Axios Macro

Treasury Secretary Janet Yellen sees the "tightest labor market we've arguably had in 50 years" amid receding inflation pressure, she tells Axios' Hans Nichols.

• Hans has been traveling with Yellen during her 10-day trip to Africa, part of a mission to deepen U.S. ties on the continent, at a time China is also making geopolitical inroads. He interviewed her today in Nelson Mandela's former house in Johannesburg.

Driving the news: Yellen has used her trip to try to convince Africans —from presidents to subsistence farmers — that the U.S. wants to partner with them for the long-term.

• Along the way, she's visited a slave memorial in Senegal, a remote farming village in Zambia, and a job retraining facility in South Africa's coal region.
• Here are her thoughts about the state of the U.S. economy. Watch for more Axios coverage of her comments on the debt ceiling, the future of the World Bank, and more in the coming days.

Yellen on inflation: "Well, there can be hiccups," Yellen said. "I wouldn't predict month to month-type changes, but we've seen inflation come down substantially."

• "We've still got a substantial contribution from rental prices, but that's going to come out over the next five or six months. So I expect that to cause further deceleration and inflation."
• "Goods prices have actually been falling but service prices are rising more rapidly."

She called the 2.9% rate of GDP growth reported this week a "solid growth number" and emphasized that slower growth is desirable in this high-inflation environment.

• “We expect and want to see a slowdown in the economy in order to help get inflation under control," Yellen said.
• "We have the tightest labor market we've arguably had in 50 years," Yellen said. "Fundamentally the job market remains very strong and you're not seeing, in aggregate, a lot of layoffs."

Between the lines: The Treasury secretary still sees a pathway for the U.S. economy that includes inflation coming down, against a backdrop of a still-strong job market.

The overall labor market is solid and real incomes are growing. But the consumer — once eager to spend — is now socking away their cash, appearing more hesitant about opening their wallets for various things.

• That's the takeaway from Friday's personal income and spending data showing that consumers, the bedrock of the U.S. economy, are becoming increasingly wary.

Why it matters: The drop-off in consumer demand bodes well for curbing inflation. But it could also be the beginning of a bigger, more worrisome slowdown that could put the economy in a rut.

By the numbers: Consumer spending fell by 0.2% in December, while November was downwardly revised to -0.1%, echoing other data that showed a sharp slowdown in shopping at the end of the year.

• One result of the spending slowdown is an upswing in the personal saving rate, after months of consumers drawing down the massive buffer of savings built up during the pandemic.
• In September, that rate fell to a rock-bottom 2.4% — the lowest recorded in over a decade. Since then, it's risen steadily, hitting 3.4% last month.

What they're saying: "Consumers are growing cautious after rapidly drawing down on their savings last year," Lydia Boussour, senior economist at EY-Parthenon, wrote in a note.

The intrigue: What's happening now is a reversal of behavior seen earlier in the year. Then, real incomes were falling as inflation raged — an environment in which it would make sense for consumers to pull back.

• But that didn't materialize until the final months of the year, even as real disposable income grew at solid 4% rate in the fourth quarter.
• "[H]ouseholds have burned through much of their excess savings accumulated during the pandemic and the savings rate has begun to renormalize," Conrad DeQuadros, an economist at Brean Capital, wrote in a note.

The backdrop: As expected, the Fed's preferred gauge of inflation continued to cool last month.

• The core Personal Consumption Expenditures index, which excludes food and energy costs, rose at a 2.9% three-month annualized rate — dropping, but still above the Fed's 2% target.