Populareconomicsblog

Financial FAQs

Much talk has been made of what the Chairman Powell and US Fed officials say they learned from the inflation spiral of the 1970s. Keep employees’ wages from rising too fast, since they are that part of the inflation equation the Fed can control.

That is, by raising interest rates the Fed hopes to pressure employers to restrain hiring practices and wage hikes by making it more expensive to do so.

But the problem is Fed economists know that many other factors affect inflation—e.g., corporations inhibit competition with monopolistic practices, supply-chains are not always dependable providers, and geopolitical events like wars and pandemics create major scarcities, as has happened since 2020.

FREDwagesandsalary

The above St. Louis Fed (FRED) graph dating from 1950 shows how successful the Fed’s main monetary policy has been of suppressing wages to keep inflation moderate.

Wages and salaries rose on average 5-10 percent annually until 1980, when Paul Volcker began his reign as Federal Reserve Chairman. Employees’ incomes then began the long descent to averaging less than 5 percent since.

Inflation was tamed, the inflation battle was won, but at what cost? Did it make most Americans better off? No. There were a series of recessions culminating in the Great Recession of 2017-19 in which they lost a greater share of total wealth generated by their employers.

Inequality.org

The picture is startling per this popular graph.

Income disparities are now so pronounced that America’s richest 1 percent of households (orange line in graph) averaged more than 84 times as much income as the bottom 20 percent in 2019, according to the Congressional Budget Office. Americans in the top 0.01 percent (brown line) tower stunningly higher. With average household income of $43 million, they bring in 1,807 times more income than the bottom 20 percent. 

Of course, globalization and the lowering of trade barriers that moved higher paying wages overseas have been the orthodox explanations for why workers lost such a share of the wealth pie. But also lost in the discussions was the Fed’s monetary hand of quickly raising interest rates when inflation heated up and dropping them when a recession resulted.

That has been the Fed’s pattern since the Volcker era. Keep inflation down at all costs, even if it harms employment. Yet we know since the pandemic that a war and COVID-19 scarcities have been most responsible for the sudden inflation spike.

The post-pandemic era has therefore created new opportunities with the need to rebuild the US economy since the pandemic. $Trillions are being spent in a ‘new’ New Deal era of governments coming to the rescue as they did in the 1930s.

The result is a fully employed American economy with rising wages and salaries for years to come—unless the Fed attempts once again to tamp down this activity with its outdated policy goals.

It could right the imbalance that has always benefited employers in the name of price stability since the 1980s by allowing its mandate of maximum employment to continue and restraining further rate hikes.

Harlan Green © 2023

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

Financial FAQs

AtlantaFederalReserve

The Atlanta Fed’s GDPnow graph perfectly illustrates how uncertain are predictions for second quarter economic growth. They go literally from negative growth to 2 percent plus!

Why? Because though manufacturing sector growth has been negative for seven months, the service sector of our economy has been supporting jobs and the US economy, which makes up most of economic activity these days.

The latest reading by the S&P Global “flash” U.S. service sector activity index fell to a 54.1 in June from 54.9 in the prior month, a two-month low. Economists surveyed by the Wall Street Journal had forecast a reading of 53.3.

The S&P Global “flash” U.S. manufacturing sector index, meanwhile, slid to a six-month low of 46.3 from 48.4 in May. Any reading above 50 in the surveys shows continuing growth.

And Treasury Secretary Yellen has been more optimistic of late, though warned about the danger to growth if the US Fed continues to raise interest rates.

“I’m not going to say it’s not a risk, because the Fed is tightening policy,” she added, referring to the Federal Reserve’s series of interest-rate increases.

The Federal Reserve has announced its first rate pause since it began to raise short term rates last year. But it threatened to raise rates twice more this year after a six week pause to study the impact of its policies to date.

The Atlanta Fed’s survey attempts to take in any and all indicators of the growth trajectory, so I am conjecturing economists cannot agree on which is the better model, but the fact is we are still at full employment, which has defied the US Fed’s attempts to slow consumer demand quickly enough to their liking, which they say must mean more joblessness! That was the mistake of Greenspan’s tenure as Fed Chairman that I’ve been harping on ad nauseum. He kept raising rates until it caused the Great Recession!

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 1.9 percent on June 20, up from 1.8 percent on June 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth increased from -2.1 percent to 2.2 percent.”

I said recently that inflation may have all but disappeared by next year, at least for wholesale goods and services, as the Producer Price Index took a sudden plunge in May to an almost zero inflation rate. And it measures the price of wholesale material costs that go into the PPI.

The Producer Price Index (PPI), the Federal Government’s wholesale inflation indicator, shows the Federal Reserve has already overreacted to the inflation surge. Its index for final demand plunged from 2.3 percent to 1.2 percent YoY in just one month, April to May 2023.

“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.”

These changes will also be reflected in the retail Consumer Price Index in coming months, and we could begin to experience a close to zero overall inflation rate if it continues its downward trend very soon.

And, though I’m in danger of repeating myself too much, another inflation indicator is moving quickly downward, U.S. import prices, which fell 4.6 percent from March 2022 to March 2023. This was their largest over-the-year drop since import prices declined 6.3 percent from May 2019 to May 2020.

This basically means the US economy is at full employment, so why wouldn’t consumers spend more on leisure activities such as dining out and travel?

