Inflation Is Going Nowhere

Posted on March 1, 2024 by Popular Economics Weekly

Popular Economics Weekly

I said recently that the US economy has made a soft landing. Here is further proof with the release of the government’s Personal Consumption Expenditure Index (PCE) that measures consumer spending.

Inflation has flattened and been stuck close to the Fed’s 2% target rate for months. This has reassured consumers enough as measured by consumer sentiment surveys that they have kept up their spending patterns, giving a boost to strong first quarter growth.

The January PCE price index increased 2.4 percent year-over-year (YoY), down from 2.6 percent YoY in December, and down from the recent peak of 7.1 percent in June 2022.

The PCE price index, excluding food and energy, increased 2.8 percent YoY, down from 2.9 percent in December, and down from the recent peak of 5.6 percent in February 2022.

FRED/CalculatedRisk

And the 6-month index PCE Price Index is up 2.5%, Core PCE Prices: 2.5%
Core minus Housing: 1.8%. That means inflation will probably remain stuck somewhere between 2 to 2.5% for the foreseeable future.

American workers are fully employed, and wages are rising slightly faster than inflation. Next week’s release of the monthly unemployment report should confirm nothing has changed.

This is why consumers remain optimistic, per the University of Michigan’s consumer sentiment survey:

“Consumer sentiment moved sideways this month, slipping just two index points below January and holding the gains in sentiment seen over the past three months,” said survey director Joanne Hsu. “Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings.”

This should also answer the question why fourth quarter 2023 GDP growth was holding at 3.2 percent in its second reading. 

The price index for gross domestic purchases (GDP) increased (just) 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter. The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.

Inflation has fallen dramatically, in other words. The supply chain of goods and services has caught up to demand. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply in the last 12 months.

And, though I’m repeating myself, health care spending is soaring, as a record 21.3 million people have officially signed up for healthcare insurance through the HealthCare.gov Marketplace for 2024, marking a third consecutive banner year for the program.

HHS Secretary Xavier Becerra said, “Once again, a record-breaking number of Americans have signed up for affordable health care coverage through the Affordable Care Act’s Marketplace, and now they and their families have the peace of mind that comes with coverage.”

So, I would add another reason for the improving mood of consumers: a healthier workforce is a more productive workforce.

Maybe economic stability at home is what we need with the rest of the world in turmoil.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Higher Growth Ahead?

Posted on February 28, 2024 by Popular Economics Weekly

Financial FAQs

The US economy hasn’t slowed. Fourth quarter Gross Domestic Product (GDP) growth was down slightly from 3.3 percent to 3.2 percent in the second estimate, but predictions for first quarter 2024 growth have increased.

BEAgdp

“The increase in real GDP (in Q4) reflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, and residential fixed investment that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased,” said the BEA.

Consumer spending is the main reason growth was so strong. It was revised upward from 2.8 percent to 3 percent annually.

Inflation has been tamed as well. The personal consumption expenditures (PCE) price index increased just 1.8 percent, an upward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.1 percent, an upward revision of 0.1 percentage point.

The PCE price index is the best measure of inflation, since the GDP covers total domestic economic output.

AtlantaFed

And the Atlanta Federal Reserve’s GDPNow estimate of first quarter 2024 growth was just raised. This has proven to be one of the most accurate future growth predictors, as I’ve been saying.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 3.2 percent on February 27, up from 2.9 percent on February 16,” said the Atlanta Fed. “After recent releases from the US Census Bureau and the National Association of Realtors, the nowcast of first-quarter real gross private domestic investment growth increased from 2.5 percent to 4.6 percent.”

Gross domestic private investment is the other driver of growth, as the Inflation Reduction and Infrastructure Act $billions in government spending have seeded the increase in private investments.

And the US economy has been fully employed for more than two years, so there’s a scarcity of workers. Employers have needed to invest more in capital expenditures—whether its AI or more efficient factories—to meet the demand for their products.

This translates to workers being more productive, as I said recently.

