The Atlanta Federal Reserve has just upped their estimate of Q3 economic growth to +2.9 percent after two quarters of negative growth. Why are they thinking that economic growth will resume when the Fed says it intends to push interest rates even higher?
Part of the problem, according to renowned economist Professor Jeremy Segal of the Wharton School in a recent CNBC interview, is the Fed bases its outlook on inflation indicators six months to a year behind actual inflation trends.
They should instead base their actions on current economic indicators, says Segal, such as the real money supply and disposable incomes, which have been falling sharply. The amount of money in circulation controls much of the economic activity of banks as well as consumers and higher interest rates will shrink the M2 money supply even further.
MarketWatch economist Rex Nutting’s above graphs show that the real money supply, disposable income (i.e., after taxes), and home prices that measure real wealth for the two-thirds of American households that own homes, have been declining for months.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) is also based on actual economic indicators—such as employment and wholesale trade. As of October 7, its latest forecast for the third quarter of 2022 is 2.9 percent, up from 2.7 percent on October 5.
“After this morning’s employment situation report by the US Bureau of Labor Statistics and the wholesale trade report from the US Census Bureau,” said the GDPNow press release, “the ‘nowcast’ of third quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 1.1 percent and -3.6 percent, respectively, to 1.3 percent and -3.4 percent, respectively.”
Part of the problem may be the Atlanta Fed looks at numbers affecting all Americans vs. Fed Chair Powell looking at numbers that rely on indexes that measure data affecting 30 to 40 percent of our population, such as rents and food prices that have seen the highest price increases.
There are also other leading indicators of inflation, including commodity prices, supply times, the value of the dollar BUXX, 0.25% DXY, 0.16%, says Nutting. Almost all of these have peaked and are now declining. These are other signs that inflationary pressures are lessening.
“The biggest risk to the economy is that the Fed and other central banks will tighten too much, according to 55% of economists surveyed by the National Association of Business Economics,” he said.
If economic growth is positive for the rest of this year, it may be a sign that the actual inflation indicators Professor Segal and Nutting advocate may have bottomed, and economic growth has resumed.
Will the Federal Reserve realize this in time to avert another recession?
Harlan Green © 2021
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