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

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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

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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

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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

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Interest Rates About To Fall?

Posted on February 1, 2024 by Popular Economics Weekly

Financial FAQs

Fed Chair Jerome Powell was as ambiguous as ever at yesterday’s post-FOMC press conference. He reported 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.

When asked by several reporters how much confidence was needed, he responded they needed “greater confidence” but couldn’t be pinned down on what that meant.

In fact, Powell’s Fed Governors don’t seem to understand the main cause of post-pandemic inflation. Most economists today attribute it to the worldwide economic shutdown that stopped production, which took years to recover, contributing to the scarcities that scared consumers—remember the toilet paper shortage?

So what caused such a precipitous drop in inflation, the fastest drop in post-WWII history? Supply-chains have recovered, and we are beginning to see a large jump in labor productivity, which is a significant increase in the amount of goods and services produced per worker-hour.

FREDproductivity

I maintain a major reason supply chains have recovered so quickly is the surge in labor productivity that began in the first quarter of 2023. And why not? There had been a large increase in capital expenditures in the second quarter of 2021 as companies ramped up production after the shutdown.

Capital expenditures, or CAPEX, is the seed-money that increases productivity by investing in new technologies and factories. It fell as per the above FRED graph when the Fed began to raise interest rates, but corporations were able to absorb the interest rate increases as their profits soared and the various PPE and PPI aid money began to filter into the equation.

“Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported today, as output increased 3.7 percent and hours worked increased 0.4 percent.”

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

MarketWatch reported that Mohamed El-Erian, chief economic adviser at Allianz, said in a post on X, the social-media platform formerly known as Twitter, Powell’s decision to push back against a March cut “is fueling more questions about the risks of the Fed being late again, albeit in a different direction.”

But the markets like to respond to facts rather than hearsay and we now have a huge revision to the GDPNow growth estimate from the Atlanta Fed that I’ve been following. In fact, GDP growth may be accelerating in 2024.

AtlantaFed

It’s revision said: “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.” 

The revision came 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, as well as first-quarter real gross private domestic investment growth—all showed sharp increases.

So, is the large jump in the Q1 GDP forecast too outrageous? Maybe not, because construction spending is soaring from the various government initiatives, such as the Infrastructure and Inflation Reduction Acts, and the Manufacturing ISM report has turned slightly positive after one year of decline.

Spending just on construction projects rose 0.9% in December to $2.1 trillion, the Commerce Department reported Thursday. It has risen every month in 2023. It is what the government and private companies spend on projects, from housing to highways.

And I also reported on the strong Q1 real gross domestic investment (Capex) growth above.

So, what will higher economic growth do to inflation? It hasn’t hurt the inflation decline to date. Why, because so much of the spending that goes into the GDP is on modernizing the US economy, further increasing US labor productivity.

Harlan Green © 2024

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

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Will 2024 Be Even Better?

Posted on January 30, 2024 by Popular Economics Weekly

The Mortgage Corner

The US economy grew either 2.5 percent or 3.1 percent annually in 2023, whichever GDP growth indicator you choose.

Why such strong growth when the rest of the world is still recovering from the COVID pandemic? Even China is struggling from its mishandling of COVID-19, after literally locking people in their buildings for weeks to prevent its spread.

USTreasury.gov

The US recovered more quickly because of the various, bipartisan aid packages that quickly created vaccines and dumped some $5 trillion in cash into consumer and business pockets—such as the PPI and PPE payments to cover losses incurred by the pandemic.

This is portrayed in the US Treasury graph of developed countries’ jobless rates. Only Japan and Germany have unemployment rates below our 3.7 percent, which has held now for two years.

That means ‘Helicopter’ Ben Bernanke, Fed Chair Alan Greenspan’s successor during the Great Recession, was right. He was nicknamed such because he was first to advocate the various Quantitative Easing packages that showered (oops, I mean injected) enormous amounts of cash into the US economy and brought US out of the Great Recession of 2007-2009, so named because it caused almost as much damage as the Great Depression.

The Biden administration is doing the same with joint government-private investments in infrastructure and the mitigation of climate change that are injecting $ trillions more into the economy in productive ways that will pay for themselves and more.

Now a first look at 2024 is the Atlanta Fed’s GDPNow estimate of first quarter growth. It sees a continuing recovery.

AtlantaFed

“The initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 3.0 percent on January 26. The initial estimate of fourth-quarter real GDP growth released by the US Bureau of Economic Analysis on January 25 was 3.3 percent, 0.9 percentage points above the final GDPNow model nowcast released on January 19.”