Average employee salaries are also higher, and are now rising faster than inflation—as much as 2 percent above inflation in some sectors—which means even more demand for products, thus creating a positive loop. Higher salaried employees spend more, so companies will produce more.

That is why the cost of money has to come down, so companies can finance their projects. I said last week that James Bullard, former St. Louis Fed President, believes Powell’s Fed Governors need to begin to shrink interest rates sooner rather than later.

Bullard, in an interview with MarketWatch’s Greg Robb I’ve mentioned before, said Powell doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’.” It is a phrase credited to Chairman Powell, who feared that the Fed would react too slowly to the rapidly plunging inflation rate, causing perhaps a recession.

The Fed’s benchmark rate is now in the range of 5.25%-5.5%. The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year. “The math is not adding up that the [interest rate] is going to be at the right level,” said Bullard.

And we have an upcoming budget crunch and possible government shutdown if our political parties can’t agree on next year’s budget in the next couple of weeks! That is the major uncertainty that could inhibit growth this year.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Global Connections TV Interview

Posted on February 23, 2024 by Popular Economics Weekly

Answering Kennedy’s Call

Here is Global Connections Television interview about Building Community: Answering Kennedy’s Call, a memoir of my years of public service.

Global Connections Television (GCTV), the only talk show of its type in the world, has featured a myriad of guests ranging from leaders at the UN to the private sector to academics to non-governmental organizations.

Harlan Russell Green, a former Peace Corps Volunteer in Turkey, is the 2023 Winner of the Peace Corps Writers’ Publisher’s Award for his latest book on “Building Community: Answering Kennedy’s Call.” Mr. Green is a Rotarian, retired Mortgage Banker, and Editor/Publisher of Popular Economics Weekly, a financial wire service he began in 2000.

The US Peace Corps put him on an international trajectory that provided unique opportunities to work with the US Environmental Protection Agency, Caesar Chavez’s United Farm Workers of America, and several community development projects to create sustainable, livable areas.

One of his award-winning films was the “The Great Clean Air Debate.” With the UFWA, he produced “Fighting for Our Lives” and “Why We Boycott.” He also worked on projects with Rotary International and Partnering for Peace, an organization of Returned Peace Corps Volunteers who are now Rotarians that strive to connect Rotary Clubs with Peace Corps Projects.

I began writing this memoir in 2017, after wondering how it was possible that Americans had elected a president suffering a severe mental disorder. Did it mean our democracy was dying or already dead, and Americans now wanted a demagogue as president who believed that he was above all laws and the constitution?

It reminded me in many ways of the 1960s when there was just as much social unrest and different ideas of democracy. This was the era of McCarthyism and communist witch-hunting, right wing against left wing political views, the civil rights movement, and an unpopular war in Vietnam that was fracturing American communities.

We coped with the dysfunction and cynicism then by searching for communities that could mirror our values and ideals, and when we found them, to contribute to their growth.

Former President Obama challenged Americans to inspire the youth to a life of service in 2017 after he left the presidency; and the youth he talked about are my target audience. He said then:

“We have some of the lowest voting rates of any democracy and low participation rates that translate into a further gap between who’s governing us and what we believe. The only folks who are going to be able to solve that problem are going to be young people, the next generation. And I have been encouraged everywhere I go in the United States, but also everywhere around the world to see how sharp and astute and tolerant and thoughtful and entrepreneurial our young people are. A lot more sophisticated than I was at their age. And so the question then becomes what are the ways in which we can create pathways for them to take? Working to develop successful communities is as important today because of the deep divisions and the possibility of future wars, leadership, for them to get involved?”

Building successful communities will enable us to heal those divisions and create a more peaceful world.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Another Housing Recession?

Posted on February 22, 2024 by Popular Economics Weekly

The Mortgage Corner

The 30-year conforming fixed rate has again risen above 7 percent in just one month, and the effect is immediate. Housing construction has slowed once again, in spite of the severe housing shortage. Construction is 14.8 percent below the revised December estimate of 1,562,000 and is 0.7 percent below the January 2023 rate of 1,340,000, according to the National Association of Home Builders, and we know why.

