There’s a Housing Shortage

Posted on July 21, 2023 by Popular Economics Weekly

The Mortgage Corner

We know the spring buying season barely got off the ground because of elevated mortgage rates, I said last week. Another reason was elevated prices, due to the housing shortage.

And builders aren’t keeping up with homebuyers’ demand for any residence, new, existing, or rental properties.

Privately‐owned housing construction in June was at a seasonally adjusted annual rate of 1,434,000. This is 8.0 percent below the revised May estimate of 1,559,000 and is 8.1 percent below the June 2022 highpoint of 1,561,000. Single‐family construction is faltering in June (red line in below graph) at a rate of 935,000; this is 7.0 percent below the revised May figure of 1,005,000.

Calculated Risk

The real culprit for slowing starts and sales is sharply higher interest rates Conforming 30-year fixed mortgage rates averaged about 6.4 percent in April and May (for closed sales in June), according to Calculated Risk’s Bill McBride and 30-year rates increased to 6.7 percent in June (closed sales in July will be mostly for contracts signed in May and June).

There was no good reason for fixed rates to be rising at this time, as the inflation rate is about to fall off a cliff. Wholesale PPI inflation is up just 0.1 percent YoY and retail inflation is 3.0 percent YoY in June, so why are traders worrying about higher inflation? Bonds are good predictors and a hedge against inflation, which means they should be falling in line with declining inflation.

Multi-family (apartment) construction is staying ahead of single-family construction (blue line in graph) because most home seekers must rent. There are too few homes being built in the affordable range.

That is why there are currently there are 994 thousand multi-family units under construction.  This ties the record set in July 1973 of multi-family units being built for the baby-boom generation. For multi-family, construction delays are a significant factor. The completion of these units should help with rent pressure.

June existing-home sales were weak as well. Total existing-home sales[1] – year-over-year, were 18.9 percent down from 5.13 million in June 2022.

The wide swings in monthly sales and construction figures are largely due to wildly fluctuating interest rates, as I said. It stymies buyers and makes construction costs more uncertain, hence slows down housing starts.

That is why housing prices are also back up to last year’s high. At $410,200, the median existing-home sales price for June was the second-highest price ever recorded from one year ago of $413,800. It was the third time the monthly median sales price eclipsed $400,000, joining June 2022 and May 2022 ($408,600). 

So it seems the financial markets aren’t yet reacting to the current inflation numbers. There are still some hard-line inflation hawks who believe we are reliving the 1970s, when inflation rose into double digits.

That was a time of scarcities, particularly Middle East wars and an OPEC oil embargo. Those bottle necks also existed briefly with the pandemic and a Ukraine war. But the data today are telling us that’s having little or no effect on current inflation.

Fed Governors should have realized by now the harm any further rate increases will do to our rather desperate housing shortage; particularly for affordable housing.

Harlan Green © 2023

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“It’s Consumer Spending, Stupid!”

Posted on July 18, 2023 by Popular Economics Weekly

Financial FAQs

FREDretailsales

Consumer spending has markedly slowed due to higher interest rates and depleted savings, but it is growing enough to maintain economic growth. This was confirmed by Tuesday morning’s retail sales report.

“June retail trade sales were up 0.2 percent (±0.5 percent)* from May 2023, and up 0.5 percent (±0.5 percent) above last year. Nonstore retailers were up 9.4 percent (±1.6 percent) from last year, while food services and drinking places were up 8.4 percent (±2.3 percent) from June 2022,” said the US Census Bureau.

“It’s Consumer Spending, Stupid!” is the title of a NYTimes article by Professor James Livingston, an economic historian, written years ago that helps to explain why the pandemic recovery has continued and no recession is on the horizon.

“As an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.”

Professor Livingston’s column highlighted why without government investing in future growth, US economic growth would have stagnated since 1980.

“Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.”

We have been a consumer-driven economy for decades, but because of the $trillions being invested in the US economy today, we may escape a recession altogether—a ‘no landing’ scenario in which economic growth continues unabated this decade.

Goldman’s chief economist, Jan Hatzius, trimmed the probability of a recession in the next 12 months to 20 percent from 25 percent — well below the 54 percent median among forecasters who participated in the last Wall Street Journey survey.

“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” said Hatzius.

Add to that the Atlanta Fed GDPNow estimate of second quarter growth is now 2.4 percent.