The Atlanta Fed’s estimate of future GDP growth has been surprisingly accurate, in other words, and more positive than that of most Blue Chip economists surveyed as shown in the Atlanta Fed graph.

Further evidence of a surging economy is rising consumer confidence. The Conference Board’s Consumer Confidence Index® rose in January to 114.8 (1985=100), up from a revised 108.0 in December. It was the highest since December 2021, and marked the third straight monthly increase.

“January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions as companies continue to hoard labor,” said Dana Peterson, Chief Economist at The Conference Board. “The gain was seen across all age groups, but largest for consumers 55 and over.”

And lastly, Pending Home Sales Index (PHSI)* – a forward-looking indicator of home sales based on contract signings – increased to 77.3 in December. Year over year, pending transactions were up 1.3%. An index of 100 is equal to the level of contract activity in 2001.

“The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices,” said Lawrence Yun, NAR chief economist. “Job additions and income growth will further help with housing affordability, but increased supply will be essential to satisfying all potential demand.”

Lower interest rates will be the key to further recovery. Consumers are saying they are happier and a strong employment report on Friday should confirm 2024 may be an even better year.

Harlan Green © 2024

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

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US Economy Has Landed

Posted on January 25, 2024 by Popular Economics Weekly

Popular Economics Weekly

There is no longer any doubt with the initial estimate of fourth quarter GDP growth just in. The US economy has made a soft landing. The economy grew 3.3 percent in Q4 after a 4.9 percent increase in Q3, and 2.5 percent for the full year.

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 was 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.

BEA.gov

This is while “The price index for gross domestic purchases (GDP) increased 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.”

Why has inflation fallen so dramatically? There are a number of reasons, beginning with the fact that the supply chain of goods and services has caught up to the demand by consumers and companies for goods and services. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply in the last 12 months, largely because of new technologies such as AI, which has stream-lined supply chains, shortening delivery times.

Real GDP also reflected increased spending in exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment. Spending and investing has increased across the board.

Why wouldn’t consumers keep buying? Americans are fully employed, and average hourly wages are rising faster than inflation (+4.1%). Inflation has been falling particularly sharply over the past 6 months (1.9%-2.5%, depending on which inflation measure we look at), I said last week.

And 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, per the press release.

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.

Oh yes, and U.S. new-home sales rose 8 percent to an annual rate of 664,000 in December from a revised 615,000 in the prior month, the Commerce Department reported Thursday; even with very high interest rates.

The median sales price of a new home sold in December fell to $413,200 from $426,000 in the prior month partly because for sales inventories have risen to an 8-month supply.

These are all signs of recovery that will accelerate when the Fed governors finally decide inflation is no longer a danger and begin to lower their interest rates.

Harlan Green © 2024

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

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Much Less Pessimism

Posted on January 23, 2024 by Popular Economics Weekly

Financial FAQs

Is the Irrational Pessimism I’ve been writing about finally turning into a more rational optimism that reflects how consumers see the current economy?

The two major measures of consumer confidence—the Conference Board’s Confidence Index and University of Michigan’s Consumer Sentiment Index are showing the mood of most Americans is improving, after the sudden inflation shock brought on by the COVID pandemic.

Yet there are still doubters that 2024 will cement the recovery. Why?

It’s mainly due to geopolitical uncertainties from regional wars and the lagging recoveries of EU countries and China still suffering the aftereffects of the pandemic.

The most recent predictions of the Conference Board’s Index of Leading Economic Indicators that is supposed to predict future activity is one example.

“The US LEI fell slightly in December, continuing to signal underlying weakness in the US economy,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board, though six of the ten indicators have turned positive.

“Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead.”

But interest rates have fallen sharply, manufacturing is showing signs of recovery, and consumer confidence has just shot up. So maybe the LEI is now looking through the rear-view mirror, just as consumers still in a foul mood have been doing because of damage done from the pandemic.

UofMichigan

The University of Michigan’s survey jump was huge: “Consumer sentiment soared 13% in January to reach its highest level since July 2021, showing that the sharp increase in December was no fluke,” said Survey Director Joanne Hsu. “Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations. Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended. (my emphasis)

SFFed

Nobelist Paul Krugman in a recent NYTimes Opinion also points out another sentiment index by the San Francisco Fed, its Daily News Sentiment Index that looks at 200 publications for favorable/unfavorable coverage of economic news.

It has been trending positive since mid-year 2023.

Such surveys don’t portend a looming recession, rather the end of one. Shouldn’t we be listening to consumers that are the final arbiter of business cycles since they account for 70 percent of economic activity?

Harlan Green © 2024

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

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