The just-released Fed minutes from January’s FOMC meeting showed how timid the Fed Governors have become. They want a complete surrender of any inflation before declaring victory. Inflation will only be conquered in their eyes when it has already surrendered.

“In discussing risk-management considerations that could bear on the policy outlook, participants remarked that while the risks to achieving the Committee’s employment and inflation goals were moving into better balance, they remained highly attentive to inflation risks. In particular, they saw upside risks to inflation as having diminished but noted that inflation was still above the Committee’s longer-run goal.”

Calculated Risk

Wholesale prices tell us which direction inflation is trending and service inflation has slowed considerably in the past year, with wholesale service prices rising by 2.2 percent in 12 months.

The cost of wholesale goods, meanwhile, fell for the fourth month in a row and is down 1.7 percent in the past 12 months. The decline was led by gasoline. The wholesale cost of partly finished goods fell slightly last month and is 3.8 percent lower compared with a year ago. The cost of raw materials is down an even sharper 15 percent compared with a year earlier.

This indicates inflation that continues to trend down, rather than “stubborn” inflation. And that is puzzling many economists, because the retail CPI focuses on rents, for instance, some 40 percent of it, and is making an outsize influence on the inflation index when there are other more balanced inflation indicators that we have been talking about.

This particularly irks Realtors and the National Association of Realtors since high interest rates are the main cause of the housing shortage, with housing barely out of its own recession.

“One big source of stubbornness to further calmness is that housing shelter inflation is rising at 6% (per the CPI). That’s a bit of a mystery since apartment rents are no longer rising and single-family rent growth is at low single-digits,” said Lawrence Yun, chief economist at the National Association of Realtors, in a statement.

January existing-home sales aren’t heartening. Home sales rose slightly because home buyers jumped on mortgage rates that were below 7% at the start of the year, says the NAR.

Sales activity rose to the highest level since August 2023 as total existing-home sales[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – elevated 3.1% from December to a seasonally adjusted annual rate of 4.00 million in January. Year-over-year, sales slipped 1.7% (down from 4.07 million in January 2023).

“While home sales remain sizably lower than a couple of years ago, January’s monthly gain is the start of more supply and demand,” said NAR Chief Economist Lawrence Yun. “Listings were modestly higher, and home buyers are taking advantage of lower mortgage rates compared to late last year.”

But how long will the Fed’s intransigence last if Chair Powell keeps repeating his mantra that they “remained highly attentive to inflation risks?” The risk could be a collapsing housing market that is just beginning to recover.

The Fed wants to keep up the inflation battle even after the inflation dragon has been slain. In their fear that they won’t be taken seriously, they risk not being taken seriously if their efforts cause another housing recession.

This happened once before and caused a busted housing bubble and the Great Recession. I am hopeful Chair Powell, et. al., is about to see a hopeful light at the end of the inflation tunnel.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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High Productivity the Key

Posted on February 19, 2024 by Popular Economics Weekly

Financial FAQs

There is a major reason the US economy is doing well in so many ways—with plunging inflation, surging consumer spending, and the highest economic growth of developed countries—that is often overlooked in economic reports.

Labor productivity has been surging lately. It is the seed of our present prosperity as well as future growth. Non-supervisory workers are producing more per hour in the last three quarters that at any time since the COVID pandemic.

FREDlaborproductivity

Non-farm labor productivity has soared from a low of -2.4% to +2.7% annually in eighteen months (Q2 2022 to Q4 2023) as portrayed in the above FRED graph.

Why? Most economists say it’s because the US economy has been fully employed for so long—more than two years—that there’s a scarcity of workers, so employers have needed to invest more in capital expenditures—whether its AI or more efficient factories—to meet the demand for their products. This translates to workers being more productive, as they are running the new machines and software services.

