Economic data this morning broadly came in healthier than expected, including weekly jobless claims. Initial claims were expected to go unchanged at 220K.  While that previous week’s reading was revised up to 221K, this week’s print fell all the way down to 202K. That is the lowest reading on jobless claims since the week of October 14th and September 16th before that. In all, that makes for one of the lowest readings on claims since January of last year.

Before seasonal adjustment, claims are largely following the usual seasonal pattern having been trending higher since the early fall.  Currently at 248.3K, unadjusted claims are running at the lowest level for the comparable week of the year since 1969.

Continuing claims have gotten much more elevated than initial claims over the past few months. Currently totaling 1.876 million, continuing claims have risen meaningfully from the low of 1.658 million put in place just three months ago. However, the consistent pace of increases over that span (every week from September 16th through the first week of November saw a week over week increase) has slowed, having been more choppy in the past month.  In fact, at 1.876 million, the current reading is still almost 50K below the recent high of 1.925 million set in mid-November.

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This morning’s Consumer Price Index for November was mostly in line with expectations (although the headline reading was slightly higher than expected), and the lack of any meaningful surprises has allowed the market to continue with what has lately been the path of least resistance, which has been higher. The report also showed that the most rapid leg of disinflation is most likely behind us, and while that could lead some to believe that the road ahead will be a slog, that isn’t necessarily the case.

For starters, the focus of monthly inflation reports lately has been in Core CPI (ex-food and energy). After peaking at 6.6% in June 2022, the November year/year reading came in at 4.0% for the second month in a row.

The chart below shows the historical 12-month rate of change in the y/y core CPI.  Over the last 12 months, that rate of increase has declined by two full percentage points, and outside of the prior two months, that is one of the sharpest declines since the early 1980s.  In other words, the 12-month rate of change is still declining, but the pace of decline is slowing.

November’s streak also ended what has been a monumental streak of monthly declines in the y/y core CPI reading. At seven months in October, it was the second longest streak on record, trailing only the ten-month streak of declines ending in December 1975.

Understandably, the end of the streak of declines along with the slowing rate of decline in the y/y core CPI reading could lead one to think that inflation levels are plateauing at a higher level.  However, a look at the trend of monthly prints in core CPI shows a potential tailwind in the months ahead.  The chart below shows the monthly change in core CPI over the last 24 months. While it hasn’t exactly been linear, the trend is lower.  In the twelve months from December 2021 through November 2022, eight out of twelve monthly prints were 0.5% or above, but in the last twelve months, only one print has been 0.5%.

Just looking at the last year (shaded area in chart) it’s a similar trend.  From December 2022 through May 2022, every monthly print was 0.4% or above, but in the most recent six months, every print has been 0.3% or below.  If just the trend of the last six months remains in place, for the next six months the y/y reading will be replacing monthly prints of 0.4% or more with prints of 0.3% or less which should help to keep the trend of disinflation going.

The NFIB unveiled its latest look at small business sentiment early this morning. The headline number remains in the bottom decile of its historical range, falling 0.1 points to 90.6 in November. That is compared to expectations which called for the number to be unchanged last month.

Across the categories factoring into the index, breadth was mixed in November with four categories falling, four rising, and one unchanged.  Like the headline number, many categories are also in the bottom few percentiles of their respective historical ranges, albeit with some exceptions like robust readings in plans to increase employment, current inventories, and job openings hard to fill.

As we discussed in our Morning Lineup, combining the report’s readings on employment shows some rebounding conditions for labor markets over the past few months.  Looking more closely, though, it is hard to say labor market conditions are materially accelerating.  As shown, hiring plans have risen, but on net more companies are reporting negative employment changes.  In a similar vein, compensation plans have risen sharply including a six point jump month over month in November (the largest one month increase since last October and the third largest on record), even though actual changes to compensation have been flat. Meanwhile, fewer businesses are reporting job openings are hard to fill. Small businesses are showing labor conditions have cooled over the past couple of years but are far from weak as any more recent improvements have been from plans rather than observed changes.

Similarly, sales expectations rebounded in November, contrary to a flat reading on actual sales and earnings changes. Perhaps most importantly, the share of businesses reporting higher prices has fallen down to 25,  matching the July low.  In combination with the higher reading on sales expectations, that likely helped the number of firms reporting now as a good time to expand.

Looking at the reverse, of those reporting now as not a good time to expand, the single biggest reason given for such sentiment was economic conditions.  That is typically the most widely cited reason historically followed by political climate (the NFIB has a tendency to be sensitive to politics, namely which party holds the presidency), but for the first time in at least a decade, financial conditions and interest rates earned the number two spot.  As shown below, the number of firms reporting that rates are holding them back from expanding has risen steadily since the current tightening cycle began.

As mentioned previously, actual earnings changes saw no improvement in November and are sitting near historically weak levels.  As for the reasons given for lower earnings, increased costs remain a key reason, but November also saw a significant jump in those reporting sales volumes as a problem.  In other words, inflation and weaker demand appear to be weighing on small business earnings.

Despite the burden of interest rates and expectations for credit conditions sitting at the lowest levels in over a decade, small businesses have actually increased capital expenditures dramatically to a new post-pandemic high. However, that is counter to capital expenditure plans, which have fallen in the past few months, and inventories showing drawdowns.