March 9, 2025

QuickTakes

ECONOMIC WEEK: March 10-14

After several weeks of a growth scare, the attention this week will shift back to inflation. The new scare could be stagflation, which is the risk to our more upbeat economic outlook. CPI inflation has been reaccelerating since last fall when the Federal Reserve cut interest rates by 100bps (chart). Businesses may have raised prices in February in anticipation of tariffs.

If CPI services inflation remains sticky at January's rate of 4.2%, then reviving goods inflation could raise overall inflation in coming months. While the market expects three Fed rate cuts this year, we continue to believe inflationary pressures will keep the Fed on pause for the remainder of the year (chart). We also expect the economy to remain more resilient than widely expected currently, though we did raise our odds of a recession from 20% to 35% last week.

Here's more on what to expect in the week ahead:

(1) Inflation. The Cleveland Fed's Inflation Nowcasting tracking model projects February's headline and core CPI (Wed) rose 0.23% and 0.27% m/m, respectively. That would lower the y/y readings to 2.83% and 3.16% (chart).

There may be some relief in terms of services inflation, particularly after annual price resets boosted it in January. For example, we're expecting a big monthly decline in auto insurance prices after they jumped 2.2% m/m in January. However, rent inflation is likely still moderating (chart).

Goods inflation is likely to be more troublesome than it has been for quite some time. CPI goods rose 0.8% y/y in January as nondurables prices increased 1.6%. Durables prices fell 1.2% y/y, the slowest pace of deflation in several quarters. Based on the price pressures appearing in the ISM PMIs, we expect overall goods inflation to surpass 1.0% y/y in February for the first time in several quarters (chart). February's PPI (Thu) may show whether continued deflation from Chinese imports is counterbalancing tariff-related price hikes.

(2) Unemployment. Thursday's initial unemployment claims report for the first week of March is likely to start showing the DOGE Boys' impact. Federal government unemployment claims, which are counted separately from the oft-cited private-sector figure, surged to a multiyear high for the third week of February (chart).

Initial jobless claims in the DC metro area (Washington DC, Maryland, and Virginia) have also been relatively subdued (chart). Given the heavy concentration of federally funded or federally contracted jobs in this area, we expect combined claims from these states to move higher in the coming weeks.

(3) NFIB Small Business Survey. February's NFIB survey (Tue) may show whether the optimism from pro-business policies or pessimism from tariff worries and uncertain policymaking is prevailing. The NFIB's jobs report is already out. Interestingly, 38% (sa) of small business owners reported job openings they could not fill in February, the highest since August 2024 (chart). 

This suggests laid off/resigned public-sector workers may have ample job opportunities in the private sector. However, business owners intending to create new jobs in the coming months fell to 15% of total owners. We think that an economy at full employment, even with significant uncertainty, should readily absorb relatively highly educated and skilled former federal workers.

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