Average employee salaries are also higher, and are now rising faster than inflation, which means even more demand for products, thus creating a positive loop. Higher salaried employees spend more, so companies will produce more.

That is why Jame Bullard, former St. Louis Fed President, believes Powell’s Fed Governors need to begin to shrink interest rates sooner rather than later.

Bullard, in an interview with MarketWatch’s Greg Robb, said Powell doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’.” It is a phrase credited to Chairman Powell, who feared that the Fed would react too slowly to the rapidly plunging inflation rate, causing perhaps a recession.

The Fed’s benchmark rate is now in the range of 5.25%-5.5%. The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year. “The math is not adding up that the [interest rate] is going to be at the right level,” said Bullard.

Another reason for the Fed to move more quickly in dropping rates is that wholesale prices are now falling more quickly due in part to higher productivity.

The Producer Price Index (PPI) for wholesale goods and services continues to plunge. PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.

And it is still trending downward. So where is risk of higher inflation down the road if the cost of raw materials is declining? There’s a disconnect in the reasoning of those who see a danger of higher inflation ahead, so let us hope that Powell means what he says and doesn’t forget to shrink the policy rate.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Slower Retail Sales, Lower Inflation?

Posted on February 16, 2024 by Popular Economics Weekly

Financial FAQs

The New Year is proving to have lots of ups and downs as consumer spending slows from the holidays. Tax season is afoot, of course, a time when consumers tend to save more and spend less.

That’s why retail sales fell sharply in January, while November and December sales were revised down. Financial markets rallied because it could mean the Fed cuts rates sooner if such weakness continues.

Wholesale inflation has also fallen sharply, is now close to zero percent annually, yet the financial markets continue to misread the data, fearing the Fed will put off rate cuts until later this year.

The Calculated Risk-enhanced retail sales graph is a great picture of what has happened since the COVID pandemic—incredible swings in activity that continue to confuse both Main Street and Wall Street, thereby mudding the economic waters.

FRED/BLS.gov/CalculatedRisk

“Advance estimates of U.S. retail and food services sales for January 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $700.3 billion, down 0.8 percent from the previous month, and up 0.6 percent above January 2023,” said the Census Bureau.

Sales were up 3.1 percent from a year ago, below the 5 percent longer term average. Should this be worrisome? It isn’t adjusted for inflation, so retail sales were flat when adjusted for retail inflation that is running at 3 percent.

It means consumers could be taking a break in the first quarter of 2024. Why not? Blizzards in the northern states, tornadoes in the south and midwest, are certainly reasons for consumers to take a pause.

Meanwhile the Producer Price Index (PPI) for wholesale goods and services continues to plunge, as I said. This is the cost of goods and services that go into retail (CPI) inflation, which means overall inflation will continue to fall as well.

PPI Final Demand is now up just 0.9 percent in 12 months, far below the Fed’s 2 percent target. It jumped 0.6 percent in January but monthly prices declined 0.1 percent in December 2023 and advanced just 0.1 percent in November.

FREDppi

That is why economists are saying the inflation dragon has been slayed and consumer confidence is improving. One hint of what’s in store for the New Year was the New York Fed’s 2024 Survey of Consumer Expectations, which shows improvements in households’ perceptions and expectations of their financial conditions and credit availability.

Of particular note was that perceptions about households’ current financial situations improved in January with more respondents reporting being better off than a year ago and fewer respondents reporting being worse off. The percentage of respondents expecting to be financially the same or better off 12 months from now is 76.5%, its highest level since September 2021. (my emphasis)

This is a major reason consumer confidence has been rising over the past several months.

I reported last week that the University of Michigan’s sentiment survey, for instance, also reported consumers much more optimistic about their finances and the inflation outlook.

“Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” said survey director Joanne Hsu. “January’s gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%.”

So contrary to what the financial market are reacting to, both wholesale and retail inflation continue to trend down. But it’s a bumpy ride warned one Fed Governor.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Why the Inflation Debate?

