Note that data for October and November are unavailable because the data weren’t collected during the shutdown of the federal government from October 1 to November 12 last year.) The value for December is well below the 1.21 job openings per employed person in February 2020, just before the pandemic. (Note that, as we discussed in this blog post, the employment-population ratio for prime age workers, which many economists consider a key measure of the state of the labor market, rose in December, putting it above what the ratio was in any month during the period from January 2008 to February 2020.)

The rate at which workers are willing to quit their jobs is an indication of how they perceive the ease of finding a new job. As the following figure shows, the quit rate declined slowly from a peak of 3 percent in late 2021 and early 2022 to 2.0 percent in August 2024, the same value as in December 2025. That rate is below the rate during 2019 and early 2020. By this measure, workers’ perceptions of the state of the labor market have remained remarkably stable over the last year and a half.

Overall, this JOLTS report is consistent with what some economists have labeled a “slow hire, slow fire” labor market. Fed Chair Jerome Powell’s remarks at his press conference following the last meeting of the Federal Open Market Committee (FOMC) indicates that Fed policymakers share this view, which Powell believes complicates monetary policymaking:

“So there are lots of … little places that suggest that the labor market has softened, but part of … payroll job softening is that both the supply and demand for labor has come down … growth in those two have come down. So that makes it a difficult time to read the labor market. So, imagine they both came down a lot, to the point where there is no job growth. Is that full employment? In a sense it is. If demand and supply are … in balance, you could say that’s full employment. At the same time, is it—do we really feel like … that’s a maximum employment economy? It’s a challenging—it’s very challenging and quite unusual situation.”

The BLS was scheduled to release its monthly “Employment Situation” report (often called the “jobs report”) for January 2026 tomorrow. Because of the temporary lapse in funding that began Saturday, the report will instead be released next Wednesday, February 11. That report will provide additional data on the state of the labor market. (Note that the data in the JOLTS report lag the data in the “Employment Situation” report by one month.)

President Trump Nominates Kevin Warsh to be Fed Chair

Photo of Kevin Warsh from Bloomberg News via the Wall Street Journal

This morning, President Trump ended the suspense over who he would nominate for Chair of the Board of Governors of the Federal Reserve by choosing Kevin Warsh. Warsh was considered one of the four finalists, along with Kevin Hassett, director of the National Economic Council, Fed Governor Christopher Waller, and Rick Rieder, who is an executive at BlackRock, an investment firm.

Warsh had been appointed to the Board of Governors in 2006 by President George W. Bush. Warsh was the youngest person ever appointed to the Board and served from 2006 to 2011. He is generally credited with having been heavily involved in formulating policy during the Great Financial Crisis of 2007–2009. He, along with Fed Chair Ben Bernanke, Fed Governor Donald Kohn, and New York Fed President Timothy Geithner were labeled the “four musketeers” of monetary policy during that period. (We discuss the reasons why during that period Bernanke relied on a small group for policymaking in Money, Banking, and the Financial System, Chapter 13.)

Warsh had been considered an inflation hawk, which would indicate that he would be in favor of keeping the target for the federal funds relatively high until inflation returns to the Fed’s 2 percent annual target and would also want to shrink the Fed’s balance sheet by continuing quantitative tightening (QT). Warsh’s current views are summarized in an op-ed he wrote for the Wall Street Journal in November titled” The Federal Reserve’s Broken Leadership” (a subscription may be required). In that op-ed, Warsh seems to advocate that the Federal Open Market Committee (FOMC) should be lowering its target for the federal funds rate more quickly. Presumably, Warsh’s views on appropriate monetary policy will be discussed at his confirmation hearing.

Assuming that Warsh has sufficient support in the Senate to be confirmed there remains the question of which seat on the Board of Governors he will fill. Current Chair Jerome Powell’s term as chair expires on May 15, 2026. If Powell follows recent precedent, he will step down when his term as chair ends, providing an open seat that Warsh can fill. But Powell’s term as a Fed governor doesn’t end until January 31, 2028, so he could chose to remain on the board until that time. If Powell doesn’t step down, Warsh would presumably fill the seat currently occupied by Stephen Miran, whose term technically ends tomorrow (January 31). Miran will likely remain on the board until Warsh is confirmed.

The Wall Street Journal printed a useful graphic showing the current membership of the board. Powell is listed with the Presidents Obama and Biden’s appointees because he was first appointed to the board by President Obama in 2012. But Powell was appointed as Fed chair by President Trump in 2018. He was reappointed as chair by President Biden in 2022. If Powell steps down from the board when Warsh is confirmed and if Miran is appointed to another term, or if he steps down and President Trump appoints someone else to that seat, President Trump will have appointed a majority of board members. It’s worth remembering that 5 Fed District Bank presidents vote at each meeting of the FOMC (all 12 District Bank presidents attend each meeting) and that District Bank presidents are not appointed by the U.S. president.