Compounding the confusion over economic growth, Fed Governors seem as uncertain about the future. Richmond Fed Governor Tom Barkin said it’s too soon to decide on more rate increases.

“I want to reiterate that 2% inflation is our target, and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target,” he said Friday in a speech in Maryland.

“If coming data doesn’t support that story, I’m comfortable doing more,” he said. Barkin is not a voting member this year of the Fed’s interest-rate setting panel.

Harlan Green © 2023

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

Financial FAQs

FREDusdebt

President Biden said it best concerning the agreement to raise the national debt ceiling for two years, when asked at the G-7 summit if it could cause a recession.

“I know it won’t…Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.”

What did he mean?

Federal spending had already been reduced by $1.7 trillion last year with expiration of much of the COVID-19 spending programs. The above FRED graph shows it also reduced the federal debt-to-GDP ratio from 135 percent in Q1 2020 to 119 percent in Q1 2023, a cut of 16 percent.

One of its selling points was that the new debt ceiling and 2023-24 fiscal year budget agreement would continue reducing the deficit as well as growing the economy.

The agreement will continue government programs such as the Inflation Reduction Act and Infrastructure Investment and Jobs Act that are part of the New New Deal, a bevy of government programs generated to recover from the COVID pandemic and modernize the US economy, just as happened in the 1930s with Roosevelt’s New Deal.

The New York Times estimated the agreement should cut some $136 billion in government spending over the next two years by limiting the growth of discretionary spending on such as Food Stamps and early childhood education, part of the Republican wish list.

The G-7 summit President Biden just attended also signaled greater agreement of western nations in supporting a worldwide economic recovery that will aid the US economy as well.

The coordination of G-7 countries in military spending as well as the mitigation of global warming could generate a new industrial age in the words of recent Barron’s columnist and former Senior Treasury official Christopher Smart I cited in a recent column that could “launch a golden age of industrial policy.”

He estimates that the Biden administration will mobilize a stunning $3.5 trillion in public and private money over the next decade that could spur a ‘Roaring 2020s’ (my term) over the rest of this decade.

There are those that continue to believe in a looming recession, but that can only happen if the Fed continues to raise interest rates while enforcing its 2 percent inflation target. The Conference Board’s consumer confidence survey showed higher pessimism among consumers, though it hasn’t stopped their spending in leisure and entertainment activities.

“Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Their assessment of current employment conditions saw the most significant deterioration, with the proportion of consumers reporting jobs are ‘plentiful’ falling 4 ppts from 47.5 percent in April to 43.5 percent in May. Consumers also became more downbeat about future business conditions, weighing on the expectations index.” 

Let us hope the Fed sees some light at the end of its struggle to tame inflation. More data is confirming that the inflation rate will continue to subside, regardless of the Fed’s actions.

It really looks like America will have partners to aid it in this economic recovery. There should be enough available resources to grow a new, New Deal.

Harlan Green © 2022

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

Popular Economics Weekly

FREDpceindex

After a sputtering start, it looks like the U.S. economy is picking up steam. First Quarter GDP growth was revised upward from 1.1 to 1.3 percent in the BEA’s second estimate yesterday.

And the Personal Consumption Expenditure Index (PCE) out today (Friday), the Fed’s favorite inflation indicator, confirmed consumer spending is the main engine of growth. The PCE is the best measure of consumer behavior, and rather than pulling back because of higher inflation and interest rates, spending has kept up with inflation.

Compound this with predictions of up to 2.9 percent GDP growth in Q2, and we could be off to a ‘roaring’ 2023 year and decade I’ve been touting lately.

The result won’t make our Federal Reserve Governors happy who have been hinting at the possibility of a rate pause in June, since the PCE inflation index ticked up from 4.2 to 4.4 percent YoY.

PCE data showed consumer spending sprang back to life in April, rising 0.8%, the largest gain in three months, “surpassing expectations for a 0.5% increase as Americans bought more cars and spent more on services,” said a MarketWatch commentator. Why not, when consumers are fully employed and feeling more secure about their prospects?

Within services, the largest contributors to the PCE increase were spending for financial services and insurance, health care, and “other” services (notably professional and other services). Within goods, spending for motor vehicles and parts (led by new motor vehicles) and “other” nondurable goods (notably pharmaceutical products) were the largest contributors to the increase.

And lastly, orders for U.S. manufactured goods jumped 1.1 percent in April largely because of the military, but business investment also rose sharply in another  positive sign for the economy. Manufacturing output has been shrinking over the last six months.

In a good sign, business investment rose a sharp 1.4 percent. What are corporations seeing that induces them to invest more? They are also expecting economic growth to improve.

The latest results show that consumers are in a tug-of-war with the Fed, which has been outspoken in its efforts to slow consumer spending with boosts to credit card and installment loan interest rates.

Yet Americans remained worried about the future of the economy, especially against the backdrop of another fight in Washington over the debt ceiling.

The University of Michigan sentiment survey final reading in May rebounded slightly to 59.2 from earlier in the month but was still lower than April’s 63.5 final reading.

“Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged,” said survey Director Joanne Hsu.

But they can’t be too worried as the post-pandemic surge in prosperity has been cancelling out the bad news.

Harlan Green © 2023

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