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Financial FAQs

AtlantaFedGDPNow

Because of January’s gangbusters unemployment report of 517,000 new payroll jobs and the unemployment rate decline to an all-time low of 3.4 percent, consensus is growing that the US may avoid a recession.

One indicator of a more optimistic outcome is the Atlanta Federal Reserve GDPNow estimate of economic growth that I have been reporting. It has been close to correct over the past two quarters. For instance, it predicted 3.2 percent growth for Q4 2022 and the official final estimate of Q4 from the US Bureau of Economic Analysis (BEA) came in at 2.9 percent.

It is predicting 2.2 percent growth for the first quarter 2023, when last year’s first and second quarter growth was negative (though there was no recession). The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.2 percent on February 8, up from 2.1 percent on February 7, said its press release.

Why is the Atlanta Fed’s GDPNow estimate of Q1 2023 so optimistic?

Its estimate highlighted increased foreign trade because supply chains that have been able to circumvent the Ukraine war and a host of other supply constraints so that US consumers continue to buy cheaper foreign goods, which is also holding down inflation.

The New York Fed has a new Global Supply Chain Pressure Index that tells us supply prices have eased substantially because Asian countries are recovering quickly. For instance, Chinese imports have recovered, as they work out of their COVID-induced slowdown.

Bank of America and Goldman Sachs fund managers are finding their clients also see less chance of a recession, as reported on MarketWatch.

The B of A’s latest global fund manager survey found forecasts of a recession have massively dropped since its November 2022 peak, where 77 percent of fund managers said a recession was likely, to 24 percent in February.

“Most fund managers are optimistic on inflation; 83% anticipate lower global CPI in the next year and 47% expect to see lower short-term rates in the next 12 months, the most since March 2020,” said the B of A survey.

Similarly, Goldman Sachs research analysts led by David Kostin, said in a client note on Tuesday that companies in the Russell 3000 index are talking less about an oncoming recession. Their analysis of corporate earnings calls found just 12 percent mentioning the R word.

Speaking of inflation, the well-regarded New York Fed’s consumer expectations report shows inflation expectations in particular ‘well anchored’, i.e., consumers are expecting no surprises.

“Median inflation expectations remained unchanged at the one-year-ahead horizon,” said the NYFed, “decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively.”

So we still have an inflation problem. U.S. Treasury Secretary Janet Yellen last week said she saw a path for avoiding a U.S. recession, with inflation coming down significantly and the economy remaining strong, given the strength of the U.S. labor market.

“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years,” Yellen told ABC’s Good Morning America program.

Who is right in this crazy year? The developed world has proved resilient in easing supply chains, which will bring down inflation even faster.

Harlan Green © 2023

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

Popular Economics Weekly

MarketWatch

I said last week, the U.S. economy has done it again with stronger than predicted fourth quarter GDP growth. This week a record employment gain should shock most economists and professional prognosticators to their roots.

Total nonfarm payroll employment rose by 517,000 in January, and the unemployment rate dropped to 3.4 percent, the U.S. Bureau of Labor Statistics reported today. It was double the estimates of job growth for January; whereas just 223,000 nonfarm payroll jobs were created in December.

President Biden gave a short announcement this morning that a total 12 million jobs were created in his first two years in office, also a record. It’s now looking like we should anticipate a record year of recovery rather than worry about an incipient recession, with economic growth continuing as the $trillions in government spending over the past two years gets put into a more productive economy.

“Job growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partially reflecting the return of workers from a strike,” said the BLS.

In fact, all sectors had job growth except for the information services. Is Silicon Valley cutting jobs because its revenues are shrinking? Apple, Google, Microsoft have all announced layoffs.

The drop from 3.5 percent to 3.4 percent unemployment was the lowest level since 1969 and the number of hours people work jumped 0.3 hours to 34.7 hours, matching the highest level in a year.

Why wouldn’t this be with a five-year allocation of $550 billion in federal investments in America’s infrastructure to upgrade highways and major roads, bridges, airports, ports, and water systems?

Additional investments cover expansions and improvements to the nation’s broadband access, public transportation systems, and energy grid infrastructure, as I said last week, all boosters to economic growth.

The fall in wage inflation will upset the Fed most, since the report showed that average annual hourly wage growth had dropped to 4.4 percent. I.e., it is falling with a stronger job market.

