Populareconomicsblog

Popular Economics Weekly

MarketWatch

Surprise, surprise. Americans remain fully employed, in spite of the Fed’s efforts to slow economic growth. The ‘official’ unemployment rate dropped to 3.4 percent in April. The last time it was this low was in 1968.

It is raising hopes we may avoid a recession.

“Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4 percent, the U.S. Bureau of Labor Statistics reported today Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance.”

What is going on? It peaked at 14 percent in April 2020 then plunged incredibly quickly after what was just a two month recession. This had never happened since World War Two.

Could it be the COVID-19 pandemic, the first worldwide pandemic in 100 years that has killed more then seven million citizens of the world?

Of course it was the pandemic, which has upset everyone’s prognostications, especially the Fed’s economists, because so much has changed in 100 years. But there are some similarities. The Spanish flu lasted from 1920-22, and then the Roaring Twenties kicked in that was the greatest economic expansion in history at the time.

And then came the Great Depression and a New Deal when Roosevelt’s government became the solution rather than the problem.

The same is happening today. Both Democrats and Republicans raised $trillions to pay for the COVID-19 recovery, putting actual checks in consumers’ pockets so that they still have some $1 trillion in savings, which has kept them spending, and employers hiring ever more employees.

Everyone seems to be working that wants to work. The BLS said among major worker groups, the unemployment rates for adult men (3.3 percent), adult women (3.1 percent), teenagers (9.2 percent), Whites (3.1 percent), Blacks (4.7 percent), Asians (2.8 percent), and Hispanics (4.4 percent) were at record lows.

Education and Health added 77,000 jobs, followed by Professional/Business and Leisure and Hospitality; all in the service sector. Governments added 23,000 jobs, which highlighted just how government spending has boosted growth.

The one factor that worries Fed governors most is that average hourly wages rose slightly to 4.4 percent, though it has fallen sharply from its high last year.

Stocks are rallying because it has reduced fears of an imminent recession. In fact, how is that possible now?

Consumer spending is the main engine of U.S. growth and grew 3.7 percent last month, I wrote last week. It was the biggest increase in almost two years. Businesses are now aggravating the inflation problem by not meeting consumers’ needs, reducing investments and production at a time when consumers are still consuming, thus keeping prices from declining more quickly.

What is the Fed to do that just raised their rate another 0.25 percent? Former Fed Chair Greenspan made the mistake of continuing to raise the Fed Funds rate 16 consecutive times over two years, this causing the housing bubble to bust and the Great Recession in 2008-09.

How can Chairman Powell avoid making the same mistake?

Harlan Green © 2023

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

Popular Economics Weekly

BEA.gov

First quarter 2023 economic growth was not good, after all the conjecture over where US growth is headed. U.S. Gross Domestic Product grew at just a 1.1 percent annual rate in the first three months of this year, as declining business investment offset strong consumer spending causing the slower growth.

Consumer spending kept US economic growth barely positive. So the Fed’s rate hikes are making a difference. But it was businesses cutting back on spending and stocking inventories, not consumers that slowed Q1 growth.

Consumer spending is the main engine of U.S. growth and grew 3.7 percent, the government said Thursday. It was the biggest increase in almost two years. Businesses are now aggravating the inflation problem by not meeting consumers’ needs, reducing investments and production at a time when consumers are still consuming, thus keeping prices from declining more quickly.

What is the Fed to do with one more rate hike scheduled? They are harming future growth six month to a year ahead, while consumers want to spend because they are still fully employed.

One economist believes we are already in a rolling recession, with some sectors still growing while others are shrinking. Consumers still love leisure activities like dining out and travel, for instance, but are buying fewer things like cars and other durable goods.

Businesses like manufacturing see this as recessionary and so have cut back on investments, and hence future growth.

“The strong and healthy job market is one of the reasons we’re not seeing every sector declining simultaneously as we do in a classical recession,” said Sung Won Suhn, an economist at Loyola Marymount University. “This is the bedrock of the economy that’s enabled a more moderate rolling recession,” who was cited in the Washington Post.

We can therefore say the Fed has already induced a recession, but a mild one if the Fed will now pause in its rate hikes. They should pause because the simple fact is regional banks are still in trouble, such as First Republic that has seen another multi-billion dollar withdrawal of deposits that sent its stock plunging 50 percent recently.

So the Fed maintains it is now the job market that is causing stubborn inflation because Americans are still fully employed!

But is it wise for the Fed to now want to put workers out of work at a time when banks are faltering, there is a major European war, and there is still a scramble for available resources?

Harlan Green © 2023

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

Financial FAQs

BEA.gov

It is no longer lost on the Fed Governors that the record speed they have raised short-term interest is causing a possible recession. They have even said so in their just released minutes from the latest FOMC minutes.

Three medium-sized regional banks have already failed and several dozen are on the FDIC watchlist, who have overinvested in uninsured assets that are devaluing fast as interest rates have risen.

And inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.

In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March. Prices for final demand goods decreased -1.0 percent, and the index for final demand services moved down -0.3 percent—all plunging the largest monthly amount in three years.

So, alarm bells are sounding for the Fed to move in the opposite direction—to not only pause but reverse course, if they believe what they say—and inflation is no longer a problem.

Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.

It turns out the Fed Governors have been too good at their job, catching banks and regulators flat-footed from the effects of their rate hikes and a probable cause of a recession sometime later this year.

Why? Because Fed officials are now seeing signs that banks are tightening their credit standards as well, following the Fed’s guidance, which will harm business investments and even homebuyers who will find it more difficult to qualify for a loan or mortgage.

“Financial conditions tightened considerably over the intermeeting period as a whole,” said the minutes. “Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes.”

Given their assessment of the potential economic effects of the recent banking-sector developments, the Fed’s staff now sees “a mild recession starting later this year with a recovery over the subsequent two years.”

The minutes also show that “many” officials said that the likely effects of the banking stress had led them to lower their estimate of the peak rate that would be needed to bring inflation under control, according to the minutes of the March 21-22 meeting.

With such fears it would be far wiser to anticipate other inflation indicators plunging as fast. And once that happens what other dominoes may fall?

But instead, FOMC officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage point, the ninth increase over the past year. That brought the fed funds rate to a target range of 4.75%-5%, its highest level since late 2007.

Other economic sectors are beginning to plunge as well. Sales at retailers dropped 1 percent in March and declined for the fourth time in the past five months, said the Census Bureau. Watch out below if this reflects consumers beginning to close their wallets.

The problem the Fed Governors haven’t understood in their panicked reaction to the initial inflation surge was that conditions outside of the Fed’s control have caused most of the inflation. A historic pandemic that shut down worldwide economic activity and a European war have been the main cause shrinking world-wide production, while governments pumped in excess liquidity to keep their economies afloat.

There is now the real possibility that the Fed intends to cause a recession, which is the only result that will bring down the inflation rate to 2 percent, which they seem fixated on doing, despite the possibility of more bank failures.

Harlan Green © 2022

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