This was after recent increases in the nowcasts of second-quarter real personal consumption expenditures and real government spending growth from 1.2 percent and 2.4 percent, respectively, to 1.4 percent and 2.8 percent, partially offset by a decrease in the nowcast of second-quarter real gross private domestic investment growth from 10.5 percent to 9.4 percent.

Professor Livingston is brutal in his assessment of the contribution of corporate profits to US economic growth.

“So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”

Consumer spending is not only the key to economic recovery in the short term; says Livingston, it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)

So it turns out the American consumer is the mainstay of US growth, and we should celebrate that fact.

Harlan Green © 2023

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What Happened to Inflation?

Posted on July 13, 2023 by Popular Economics Weekly

Popular Economics Weekly

FREDppifinaldemand

What happened to the inflation problem? The latest wholesale inflation data show the Fed has more than succeeded in its campaign to tame inflation.

The wholesale Producer Price Index (PPI) for final demand in wholesale goods and services barely grew at all (see the FRED graph above) in the Bureau of Labor Statistics latest release.

Wholesale prices rose just 0.1 percent in June, extending a string of weak readings that suggest inflation in the U.S. is likely to continue to decelerate. Over the past 12 months the PPI plunged to 0.1 percent from 1.1 percent in the prior month. That’s the lowest reading since September 2020.

This is while Americans are still fully employed. The Fed consensus had postulated at least a 5 percent unemployment rate would be needed to bring inflation down to their 2 percent target rate. And former Treasury Secretary Larry Summers infamously said unemployment could go as 7 percent with the loss of several million jobs to tame the inflation tiger.

It will only intensify the debate among economists whether there will be a ‘soft landing’, or whether there will be no landing at all—a ‘no landing’ scenario in which economic growth continues to be positive into next year, regardless of the predictions that higher interest rates must ultimately lead to a recession (i.e., negative growth).

In fact, wholesale inflation (mainly the cost of raw materials) is in danger of turning negative, which means retail prices could also fall. (This would be a danger sign if not for other factors, since falling prices are a deflationary trend if passed on to retail prices, which usually means a looming recession.)

But with the current 3.6 percent unemployment rate, and $trillions being invested in modernizing US infrastructure this decade, this is unlikely. Americans will be employed in better-paying jobs for years to come.

Even the so-called core prices the Fed loves to cite as a more stubborn indicator of inflation decelerated to 2.6 percent from 2.8 percent, marking the smallest increase since March 2021.

Why this sudden deceleration in inflation, after all the predictions that it will remain high and become embedded in consumers’ expectations?

Firstly, the supply-chain shortage has disappeared, and every country is racing to resupply themselves from the effects of the pandemic,

I earlier cited a Global Finance Magazine article that touted the increased capital spending everywhere today, not just in the US, since the pandemic:

“Despite concerns that economic growth may slow as central banks tap the brakes to combat inflation, companies around the globe are in a spending boom for capital such as factories and for things like digitalization and automation, 5G networks and the transition to clean energy.”

The other concern has been that wage increases might cause inflation expectations to become ‘embedded’ in prices for years to come.

FREDwagesandsalaries

Yet household incomes haven’t kept up with inflation since the 1970s, as portrayed in the FRED graph dating from 1950. They are now rising at just 1.2 percent quarterly, seasonally adjusted, in the face of full employment, according to the latest FRED data.

So now we have the means and opportunity to begin the process of renewing the American economy with governments spending again, and maybe avoiding any recession with a ‘no landing’ outcome.

Harlan Green © 2023

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Homebuying Season Continues

Posted on July 12, 2023 by Popular Economics Weekly

The Mortgage Corner

We know the spring buying season barely got off the ground because of elevated mortgage rates. But there are enough homes for sale to continue purchases into the summer.

An analysis by Redfin, the national real estate and housing finance entity, showed active listings still high in June, but down -8.1 percent YOY from 2021 and 2022 per the Redfin graph of active listings below.

There is enough supply (2.5 months) that median housing prices fell $50,000 last year in June, from $397,000 to less than $350k in December 2022. But prices rose again this June 2023 to $382,861, so the question is what happens next?

This always depends on supply, and builders have been playing catchup, as I’ve been saying. There are now as many new homes as existing homes for sale.

So, will supply improve enough and interest rates hold steady enough to allow prices a downward trajectory for the rest of this year, as well?

Redfin.com

“There are two things that would jumpstart the housing market: A big drop in mortgage rates and/or a big surge of new listings,” said Redfin Deputy Chief Economist Taylor Marr. “Neither of those things happened this spring; instead, rates rose and new listings dropped to record lows. And with one or two more interest-rate hikes expected this year, mortgage rates are likely to remain elevated at least through the summer, continuing to limit both demand and supply.”

