Consumer spending, which represents nearly 70 percent of GDP, has been quite strong thus far in 2023. While household spending has been volatile, smoothing it out over the past several quarters indicates underlying momentum. Yesterday's September retail sales data indicated continued strong spending.
The solid spending in the face of tightened monetary policy suggests consumption is likely supported by households' strong balance sheets as well as confidence in future labor income. I will be watching the spending data carefully, including those that hint at a slowdown. Though hard to measure, it seems that households are drawing down their liquid assets. Some other data supporting a slowing include more use of credit cards this year and a return of delinquency rates for consumer loans, which plunged over the course of the pandemic, to essentially their pre-pandemic levels.2 Also, as I mentioned earlier, financial conditions have tightened considerably since July. Of course, I have been waiting a while for tightening financial conditions to cause a significant slowing of spending, and I have been consistently surprised at the resilience of consumer spending. So I will be patient in waiting for the data to document how spending evolves.
Another component of GDP that I'll be watching is investment in non-residential structures. Manufacturing investment boosted real GDP growth in the first half of the year, partly driven by a surge in the construction of semiconductor and electric battery factories that began before new government subsidies were enacted and driven higher by that legislation. Recent data suggests this spending is leveling off at a new, higher level: Construction spending growth has flattened out in recent months, and so have new project starts. In addition, the considerably higher interest rates over the past three months can dampen this growth. Only time will tell whether these factors slow investment activity or whether the subsidy programs and the enthusiasm for onshore chip and battery production continue to encourage higher investment spending.
Let me turn now to the labor market. Since the FOMC's September meeting, the labor market data indicate continued tight conditions. The economy created 336,000 jobs in September, a robust figure that was much higher than forecasters expected. While the previous two job reports had signaled softer job growth, revisions to those reports added another 100,000 jobs. While down from the elevated levels seen in the first part of last year, the latest three-month average for new jobs of 266,000 is not that much different from the three-month average at the end of 2022 of 284,000. The inference is that job growth is still exceptionally strong and hasn't slowed much this year.
Other data, however, are showing some continued loosening of conditions in the labor market. For example, looking through some monthly volatility, the number of job openings for every person counted as looking for a job was 1.2 in 2019 and shot up to a peak of 2 in March 2022. As we tightened policy and put downward pressure on labor demand, this ratio fell to 1.8 at this time last year and is currently 1.5. In addition, labor force participation has moved up notably this year, particularly among prime-age workers. Looking across various measures of labor compensation, the rate of wage growth has also moderated, despite an unemployment rate that is near a 50-year low. These metrics are not yet at their pre-pandemic levels but are moving closer to levels that would be consistent with 2 percent inflation.
In sum, although the labor market is showing signs of loosening by various metrics, it is still unusually tight. While I anticipate that it will continue to loosen, I will be watching closely to see that this remains true.
Now let's talk about inflation. As reported a week ago, headline inflation based on the consumer price index (CPI) was 3.7 percent in the 12 months through September, down significantly from 8.2 percent the year before. Core inflation, excluding energy and food prices, was 4.1 percent, down from 6.7 percent last September. We will get an update on personal consumption expenditures (PCE) inflation next week, but based on data we received through August, the 12-month percent change in PCE inflation was 3.5 percent and core PCE inflation was 3.9 percent.
Focusing on the annualized three-month change in inflation gives a better, albeit noisy, indicator of inflation dynamics. With this measure, core CPI was 3.1 percent based on data from July through September. Core PCE, increased 2 percent based on June through August. Across the categories that make up these price indexes, one finds that more than half of them had annualized monthly price increases of less than 3 percent.
Clearly, this is progress. And there are some factors that would be expected to put downward pressure on inflation in the coming months. Monetary policy is restrictive. Households are spending the excess saving accumulated during the pandemic and have growing levels of debt, which are likely to moderate spending growth. The increase in medium and longer-term interest rates over the past several months should weigh on both household and business spending.
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