Claudia Sahm on the Muddling Economy

Episode Summary

Executive Summary: The episode centered on the Fed’s policy dilemma amid a data blackout from the government shutdown, using September CPI and state-collected claims to assess a still-sticky but not runaway economy. Guests agreed inflation is drifting around 3% with tariff pass-through and persistent services inflation, while labor-market weakness is visible mainly in pockets like the DC region. The group sees a muddle-through baseline, not recession, but highlighted risks from AI/equity valuations, private credit, and longer-run immigration/productivity effects.

Main Topics: Government shutdown and loss of federal data (Priority: 5/5): Guests said the shutdown is severely disrupting official statistics, making it hard to gauge inflation, labor conditions, and whether the economy is turning. They stressed alternative data help, but cannot fully replace federal series, especially for policymaking. September CPI and inflation outlook (Priority: 5/5): The only major government release available showed headline and core inflation near 3%, with tariff-sensitive goods, energy, and some food categories adding pressure. The panel interpreted this as inflation moving higher than the Fed’s target and not yet on a disinflationary path. Labor market signals and claims data (Priority: 4/5): With BLS employment data absent, state-aggregated unemployment claims became a key proxy. Claims remain low overall, but DC-area federal-worker filings stand out, reinforcing a low-hire/low-fire environment rather than broad layoffs. Fed policy path and rate-cut debate (Priority: 4/5): Claudia Somme argued the data support another 25 bp cut rather than a larger move, and said the September CPI does not strengthen the case for a 50 bp cut. The panel expects the Fed to keep easing gradually while balancing sticky inflation against downside labor risks. Tariffs, goods inflation, and supply effects (Priority: 4/5): The guests emphasized tariff-sensitive goods are continuing to pass through into consumer prices, likely as one-time level shifts spread over several months. They also noted some of the inflation increase could be temporary and not demand-driven. Broader risks: AI, valuations, private credit, and distributional stress (Priority: 3/5): The discussion broadened to whether equity-market valuations and AI-related spending could unwind, whether lower- and middle-income households remain under pressure from high rates, and whether private-credit issues are idiosyncratic or systemic. Long-run labor supply and productivity concerns (Priority: 3/5): Somme expressed concern that reduced immigration and tighter visa policy could slow trend growth and productivity over time, even if the near-term cycle avoids recession.

Key Arguments: The shutdown is not yet a macro shock, but it is dangerously blinding policymakers exactly when the labor market could be shifting. Alternative private data are useful supplements, but they cannot replace federal statistics as public goods because private firms cannot guarantee continuity, transparency, or public purpose. September CPI supports the view that inflation is still around 3%, with tariff pass-through pushing goods prices higher and shelter helping keep core inflation from being even hotter. Core services excluding shelter remain sticky, which matters because it is one of the few places weakness from demand deterioration would likely show up if the labor market were worsening. Initial claims remain low enough to argue against a recession, though the DC area shows clear federal-government-related distortions. The Fed likely has room to cut by 25 basis points again, but the data do not justify a 50 basis point cut. A major equity-market correction tied to AI enthusiasm is a real risk scenario because it could hit wealth effects and capex, though it is not the baseline. Lower- and middle-income stress is more likely to ease as rates come down, since restrictive policy hits credit-card and mortgage borrowers unevenly. Longer-run growth risk may come less from recession than from weaker productivity and labor supply if immigration and visa restrictions persist.

Data Points: CPI, month over month: 0.31% - September consumer price index increase from August, matching consensus expectations. CPI, year over year: 3.0% - Headline CPI rose from 2.9% in August to 3.0% in September. Energy prices, month over month: 1.5% - Energy was a major driver of the monthly CPI increase. Gasoline CPI, month over month: 4.1% - Gas prices rose sharply in September and lifted energy inflation. Energy services, year over year: 5.1% - Electricity/energy services remained elevated despite a monthly decline. Food at home, month over month: 0.3% - Grocery prices increased in September after a 0.6% rise in August. Food at home, year over year: 2.7% - Grocery inflation remained elevated, likely reflecting tariff-sensitive imports. Core CPI, month over month: 0.23% - September core CPI came in close to the panel’s expectation. Core CPI, year over year: 3.0% - Core CPI fell from 3.1% in August to 3.0% in September. Core CPI, 3-month annualized pace: 3.6% - Short-run trend suggests inflation is running too hot. Core CPI, 6-month annualized pace: 3.0% - Medium-run trend still above the Fed’s objective. Tariff-sensitive CPI basket, month over month: 0.37% - A composite measure of tariff-exposed goods rose faster than headline and core inflation. Tariff-sensitive CPI basket, 3-month annualized pace: ~5% - Shows continued upward pressure from tariffs. Initial unemployment claims: 230,000 - Weekly claims rose from 220,000 but remained low in absolute terms. Continuing claims: 1.94 million - Claims were up from the prior week and notably higher than a year earlier. DC region continuing claims change vs. year ago: ~50% - D.C., Maryland, and Virginia showed a large rise tied to federal layoffs/furloughs. Shutdown mentions in Michigan survey: 2% - Only a small share of respondents spontaneously mentioned the government shutdown. Paper household products inflation: 5.5% year over year - Marissa’s stats game example; linked to Canadian imports and tariff concerns. Paper household products monthly increase: 1.0% - Category inflation continued rising in the latest month. Imputation method figure: 40% - BLS reported that 40% of imputations used a less-preferred/different-cell method in the September CPI update. Quits rate: 1.9% - Claudia’s stats-game item; used to discuss low churn and labor-market context.

Pivotal Quotes: "Private companies do not create public goods. And government statistics are public goods." — Claudia Somme: Explaining why private-sector data sources like ADP cannot fully replace federal economic statistics. "I think this will bring on any of the hawks. I think they'll have a solid consensus to cut." — Claudia Somme: Her assessment that the September CPI will support another modest Fed rate cut rather than a larger one. "Inflation, CPI inflation, consumer price inflation is basically 3% headed north here." — Mark Sandy: Mark’s summary of the September CPI and tariff pass-through narrative.

Implications: Listeners should expect a Fed that keeps easing cautiously while inflation stays around 3%. The bigger risk is not an imminent recession, but reduced visibility, tariff persistence, and longer-run growth drag from policy and labor-supply changes.