Supplies should increase because groundbreaking on U.S. single-family homebuilding projects surged in May by the most in more than three decades and permits for future construction also climbed, suggesting the housing market may be turning a corner after getting clobbered by Federal Reserve interest rate hikes.

“The May housing starts data and our latest builder confidence survey both point to a bottom forming for single-family residential construction earlier this year,” said NAHB Chief Economist Robert Dietz. “However, due to weakness at the start of the year, single-family housing starts are still down 24% on a year-to-date basis.”

What gives us hope the Fed will slow its rate hikes is consumer inflation continues to decline. U.S. consumer prices rose a modest 0.2% in June. The CPI rate of inflation slowed to the lowest level since 2021. The last time inflation was this low was in March 2021.

The overall Consumer Price Index inflation rate plunged from 4 to 3 percent in 12 months, its core rate without food and energy prices fell to 4.8 percent.

But even though there wasn’t much of a spring homebuying season this year, there was a spring building season,” Redfin’s Marr said. “That means there’s hope for more listings somewhat soon, with homebuilders working to fill the inventory bucket.”

NAR chief economist Lawrence Yun said in reaction to the good inflation report that falling gasoline prices and healthcare service costs were helpful. Rents are still climbing at a brisk pace, rising by 8.3 percent, but have turned the corner for sure. Rents were rising at 8.8 percent in the early part of the year, so this is the slowest gain in 7 months.

Rents comprise 40 percent of the Consumer Price Index, and with so many apartment units under construction, rents should continue to decline, thus improving the inflation rate and prospect for lower mortgage rates.

Harlan Green © 2023

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Americans Still Fully Employed

Posted on July 7, 2023 by Popular Economics Weekly

Popular Economics Weekly

MarketWatch.com

Hiring has been slowing in some business sectors, but government, education & health, and construction kept the BLS unemployment rate at a historic low of 3.6 percent per the MarketWatch graph.

American governments and the construction industry are hiring because the Infrastructure, Inflation Reduction and CHIPS Acts are modernizing the US economy for the first time in more than 70 years.

This is what should happen when the private sector hasn’t been investing in the future. So-called Capex, or capital expenditures, have been low for years and will now invest more when governments come along.

It happened during the 1930’s New Deal and after World War II, before government retreated to mainly support Social Security and Medicare, as well as the mortgage industry to create the post-war housing boom.

FREDcapex

Reaganomics and the conservatives’ “deficits don’t matter” crowd took over in the 1980s with massive tax cuts as well as spending cuts in favor of stock buybacks and enriching corporate CEOS.

Capex spending (funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment) plunged to almost zero (0.8 percent) in Q1 2023 per the St Louis FRED graph, which shows the sharp plunge in capital expenditures after 1980. And no country can take care of its citizens if most of its private capital goes to boosting stock buybacks and corporate profits.

Global Finance Magazine touted the increased capital spending everywhere today, not just in the US, since the pandemic:

“Despite concerns that economic growth may slow as central banks tap the brakes to combat inflation, companies around the globe are in a spending boom for capital such as factories and for things like digitalization and automation, 5G networks and the transition to clean energy.”

And this spending should continue for the rest of this decade, given the $Trillions allotted to American industry to do the job, and a fully employed economy. Even the government’s latest JOLTS report (Job Openings and Labor Turnover Survey) out last Thursday showed almost 10 million job vacancies waiting to be filled.

Harlan Green © 2023

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Consumer Splurge Continues

Posted on July 3, 2023 by Popular Economics Weekly

Financial FAQs

BEA.gov

Consumers continue to spend, and what can the Fed do about it?

This will be debated by market analysts ad nauseum until the next Federal Reserve FOMC meeting in July. And then Chairman Powell, et. al., will probably follow former chair Paul Volcker’s lead; keep raising interest rate maybe another 0.50 percent by December and see then whether the US economy really hits the skids, even as inflation continues to decline.

The Fed’s most important inflation measure, the Personal Consumption Expenditure Price Index (PCE) measure of inflation, fell from 4.3 percent to 3.8 percent, but its core rate excluding food and energy remained higher (4.6 percent) because travel is soaring, keeping service prices from falling as much

Personal outlays (spending) barely moved, up 0.1 percent, while personal income rose 0.4 percent so the savings rate is rising (black line in graph).