Posted on February 14, 2024 by Popular Economics Weekly

The Mortgage Corner

This month’s Consumer Price index looked hotter at first glance, but it wasn’t. It was slightly cooler, so there was no real reason for yesterday’s 500 pt. plunge in the DOW.

That’s where the debate is raging these days. Looks matter more than substance in the financial markets. The CPI inflation data had actually improved. So why the market pessimism?

“The all items index rose 3.1 percent for the 12 months ending January (red bar in graph), a smaller increase than the 3.4-percent increase for the 12 months ending December, said the Bureau of Labor Services. The all items less food and energy index rose 3.9 percent over the last 12 months (green bar), the same increase as for the 12 months ending December. The energy index decreased 4.6 percent for the 12 months ending January (black bar), while the food index increased 2.6 percent over the last year (blue bar). “(bold emphasis mine)

BLS.gov

This indicates inflation that continues to trend down, rather than “stubborn” inflation. And that is puzzling many economists, because the CPI focuses on rents, some 40 percent of it, thus making an outsize influence on the inflation index, when there are other more balanced inflation indicators that we will talk about later.

This particularly irks Realtors and the National Association of Realtors since high interest rates are the main cause of the housing shortage, with housing barely out of its own recession.

“One big source of stubbornness to further calmness is that housing shelter inflation is rising at 6% (per the CPI). That’s a bit of a mystery since apartment rents are no longer rising and single-family rent growth is at low single-digits,” said Lawrence Yun, chief economist at the National Association of Realtors, in a statement.

The US economy has landed with the huge Q4 GDP growth spurt of 3.3 percent and 335,000 nonfarm payroll jobs created, and inflation that’s approaching the Fed’s 2% target rate.

And the Atlanta Fed GDPNow Q1 2024 growth prediction is now 3.5 percent, so growth continues this year.

What may irk Fed officials who are particularly recalcitrant to call victory over inflation is that wages continue to rise higher, even as inflation is falling. A majority of Fed officials seem to subscribe to former Fed Chair Paul Volcker’s edict that strong wage growth and a 2% inflation target can’t coexist. But that has been happening for the past two years.

Another misconception is what happens when inflation is ‘held’ at 2 percent. The post-Great Recession era of 2009-2020 was called the era of ‘great moderation’ because the inflation rate remained at 2 percent over that time. But what was the cost?

The unemployment rate had skyrocketed to 10 percent at the end of the Great Recession, and didn’t get below 4 percent until August 2018, averaging between 5-6 percent during that decade.

Job growth and wage growth were muted because the Obama administration emphasized policies that paid down the debt rather than higher growth when Republicans engineered a total government shutdown . The result was Hilary Clinton and the Democrats losing in 2016, as they were hammered on the weak growth and employment numbers.

Another economist, Duke Finance Professor Campbell Harvey, gave a more dire prediction if the Fed didn’t move faster to cut interest rates.

“All the hikes in 2023 were justified by inflation being outside the comfort zone. … It’s the same mistake and we know that higher rates are not good for economic growth,” Harvey said in a MarketWatch interview. 

“It increases the cost of capital, it means less investment, it means higher borrowing costs. All of this is anti-growth,” he added. “So we need to snap out of it.”

Two other inflation indexes, for Personal Consumption Expenditures (PCE), and Producer Prices (PPI) are already in the 2 percent target range or below.

It means the Fed would rather look tough and endanger a recession than recognize that decent growth and a fully employed economy paying good wages can coexist without causing a recession.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Inflation Still Too High?

Posted on February 9, 2024 by Popular Economics Weekly

Financial FAQs

In an excellent piece in MarketWatch, Jeffry Bartash quoted Fed Chair Powell on remarks he made last week in a 60 Minutes interview. Why do Americans still seem unhappy with the economy in many surveys?

“People are going to the store, and they’re paying much more for the basics of life than they were two years ago, three years ago,” said Powell. “And they’re not happy about it. And it’s fine that inflation is coming down,” he added, “but the prices they’re paying are still high.”

