Populareconomicsblog

Popular Economics Weekly

NBER.org

The latest inflation data make it almost unanimous: Chairman Powell, leading economists and even his Fed Governors are saying the Federal Reserve Governors may not raise interest rates again this year, or even next year.

Why? Inflation has been tamed; except for gas prices, which have soared of late due to more positive economic growth and OPEC cutting oil production.

Second quarter GDP growth was 2.1 percent, and there are estimates of 4 percent or higher Q3 growth. It is a picture of the U.S. economy returning to a more normal growth pattern.

This is while the headlines are screaming that U.S. retail and wholesale prices have suddenly spiked. Wholesale PPI prices jumped 0.7 percent in August to mark the largest increase in 14 months, as did retail CPI prices the day before.

“The Producer Price Index for final demand increased 0.7 percent in August, seasonally adjusted, after rising 0.4 percent in July, the U.S. Bureau of Labor Statistics reported today. The August advance is the largest increase in final demand prices since moving up 0.9 percent in June 2022.

But note that on an unadjusted basis, the index for final demand rose (just) 1.6 percent for the 12 months ended in August.

So why isn’t retail CPI inflation following suit with its overall inflation rate rising to 3.7 percent?

An NBER working paper by noted economists Olivier Blanchard and former Fed Chair Ben Bernanke, accompanied by the above NBER graph, maintain rising wages are the culprit.

“Rising commodity prices and supply chain disruptions were the principal triggers of the recent burst of inflation. But, as these factors have faded, tight labor markets and wage pressures are becoming the main drivers of the lower, but still elevated, rate of price increase.”

But the above NBER graph shows that is not yet the case. The blue portion of the bar portraying energy prices has shrunk the most. The red and yellow portions portraying wage pressure and product shortages have shrunk the same amount bringing actual inflation (black line) below 4 percent. The gray portion is a pre-pandemic historical compendium of contributions to inflation (Don’t ask what that means, read the paper for further clarity).

So once again the fear of persistent wage inflation is driving their analysis, as many blamed for the 1970s era of stagflation. Yet they almost totally ignore the role of persistent supply shortages in the inflation equation, (oil shortages in the 1970s, Ukraine-Russian war shortages and trade sanctions today), as well as the profit-taking role of producers and distributers that padded their profits because of supply bottlenecks.

The recent spike in retail CPI and wholesale Producer Price Index was also because the financial markets believe recession dangers are over and therefore the demand for gas and oil use will only increase, another indication that markets are functioning normally.

That is why Goldman Sachs chief economist Jan Hatzius is predicting no looming recession and better economic growth ahead, as I said last week.

We can also thank Bidenomics, the boost to growth that the infusion of $billions into renewal of the US economy in infrastructure, CHIPs manufacturing, and the conversion to more climate friendly policies has jump started.

Above all, we see consumers feeling prosperous enough to continue to shop and enjoy more leisure activities even with higher interest rates. The Fed has signaled they won’t be in any hurry to drop their interest rate. But that’s also a sign of interest rates returning to more normal levels that prevailed before the COVID pandemic.

Harlan Green © 2023

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

Financial FAQs

FREDcpi

Americans want to blame someone for the post-pandemic inflation surge, according to most polls. Yet when in our history has it been a real problem affecting serious economic growth?

Consumer prices rose again in August to reach a 3.7% yearly rate, based on Wednesday’s release of the monthly consumer-price index. That marked its biggest jump in 14 months and a higher reading than the recent 3% low set in June (see chart) as the toll of the Fed’s rate hikes kicked in.

Horrors, according to some pundits! But it hasn’t affected economic growth which is again surging after the pandemic—up 2.1 percent in Q2. And just last week S&P Global Market Intelligence raised its third-quarter GDP estimate by nearly two percentage points to an annualized rate of 4%, citing strong retail sales data. It moved its annual estimate up slightly to a historically strong 2.3 percent.

What makes the above FRED consumer price index (CPI) chart more interesting is that I have dated it to World War I; yes, pre-1920 and World War I; to give inflation the proper historical perspective. It shows that inflation, in fact, has rarely been a problem in our up-and-down consumer-driven capitalist economy.

Why? We have seldom had a supply problem—i.e., not enough goods and services to balance out and keep inflation in check—because the US economy is very productive and able to quickly meet surging demand.

The 1970’s stagflation era when the CPI topped out at 14 percent in 1980 was an exception because we didn’t yet have the means to produce enough oil, and OPEC did, so they embargoed the supply to US because of our support of the Arab-Israeli War, which sent oil prices skyrocketing that we depended on.

The other major peak was 1947 when post-WWII consumers demanded more while our WWII economy was just beginning to shift out of war-mode and produce autos instead of tanks.

(The earlier 1917 to 1920 spikes were for the same reason—a WWI economy shifting back to a peacetime economy.)

Looking at the graph again, moderate inflation has been the norm—averaging around 2.5 percent and never more than 5 percent since 1980—until the post-pandemic spike, which again was mainly caused by another war, the war against the COVID-19 pandemic that paralyzed the world economy for a time, until supply chains began to catch up.

It is difficult to imagine another time when wild animals wandered in the empty streets of major cities under lockdown.

In the words of CNN senior business reporter Alison Morrow, “Demand went from zero to 100, but supplies couldn’t bounce back so easily. Factories were on lockdown or navigating Covid-19 restrictions, and raw materials were harder to get because of the sudden swell in demand. Shortages of just about everything cropped up, especially workers to unload goods and drive them to their destination. We’re still untangling the mess at ports around the world.”

And there is another war going on, the Ukraine-Russia war, which is affecting the current spike in energy prices, and is the main reason for this month’s uptick in inflation.