Oh yes, we are getting ahead of ourselves because July 4 is coming up and the times are good for most American consumers because they still have lots of savings and nobody is losing their job that wants to keep it.

And after the final first quarter estimate of Gross Domestic Product (GDP) growth rose to 2.0 percent, economists are beginning to predict Q2 may grow as much. Consumer spending rose 4.2 percent from a prior 3.8 percent annual clip, explaining most of the upward increase in first quarter GDP. It was the biggest gain in two years.

And, the Atlanta Federal Reserve’s GDPNow second quarter estimate of blue-chip economists and its own data research took a sharp upturn.

AtlantaFed

It was largely revised upward to 2.2 percent on June 30, from 1.8 percent on June 27, because of upward revisions to second-quarter real personal consumption expenditures growth (just reported above) and second-quarter real gross private domestic investment growth.

The manufacturing sector keeps contracting, however. The Institute for Supply Management’s manufacturing survey dipped to 46 percent in June from 46.9 percent in the prior month. It was the lowest reading since May 2020.

This is why predictions of a looming recession are still being made. Manufacturing makes up just 11 percent of GDP activity, however.

That’s why consumers are still upbeat, The latest University of Michigan sentiment survey reflected their optimism:

“Consumer sentiment rose 9% this month, a consensus improvement across all demographic groups. The year-ahead economic outlook soared 28% over last month, and long-run expectations rose 11% as well. Overall, this striking upswing reflects a recovery in attitudes generated by the early-month resolution of the debt ceiling crisis, along with more positive feelings over softening inflation,” said survey director Joanne Hsu. 

This Friday’s employment report for June will give more direction for Q2, so why are consumers still so upbeat. It looks like inflation doesn’t bother them as much as the Fed.

Harlan Green © 2023

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Big Rise in Q1 Economic Growth

Posted on June 29, 2023 by Popular Economics Weekly

Popular Economics Weekly

BEA.gov

Economic growth in Q1 2023 was much better than pundits and economists predicted. GDP growth rose from its second estimate of 1.3 percent to 2.0 percent growth in the first quarter, largely because consumers spent more.

Exports were also higher, but consumer spending rose a whopping 4.2 percent annually from its second 3.8 percent guesstimate. Governments spent more as well, thanks to the recovery aid pouring into state coffers.

Why the consumer spending spree? Disposable personal income increased $587.9 billion, or 12.9 percent, in the first quarter, an upward revision of 0.5 percent from the previous estimate. And real (after inflation) disposable personal income increased 8.5 percent, an upward revision of 0.7 percentage point.

Also, personal saving was $840.9 billion in the first quarter, an upward revision of $11.6 billion from the previous estimate. The personal saving rate——personal saving as a percentage of disposable personal income—was 4.3 percent in the first quarter, an upward revision of 0.1 percentage point, said the BEA.

So consumers are still feeling flush, which is why consumer confidence is also soaring. The Conference Board’s survey of U.S. consumer confidence jumped to a 17-month high of 109.7 in June, reflecting a slowdown in inflation and fewer worries about a recession.

Now we must worry about a too-hawkish Fed spoiling the party by continuing to boost their interest rates. And that’s because conventional economists such as former Fed Chair Ben Bernanke (who once worried about too little inflation after the Great Recession) are saying even after the price of everything else returns to a 2 percent inflation target, high wages will keep the inflation fires burning.

In a just released working paper co-authored by former World Bank Chief Economist Olivier Blanchard, they said:

“We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices given wages, including sharp increases in commodity prices and sectoral shortages. However, although tight labor markets have thus far not been the primary driver of inflation, the effects of overheated labor markets on nominal wage growth and inflation are more persistent than the effects of product-market shocks. Controlling inflation will thus ultimately require achieving a better balance between labor demand and labor supply.”

This is once again looking in the rear-view mirror of the seventies when oil prices soared. But the US is no longer dependent on Saudi oil, since we developed our own oil supply, and renewable energy comprises a growing share of energy generation.

And where are inflation expectations? Still anchored at 3 percent longer term.

For instance, the University of Michigan Consumer sentiment survey reported earlier its drop in year-ahead inflation expectations receded to 3.3 percent in June from 4.2 percent in May. The current reading is the lowest since March 2021. In contrast, long-run inflation expectations were little changed from May at 3.0 percent, again staying within the narrow 2.9-3.1 percent range for 22 of the last 23 months.