Bartash showed the reason why consumers still complain in a chart, though consumers see inflation improving in the New Year. Among commodities; flour, steak and butter prices are still high; sporting events and care insurance highest in the service sector.

MarketWatch.com

The University of Michigan’s sentiment survey, for instance, reported consumers much more optimistic about their finances and the inflation outlook.

“Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” said survey director Joanne Hsu. “January’s gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%. Consumers expressed gains in their views on their personal finances as well as the macroeconomy; the short-run business outlook soared 27%.” (my italics)

She said year-ahead inflation expectations eased to 2.9 percent, down from 3.1 percent in December and 4.5 percent in November. The current reading is the lowest since December 2020 and is now within the 2.3-3.0 percent range seen in the two years prior to the pandemic.

Maybe this is why Fed Chair Powell was so ambiguous at his last post-FOMC press conference, reporting the Fed Governors decided no more rate hikes were warranted. But they needed to be more confident that inflation had been tamed before actually cutting their Fed Funds rate.

Can the Fed really hope to bring down the inflation rate(s) much further (there are several inflation indicators to choose from) without causing a recession? There have only been three ‘soft landings’ since the 1960s—i.e., when the Fed’s credit tightening didn’t cause a recession.

Why? Because it would in fact take a serious recession for prices to fall back to pre-pandemic levels in the time frame the Fed Governors would like. Businesses would then begin to lay off their workers as their profit margins fell. It happened in Japan with their busted real estate bubble that set economic growth back for decades, and from which the Chinese economy is now suffering.

Actual deflation: when prices fall rather than rise more slowly, is a terrible thing to avoid as past history has shown.

This is why financial markets are now beginning to push back at Powell’s Fed Governors seeming indecision on when to cut interest rates.

Mohamed El-Erian, chief economic adviser at Allianz, said in a Wall Street interview: “What consensus has been expecting, has gone from a soft landing to hard landing, to no landing, back to hard landing, to crash landing, back to hard landing, back to soft landing. That’s an incredible sequence and it tells you that we’ve lost our anchors. We’ve lost our economic anchors, we’ve lost our policy anchors, and we’ve lost our technical anchors.”

And the Philadelphia Federal Reserve in a just-released survey of top economists, has upgraded their forecast of healthy 2024 economic growth.

It said the near-term outlook for the U.S. economy looks better now than it did three months ago. The 34 leading economists’ forecast predicted the economy will expand at an annual rate of 2.1 percent this quarter, up from the prediction of 0.8 percent in the last survey.

What is the Fed to do with such conflicting data? Will it lower inflation without creating deflation?

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Soft Landing, What’s Next?

Posted on February 6, 2024 by Popular Economics Weekly

The Mortgage Corner

The US economy has landed with the huge Q4 GDP growth spurt of 3.3 percent, and 335,000 nonfarm payroll jobs created, and inflation close to the Fed’s 2% target rate. What happens next? It looks like it’s about to take off again, if Powell’s Fed Governors allow it to happen.

Today’s Institute of Supply Manager’s survey of the service sector shows an economy picking up speed in the New Year. Economic activity in the services sector expanded in January for the 13th consecutive month as the Services PMI® registered 53.4 percent. The sector has grown in 43 of the last 44 months, with the lone contraction in December 2022.

“The overall growth rate increase in January is attributable to faster growth of the New Orders, Employment, and Supplier Deliveries indexes,” said Anthony Nieves, survey Director. ‘The majority of respondents indicate that business is steady. They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts.”

The manufacturing sector also improved slightly in January, though still in contraction. Its manufacturing index (PMI) rose 2 pts to 49.1, with new orders showing the biggest jump.

There are many reasons for the stronger growth in 2023 and its continuing possibility in 2024. We jump started the US economy more quickly than in other developed countries, in part by putting so much cash in the pockets of consumers and businesses, so that consumers have kept spending.

BEApcexpenditures

Personal consumption expenditures (PCE) are portrayed in the above BEA graph. The higher orange line is outlays (i.e., increased spending) and shorter blue bar Disposable Income (after taxes, etc.).

