Diane Swonk

Services PMI® at 53.8%; January 2026 ISM® Services PMI® Report /PRNewswire/ -- Economic activity in the services sector continued to expand in January, say the nation's purchasing and supply executives in the latest ISM®...

ISM services index was unchanged in Jan from Dec but devil in the details.

Employment remained in expansion territory but just barely, while prices move up. Data center construction is stressing supply chains & adding to cost pressures. Tariffs another issue.

www.prnewswire.com/news-release...

Is it a productivity miracle or an illusion. Inflation is still elevated, so whatever is happening with productivity growth has not been enough to squash inflation, yet.

Baby boomers are aging into peak retirement ages; bulk hit 65 2024 - 2027.

Prelim data on real GDP remains robust. Consumption accelerated even as aggregate incomes stalled out over the summer and into the fall. The saving rate plummeted to it lowest levels since blistering inflation of 2022.

The tepid pace of job gains may still be an enough to hold the unemployment rate steady. The breakevens on unemployment have fallen precipitously in response to a drop in the supply of workers via curbs on immigration & surge in retirements.

The problem is that the construction of data centers includes very few people, which means the boom in AI investments is contributing more to overall GDP gains than employment.

Wages firmed a bit during the month. A bump in minimum wages across 19 states likely modestly added to gains.

The pressure to leverage cash flow more than debt to build data centers is beginning to show up, although speculators are entering the market.

Healthcare continued to dominate gains, while most other sectors shed jobs, including the manufacturing sector.

The largest losses were in professional business services, although the ongoing shedding of jobs in the tech-intensive information sector is notable.

ADP employment report shows we have yet to break free from the low hire, low fire environment of 2025.

Private payrolls rose only 22,000 in January after a downward revision to December.

Gains were concentrated in small and midsized firms. Large firms shed jobs.

Deregulation is not the same as no regulation and electorates with trust deficits demand more regulation. The pendulum could swing. In the interim, break bread not ties. We are social creatures, which crave connection; that begins one conversation at a time.

There are offsets. Firms are doing more with less, although the boost to productivity growth associated with AI is more of firm specific than economy wide. Deregulation has accelerated, which lowers hurdles to doing business.

8) Financial instability intensifies. One spark - another pandemic, a geopolitical shock, an AI-driven market dislocation - and we could see a destabilzing market correction.

10) The erosion in trust starts out incremental, but builds. It is nonlinear in its effects.

…work in more diverse teams and chips away at productivity.

7) Economic growth becomes more concentrated in the hands of a few firms and households, which takes a toll on the potential for the economy grow over time.

…less affluent households. Afforabilty deteriorates, which further undermines trust. Inflation is a regressive tax.

6) Worker mobility drops. Only the affluent can afford to move for a job, which erodes the efficiency of the labor market along with an unwillingness to…

4) Central banks lose their inflation-fighting crediblity, which further stokes inflation. We tend to get the inflation we expect and consumers expect a lot more than they did before the pandemic.

5) Cash transactions accelerate, which means that affluent households do better than…

Investment in factories, R&D, and worker training dries up. The AI boom is papering over a deficit in investment elsewhere.

3) Low trust means higher transaction costs, less competition (people preferring local/familiar suppliers even at higher cost), and broken supply chains.

…a legal team and a binding arbitration clause. That's friction, and friction slows growth. One can see this is the reshuffling of supply chains.

2) Investment horizons collapse. Capital flies to the safety of short-term treasuries & gold - assets you can see & touch.

The result has left us collectively retreating into our own echo chambers, sowing the seeds of deeper divisions.

The economic consequences of an erosion in trust have been well studied:

1) Transaction costs spike. Every handshake that used to suffice now requires…

An entire industry has emerged to measure it. The results are ugly. Trust is on a multi-decade downtrend. It is global and starts at the top. Our collective trust in our national governments and the media have deteriorated sharply.

Navigating a global trust deficit

Trust is quite literally the oil of the market machine. High levels of trust act as a lubricant, enabling even the simplest tractions to move forward with little costs. Low levels toss sand into the gears of the market machine.

#ppi #inflation #economy #federalreserve | Meagan Martin-Schoenberger 📊The producer price index (#PPI) advanced 0.5% in December after an 0.2% rise in October. The PPI rose 3.0% year-over-year, the same reading as November. Unlike in November, services dominated: servic...

Here is the data from my colleague Meagan.

www.linkedin.com/posts/meagan...

Producer price index came in hottest three month and six month pace since 2022 - not a good year for inflation.

The components that feed into the PCE index of inflation, which the Federal Reserve target, were not as bad but underscores why Powell was careful in declaring victory on inflation.

…from trade that was already out of whack in the GDP now forecast for real GDP growth. It had been above 5% in the fourth quarter. We are forecasting a solid gain with a 3% handle instead. That is with data to date. More is due out in retail sales and trade for December.

Pharmaceuticals imports rebounded in November after plummeting in October. There are investigations into pharmaceutical tariffs but they have not been levied on that specific category.

Exports contracted before and after adjusting for gold. The result is that we will not get the boost…

Gold wreaks havoc on trade deficit. Gold for investment purposes is asset and not considered in the GDP data, which tracks production of goods and services.

The AI boom, which have tariffs waivers to compete in what is rapidly become an arms race in AI.

Fed not declaring victory over inflation prematurely Inflation still a worry.

Consensus on a pause was “broad,” despite dissents.

Here is my entire write up.

kpmg.com/us/en/articl...

My take on the Fed and where we are. Long pause, no victory laps yet on inflation. Powell doesn’t expect clarity on whether inflation coming down until at least mid-year. New Fed Chair may want to hold off on rate cut in June to reassure makers that won’t overstimulate.

Coming up on @bloombergtv.bsky.social to discuss Federal Reserve decision at 2 est.

Hence, the Fed’s decision to pause on rate cuts in January and wait and see for the dust to settle on data disruptions and delays - it looks like inflation is being understated due to those problems.

One other issue is labor shortages emerging in the service sector where immigrants are prevalent. Quit rates in leisure & hospitality soared over the summer even as unemployment rose. That could boost service sector inflation.

Hawks worry we are risking a more persistent bout of inflation, while doves worry about causing undo damage to the labor market.

Gaps in the data, notably for inflation, make it even harder to determine where inflation is, let alone where it is going.