This is in line with the big drop in the retail Consumer Price Index from 4.9 percent to 4.0 percent, the best news yet that the Fed is winning the inflation battle. It was the smallest 12-month increase since the period ending March 2021. The all items (core) less food and energy index rose 5.3 percent over the last 12 months.

In fact, the so-called labor demand and supply imbalance can only be cured over the longer term by creating smarter immigration policies and modern technologies that improve worker productivity, due to Americans’ lower birth rate.

The Fed has little reason to intervene in what is essentially a Big Business/Labor negotiation.

Harlan Green © 2023

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US Inflation In Faster Decline

Posted on June 28, 2023 by Popular Economics Weekly

The Mortgage Corner

The Whitehouse Council of Economic Advisors (CEA) has come out with a study that compares US inflation to European inflation, and finds that ours has come down faster, much more apace, in fact.

It found that so-called ‘harmonized’ headline inflation in the US rose earlier & generally peaked earlier in the pandemic than in other G7 nations. As of April 2023, inflation is also lower in the US on a 12-month basis than in the rest of the G7. US inflation declined again in May.

Whitehouse.gov

“In May, Consumer Price Index (CPI) inflation in the United States was four percent year-on-year,” said the CEA. “Inflation in the U.S. has declined substantially since last summer, when its yearly growth peaked at over nine percent. One common question this raises is how U.S. inflation compares to inflation in other advanced countries. Due to a variety of measurement issues, such a comparison is harder than is commonly recognized.”

We first saw the dramatic decline in US inflation in the latest wholesale, PPI numbers that showed raw material prices and final demand services have an almost zero inflation rate.

“In May, the decline in the final demand index can be traced to prices for final demand goods, which fell 1.6 percent. The index for final demand services increased 0.2 percent,” said the BLS. “Prices for final demand less foods, energy, and trade services were unchanged in May after inching up 0.1 percent in April.”

Part of why the U.S. is now seeing lower inflation than the other G7 nations, said the report, is due to the omission of owner-occupied housing costs. Another important factor for headline inflation is the war in Ukraine, which has affected food and energy prices globally but especially in Europe, which has had the broadest exposure to the consequences of the conflict.

These factors should count us lucky to have an ocean between us and the G7 countries, but Chairman Powell and the US Fed needs to acknowledge this. He is now tying himself in knots attempting to justify the Fed’s hawkish stance on inflation when there’s no reason to.

As Powell said just today at an ECB economic conference in Sintra, Portugal, he believes that a soft landing is possible, but will wait to see it confirmed by upcoming inflation data.

I am optimistic of his more dovish outlook because of an oft-forgotten factor—the Fed is also responsible for the soundness of commercial banks, and therefore wants to prevent the failure of more US banks in the modern digital age, where it can happen overnight.

In an Outside the Box MarketWatch opinion piece Laura Veldkamp opined that bank failures were infrequent and tended to happen in waves; until today.

“Between 1941 and 1979, an average of 5.3 banks failed each year. According to Pew, the SVB and Signature failures were the first in more than two years. Yet, the magnitude of this year’s three bank failures surpassed the 25 that occurred during the global financial crisis in 2008.”

Hence my belief that the Fed Governors will perhaps allow a tighter labor market to flourish while they continue to crunch the numbers on inflation, rather than allow further rate increases. Let us hope so.

Harlan Green © 2023

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US Inflation In Faster Decline

Posted on June 28, 2023 by Popular Economics Weekly

The Mortgage Corner

The Whitehouse Council of Economic Advisors (CEA) has come out with a study that compares US inflation to European inflation, and finds that ours has come down faster, much faster, in fact.

It found that so-called ‘harmonized’ headline inflation in the US rose earlier & generally peaked earlier in the pandemic than in other G7 nations. As of April 2023, inflation is also lower in the US on a 12-month basis than in the rest of the G7. US inflation declined again in May.

Whitehouse.gov

“In May, Consumer Price Index (CPI) inflation in the United States was four percent year-on-year,” said the CEA. “Inflation in the U.S. has declined substantially since last summer, when its yearly growth peaked at over nine percent. One common question this raises is how U.S. inflation compares to inflation in other advanced countries. Due to a variety of measurement issues, such a comparison is harder than is commonly recognized.

We first saw the dramatic decline in US inflation in the latest wholesale, PPI numbers that showed raw material prices and final demand services have an almost zero inflation rate.