Service-sector spending is especially strong and has increased in the latest BEA estimate. This is the major reason the US economy continues to expand.

The BEA said the largest contributors to the increase were financial services and insurance (led by portfolio management and investment advice services), health care (both hospitals and outpatient services), and recreation services (led by gambling). 

Now a first look at 2024 is the Atlanta Fed’s GDPNow estimate of first quarter GDP confirms continuing recovery with a huge revision to its first quarter estimate.

AtlantaFed

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26. After this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management…”

The Atlanta Fed’s estimate of future GDP growth has been surprisingly accurate, and more positive than that of most Blue-Chip economists surveyed I’ve said before.

Such continued growth is fortunate for fully employed consumers without job worries, but maybe not financial markets that rely heavily on borrowed money.

If the Fed now becomes more hawkish about future inflation, and backs off on the timing of rate cuts, it could hurt more vulnerable regional banks (as happened last year) that are now worried interest rates may remain too high for too long.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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US Economy Has Landed–Part II

Posted on February 2, 2024 by Popular Economics Weekly

Popular Economics Weekly

I said last week there’s no longer any doubt the US economy has made a soft landing because the economy grew 3.3 percent in Q4 2023 and 3.1 percent for the year.

The first look at employment in January gave even better news. Year 2024 is off to a roaring start with 353,000 jobs created and the unemployment rate still at 3.7 percent. It has now remained below 4 percent for two years. And December’s job total increased to 333,000 nonfarm payroll jobs.

This means last year’s growth surge was no fluke, and maybe 2024 will be the beginning of the ‘Roaring 2020’s’ decade I believe has already begun. Why not? President Biden is thinking big with his Bidenomics policies that are expanding both the industrial and service sectors of the economy with policies that will take years to build out. It’s also growing health care services, cutting drug prices, and creating more jobs than ever before.

BLS.gov

“Total nonfarm payroll employment rose by 353,000 in January, and the unemployment rate remained at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, health care, retail trade, and social assistance. Employment declined in the mining, quarrying, and oil and gas extraction industry.”

Professional and business services added 74,000 jobs in January, employment in health care rose by 70,000, retail trade employment increased by 45,000. General merchandise retailers added 24,000 jobs, while electronics and appliance retailers lost 3,000 jobs.

The manufacturing is also recovering as manufacturing employment edged up in January (+23,000), government employment continued to trend up in January (+36,000), below the average monthly gain of 57,000 in 2023. Jobs gained in federal government (+11,000), and continued to trend up in local government, excluding education (+19,000).

The original Roaring 20’s occurred 100 years ago in the 1920s and was the beginning of our industrial revolution. This decade could be the beginning of a new revolution. It’s already being called the Information, or Internet Revolution.

This is while inflation, as measured by the most comprehensive inflation indicator for Personal Consumption Expenditures (PCE), has been rising at just 2 percent for the past two months!

Consumer spending has been the main engine of growth, which “reflected increases in services (led by health care) and goods (led by recreational goods and vehicles),” said the BEA.

And there’s another reason for the Fed to move quickly on cutting their interest rates. A New York community bank is raising concerns of further bank failures as happened last year.

MarketWatch reported New York Community Bancorp Inc.’s stock on Thursday triggered the steepest drop in regional-bank stocks since the collapse of Silicon Valley Bank in March 2023.

“The bank stunned markets with its fourth-quarter earnings that showed an unexpected loss, a buildup of its reserves and challenges in the office-space sector with one of two troubled loans. The bank also said it would cut its dividend by more than two-thirds to build up capital to meet regulatory requirements as a larger Category IV bank with assets of $100 billion to $250 billion.”

It’s signaling that interest rates are now harming further recovery, especially in the office sector of the commercial real estate market that regional banks cater to.

This should require the Fed, which supervises commercial banks, to expedite their rate cuts to avoid further bank failures, rather than worry about future inflation shocks.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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