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Here's a selection of charts that I'm paying special attention to these days. If there's a theme emerging from these snapshots of the economy and financial markets, it's a generally upbeat one, featuring continued low inflation, moderate and improving growth, and a gradual improvement in the fiscal outlook.
Chart #1
Chart #1 shows the 6- and 12-month growth rate of private sector jobs—the ones that really count. From a long-term perspective, it looks like the economy is growing at an unusually slow pace—barely a crawl. But considering the massive deportations of illegals and the virtual closure of our borders, it's not surprising. Some will argue that this shows an economy hovering on the brink of "stall speed," but I think that's an analogy that doesn't really apply to an economy. Economies have a strong tendency to grow if they are not burdened by abrupt and unforeseen changes in monetary and fiscal policy. Meanwhile, it is comforting to see that new claims for unemployment show absolutely no sign of any fundamental deterioration in the outlook for business profits. Firings are low and stable. The worst that can be said about jobs is that there aren't many new jobs being created. But that could be improving.
Chart #2
Chart #2 shows the monthly change in private sector jobs, which appears to have picked up in the past month. It's too early to claim victory after just one month of improvement, but some of the following charts also show recent improvement.
Chart #3
Chart #3 shows the results of a monthly survey of purchasing managers. It has shown pretty lackluster levels for the past several years, followed by an exceptionally strong January report. This could be the first sign of a long-expected surge in the outlook for business manufacturing activity. Historically, readings below 47 have frequently coincided with recessionary conditions. Readings north of 50 almost always occur during periods of decent economic growth. If the recent report is not reversed, then we could be on the verge of a very welcome growth spurt.
Chart #4
Chart #4 shows the level of the federal government workforce. The past year has been dominated by an astonishing 11% decline in the federal workforce—the by-product of Trump's aggressive attack on the Deep State, in particular the Dept. of Education. As the chart also shows, the federal workforce today is as small as it has been since 1966! There are now 324K fewer regulators of the economy. A small government workforce equates to a significant reduction in regulatory burdens, which are typically a cost that most businesses would be happy to avoid. This frees up resources for productive activity, and this is an unalloyed Good Thing. NO ONE came close to predicting that the federal government workforce would ever decline by as much as it has in the past year.
Note that the spikes in the data that occur every 10 years correspond to the temporary hiring of people needed to conduct the Census.
Chart #5
Chart #5 shows the year over year change in the Consumer Price Index, compared to a version of the CPI that excludes shelter costs (which make up about ⅓ of the CPI). The gap between the two that shows up in the past several years is the direct result of an over-estimation by the BLS of shelter costs. That problem is now behind us, and we are left with inflation that is only moderately above 2%.
Chart #6
Chart #6 focuses on shelter costs (which are called Owner's Equivalent Rent). This is what you would be paying if you had to rent the house you live in, and it is something that the BLS manufactures inside its computers, since nowhere does there exist such a thing in the real world. Here we see that in the past month and past 3 months, the annualized change in this measure of shelter costs has fallen back—finally—to what it has tended to average in normal times. That explains why the gap between the two lines in Chart #5 has disappeared.
Chart #7
Chart #7 has been featured regularly on this blog for the past several years. It is designed to show that the BLS's calculation of shelter costs (OER) is highly correlated to the year over year change in housing prices (blue line) from 18 months prior. It took longer for OER to fall (given the prior decline in housing price inflation) than I thought, but the two lines are now back in sync at a level that is consistent with 2% overall inflation. I note further that national home prices rose only 1.2% last year, and, adjusted for inflation, they are 2.2% below their mid-2022 peak. Housing prices are thus quite likely to exert downward pressure on inflation in the months to come.
Chart #8
Chart #8 shows the year over year growth rate of the all-important M2 measure of the money supply. M2 rose on average by about 6% per year from 1995 through 2019, a period during which the CPI rose by 2% or less per year. More recently, M2 growth in the year ending January '26 was a mere 3.6%. In normal, pre-Covid times, most economists would predict that 3.6% M2 growth would lead to a slowdown in economic growth and a decline in inflation. Yet today the chatter is all about whether inflation is going to rise. This could be one of those times when the market is caught looking in the wrong direction.
Chart #9
Chart #9 shows what I consider to be a good measure of money demand: M2 divided by nominal GDP. This effectively measures how much of our annual income we like to hold in the form of readily-spendable money (currency, checking accounts, retail money market funds, etc). Money demand today is pretty much the same as it was prior to COVID. The Covid years were characterized initially by a gigantic increase in the demand for money, which was then followed by a return or "normal" levels. My interpretation of all this is that monetary conditions are just about right: money supply is matched by money demand, and that equates to the absence of monetary imbalances that might fuel higher inflation.
Chart #10
Chart #10 compares the strength or weakness of the dollar (a rising blue line equates to a weaker dollar, while a declining blue line equates to a stronger dollar) with the inflation-adjusted level of a basket of basic commodity prices. Note the very strong correlation of these two variables over time—except for the period following the Covid crisis, when supply chains were disrupted but the consumers wanted to ramp up their spending. Commodity prices back then were much stronger than the strength of the dollar would have predicted, and they helped fuel rising inflation. Recently, however, the two variables have come back into line with each other. Commodity prices are no longer "too strong," while the dollar is still reasonably strong itself. Conclusion: commodity prices are not a source of inflation these days. Need I add that gasoline prices today are very close to their 20-year average ($2.88/gallon), and that they have fallen almost 40% from their 2022 high? Moreover, crude oil prices today are actually almost 10% lower than their 20-year average.
Chart #11
Chart #11 shows the level of real GDP growth as it compares to two different trend lines (it's important to note the use of a log scale on the y-axis, which makes it easy to see growth trends). GDP rose by about 3.1% per year from 1966 through 2007, but since 2010 it has managed to grow by only a little more than 2.3% per year. Growth may be picking up of late, as noted in the comments above, but even if it does, the economy is still a lot less dynamic than it has been during most of our lifetimes. I think the "disappointing" growth of GDP since 2010 is due to several factors: 1) the $16 trillion the world spent on futile attempts to prevent global warming, 2) a huge increase in US transfer payments, and 3) a significant increase in regulatory burdens. All of which, I'm pleased to note, are in the process of reversing!
Chart #12
Chart #12 shows the level of federal government spending and revenues over the past 36 years. The difference between the two lines is, of course, the federal deficit, which is currently running at about $1.7 trillion per year. Note also the huge surge in federal spending triggered by the Covid crisis—that consisted of approximately $6 trillion in transfer payments which were effectively monetized by the Fed. It was all a nightmare, but it's fading rapidly. Note that spending has not reached new highs since 2022, and it has been flat for more than a year. The fiscal outlook is definitely improving.
Chart #13
Our national debt is just shy of 100% of GDP ($31 trillion), but we are not on the brink of a fiscal abyss. On the contrary, it is not unreasonable to think that Congress can manage some degree of spending control, and it is not the case that the economy faces a crushing burden of debt in any event, as Chart #13 shows. The true burden of debt is not the size of our national debt, but the cost of servicing that debt as a percent of our national income. Today that burden is significantly less than it was during the 1980s, mainly because interest rates are far lower than they were back then. If Congress exercises even modest restraint and the Fed doesn't have to raise interest rates (which they won't have to if inflation remains under control), then we can gradually reduce our deficits and the burden of our debt
All things considered, things don't look so bad at all!