“In May, the decline in the final demand index can be traced to prices for final demand goods, which fell 1.6 percent. The index for final demand services increased 0.2 percent,” said the BLS. “Prices for final demand less foods, energy, and trade services were unchanged in May after inching up 0.1 percent in April.”

Part of why the U.S. is now seeing lower inflation than the other G7 nations, said the report, is due to the omission of owner-occupied housing costs. Another important factor for headline inflation is the war in Ukraine, which has affected food and energy prices globally but especially in Europe, which has had the broadest exposure to the consequences of the conflict.

These factors should count us lucky to have an ocean between us and the G7 countries, but Chairman Powell and the US Fed needs to acknowledge this. He is now tying himself in knots attempting to justify the Fed’s hawkish stance on inflation when there’s no reason to.

As Powell said just today at an ECB economic conference in Sintra, Portugal, he believes that a soft landing is possible, but will wait to see it confirmed by upcoming inflation data.

I am optimistic of his more dovish outlook because of an oft-forgotten factor—the Fed is also responsible for the soundness of commercial banks, and therefore wants to prevent the failure of more US banks in the modern digital age, where it can happen overnight.

In an Outside the Box MarketWatch opinion piece Laura Veldkamp opined that bank failures were infrequent and tended to happen in waves; until today.

“Between 1941 and 1979, an average of 5.3 banks failed each year. According to Pew, the SVB and Signature failures were the first in more than two years. Yet, the magnitude of this year’s three bank failures surpassed the 25 that occurred during the global financial crisis in 2008.”

Hence my belief that the Fed Governors will perhaps allow a tighter labor market to flourish while they continue to crunch the numbers on inflation, rather than allow further rate increases. Let us hope so.

Harlan Green © 2023

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American Consumers Happier

Posted on June 27, 2023 by Popular Economics Weekly

Financial FAQs

American consumers can live with higher inflation, according to the Conference Board’s latest confidence survey, but can the Fed?

Its survey of U.S. consumer confidence jumped to a 17-month high of 109.7 in June, reflecting a slowdown in inflation and fewer worries about a recession, per its release. The important index of consumer thinking increased 7.2 points from a revised 102.5 in May, the Conference Board said Tuesday. It was the lowest in six months.

The Fed has lived with high inflation before, during more prosperous times. But since 1980 and the Volcker era as Fed Chairman it hasn’t tolerated any inflation rate much above 2 percent, as the FRED graph dating from 1950 makes clear. (Gray bars are recessions.)

FREDcpi

That was also when salaried employees had a larger share of the economic pie—from the 1950s to 1970s. But then oil and oil embargoes became a political football, and Big Business decided it wanted a larger share of the economic pie.

Inflation then declined during an era of ‘great moderation’ after 1980 and employees behaved themselves as they lost their bargaining power when so many higher-paying union jobs fled overseas.

There is a reversal of fortunes happening since then thanks to the COVID pandemic when private industry stopped investing and governments had to step in to spur the recovery.

Workers’ salaries are surging, hence the rising confidence of consumers in the latest surveys.

“Consumer confidence improved in June to its highest level since January 2022, reflecting improved current conditions and a pop in expectations,” said Dana Peterson, Chief Economist at The Conference Board. “Greater confidence was most evident among consumers under age 35, and consumers earning incomes over $35,000.

“The expectations gauge continued to signal consumers anticipating a recession at some point over the next six to 12 months,” said Peterson, “but considerably fewer consumers now expect a recession in the next 12 months compared to May.”

Why the dichotomy in consumer thinking? Because we all know the Fed’s propensity to keep raising interest rates, as long as they believe any inflation rate above 2 percent endangers economic growth. And there is a growing consensus that further rate hikes will plunge US into a short recession, at least.

The University of Michigan’s sentiment survey that economists also look at showed more optimism.

Its index lifted 8% in June, reaching its highest level in four months, “reflecting greater optimism as inflation eased and policymakers resolved the debt ceiling crisis,” said survey director Joanne Hsu. “Sentiment is now 28% above the historic low from a year ago and may be resuming its upward trajectory since then,” she said.

The bottom line is that consumers have become wealthier since the pandemic, and are showing it in their buying habits by dining out and traveling more.

The bottom 50 percent, generally households with net worth of $166,000 or less before the pandemic, now hold a bigger share of the nation’s wealth than they’ve had for 20 years, the Federal Reserve estimates. Their collective net worth, $3.73 trillion, has almost doubled in two years and is more than 10 times higher than in 2011, the nadir after the last recession.

So why shouldn’t we be happier?

Harlan Green © 2023

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