West Texas Intermediate Crude, the U.S. benchmark, was near $88.58 a barrel on Wednesday, with traders focused on supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. WTI was trading at a low for the year below $65 a barrel in May.

So we shouldn’t forget such historical events do occur, but also that they have never lasted for long.

Harlan Green © 2023

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

Financial FAQs

Calculated Risk

The latest Job Openings and Labor Turnover Survey (JOLTS) report by the BLS shows there are still a lot of job openings, but that should continue to decline from the post-pandemic high of 12 million job vacancies in 2022.

Could that mean no more rate hikes by the Fed this year? Pundits and economists are mixed on that possibility in part because Fed Chair Powell gave mixed signals about their intentions at his annual Jackson Hole speech—from saying the job market is too tight, to the possibility of no recession and a soft-landing scenario maybe next year.

“The number of job openings edged down to 8.8 million on the last business day of July, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 5.8 million and 5.5 million, respectively. Within separations, quits (3.5 million) decreased, while layoffs and discharges (1.6 million) changed little.”

The key fact was that the number of job openings (black line in graph) has been declining sharply, and the number of hires is declining slowly (blue line). There were just 187,000 nonfarm payroll jobs added in July’s unemployment report. But retailers are gearing up for the holidays.

Over the month, job openings decreased in professional and business services (-198,000); health care and social assistance (-130,000); state and local government, which had increased the most in last month’s unemployment report. Whereas job openings increased in information (+101,000) and in transportation, warehousing, and utilities (+75,000), jobs in demand over the holidays.

The August unemployment report comes out this Friday, and there’s no real consensus by economists on what it might be.

Other news was a big drop in one consumer confidence report by the Conference Board that said consumers are losing confidence because energy and food prices are rising again, just when they thought inflation was being tamed.

Although bad news for consumers, it’s music to the ears of Powell, since it could mean less consumer spending, which in turn could depress the inflation rate without further Fed actions.

What is making Fed officials nervous is the Atlanta Federal Reserve’s advance estimate of third quarter economic growth jumping to 5.9 percent because of higher third-quarter real gross private domestic investment growth, thought to be an almost unbelievable growth rate just weeks ago.

I said last week that GDP growth is soaring because private capital spending has also picked up, proving that governments must kick start many of those projects that don’t promise enough profits to bring in private investment, i.e., long term projects like roads, bridges that pay for future growth.

But said spending doesn’t have to be inflationary, as inflation hawks maintain. It inflates the budget, but doesn’t have to boost inflation if it’s paid for; i.e., if tax revenues keep up with spending, which is after all a reinvestment in our productivity, just as private industry does with its capital spending.

This is the truth that Wall Street and the inflation hawks don’t like to hear, either. It’s the chicken and the egg problem. Inflation occurs because not enough of something is produced when demand is high for such things. Policies that slow growth are counterproductive, because they seek to dampen demand rather than spend to produce more.

Harlan Green © 2023

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

Financial FAQs

FREDprofits/gdi

The St. Louis Fed (FRED) graph of corporate profits as a percentage of Gross Domestic Income (GDI), a good proxy for gross domestic output (GDP), explains much of what boosted inflation during the COVID pandemic. The product shortages and supply chain shortcomings caused the sudden scarcity of goods, but not the sky-high retail inflation that consumers in particular experienced.

Corporate profits accounted for the largest share of the price hikes experienced since the pandemic. Data from the U.S. Commerce Department shows that 2021 corporate profit margins were the largest they’ve been in 70 years, some 16.7 percent in 2021, the last year annual profit data was available.

That is why consumer CPI inflation surged in 2021 and is slowly returning to more normal levels. You name it—food service and energy companies took advantage of the sudden shortages in their efforts to maximize profits.

BLS.gov

The Consumer Price Index (CPI) rose just 0.2 percent in July, and the yearly rate of inflation rose to 3.2 percent from 3 percent in the prior month, the consumer price index showed. It was the first increase in 13 months.

The core rate without food and energy prices over the past year slowed to 4.7 percent from 4.8 percent and is the lowest rate in almost two years.

However, a large share of the remaining core inflation includes housing rents and used car prices that have remained stubbornly high. Since when is the Fed responsible for bringing down rents and car prices? These prices are controlled by intermediaries like realtors and auto dealers that want to maximize their own profit margins, not by the Fed.

There is also a surge in business productivity reports Brian Bethune, a Boston College economics professor. Business productivity jumped by 3.7 percent while unit-labor costs rose just 1.6 percent.

“At the same time, overall prices increased by 2.2% — well within the U.S. Federal Reserve’s target and the lowest inflation rate since the second quarter of 2020,” said Professor Bethune.

U.S. corporate profit margins have been excessive, said Bethune.

“In other words, there was “profitflation” — also known as “greedflation,” The ability of industry to raise prices aggressively, rather than defensively, is tied to increasing business consolidation and more mergers and acquisitions. Indeed, bank takeovers resurfaced in the first half of 2023 under severe liquidity stresses created by higher short-term interest rates; that story is not yet over.”

The inflation battle has been largely won, and corporate profit margins are declining as supply chains catch up to demand. They were down – 4.1 percent in Q1 2023, according to the Bureau of Economic Analysis (BEA).

Consumer spending is tapering as well that has been the main cause of said demand, so that personal consumption expenditures (PCE) were up 5.4 percent YoY in June, down from the post-pandemic high of 13.1 percent in 2021.

Consumers provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth.

The story is not over for the Fed’s battle with inflation, either. High interest rates that are crimping corporate profits as well as consumer spending will continue to bring down the inflation rate. But we don’t want outright deflation China is experiencing that is causing massive unemployment among its youth.

We cannot really afford another recession, such as happened in 2007-09, or might happen again if the Fed continues to boost interest rates.

Harlan Green © 2023

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