So, inflation isn’t endangering job growth; the opposite is happening. The most important figure in the Q4 GDP report was the inflation rate rose at an annual 3.2 percent pace in Q4, falling from a 4.3 percent advance in the prior three-month period.

The so-called inflation deflator used in the Bureau of Economic Analysis that measures the aggregate prices for all goods and services transacted domestically signals inflation will continue to decline. So why shouldn’t we be hopeful that 2023 might be a better year for Americans?

The fastest job growth was in sectors that most benefit the public—Education & Health, Leisure/Hospitality, Professional/Business, and Government.

In the face of a rising tide of prosperity for all, does the Fed dare to raise interest rates much further?

Harlan Green © 2023

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

The Mortgage Corner

BLS.gov

A preview of December’s official unemployment report was given today. Employers continued to fight the Fed by offering more jobs in the December Bureau of Labor Statistics JOLTS report, its Job Openings and Labor Turnover Survey.

The number of job openings increased to 11 million from 10.4 million in November, signaling employers still see a huge demand for their products and services—mainly in retail and leisure activities.

“On the last business day of December, the number and rate of job openings increased to 11.0 million and 6.7 percent, respectively,” said the BLS. “In December, the largest increases in job openings were in accommodation and food services (+409,000), retail trade (+134,000), and construction (+82,000). The number of job openings decreased in information (-107,000).”

The Fed Governors probably won’t like the JOLTS report, as they believe it means inflation won’t continue to decline—or will decline too slowly. They seem to believe almost religiously that full employment is synonymous with high inflation.

So does former Treasury Secretary Larry Summers, apparently, on Bloomberg News, who has been leading the inflation hawks.

“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a speech in London Monday. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on s a horrific thesis of so-called classical economic theory that no longer applies, and which even some Fed Governors are saying they no longer believe.

In fact, the swift decline in inflation since last June occurred in the face of continuing full employment and a record-low unemployment rate.

Then why is inflation now declining so fast? Lets’ return to an even more basic economic theorem: the Law of Supply and Demand. Supplies are now catching up to said demand for goods and services, which is reflected in falling commodity (like oil and food grain) prices.

Inflation came from the aftereffects of accelerating growth after the COVID shutdowns in early 2020 getting ahead of supply-chains, hence the sudden shortages were due to the pandemic shutdowns, the Ukraine war, and China’s ongoing COVID problems.

And because world trade has become global, we are finding alternatives to these shortages.

EPI.org

So rising wages of employees are no longer the major inflation threat. The Economic Policy Institute, a labor think tank, provides a simple graphic to explain why—the widening gap between what employees produce and what they earn from their labor since 1980.

Until 1979, labor’s compensation rose in tandem with labor productivity. But then the gap widened so that labor productivity has increased 64.7 percent from 1979 to 2021, whereas a typical worker’s compensation increased just 17.3 percent, not even keeping up with inflation.

Where did the rest of the wealth end up that has been generated since 1979? It’s the reason corporate profits as a percentage of GDP were the highest ever in the summer of 2022.

The good news is that Fed Chairman Powell’s remarks after this Wednesday’s announcement of its one-quarter percent rate hike is indicating that the Fed Governors are not listening to Larry Summers.

But are they listening to wage-earners who will suffer most from a recession?

Harlan Green © 2023

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

Popular Economics Weekly

BEA.gov

The U.S. economy has done it again. The ‘advance’ estimate (1 of 3) of fourth quarter Gross Domestic Product growth of all things bought and sold domestically grew 2.9 percent, down slightly from 3.2 percent in Q3.

Consumer spending that accounts for some 70 percent of activity gave it the biggest boost, up 2.1 percent, while government spending rose 3.7 percent for the second quarter in a row.

Consumers and governments (state and federal) will continue spending in 2023 because there is so much money in circulation, as much as the Fed is attempting to shrink the money supply with its credit tightening moves.

The most important figure was inflation that rose at an annual 3.2 percent rate in Q4, falling from a 4.3 percent advance in the prior three-month period.

The so-called inflation deflator used in the Bureau of Economic Analysis measures the aggregate prices for all goods and services transacted domestically is signalinf that inflation will continue to decline. So why shouldn’t we be hopeful that 2023 might be a better year for Americans?

Enough with the numbers. The financial markets are rallying on the good inflation news and interest rates are tumbling.

“The increase in real GDP reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and exports,” said the BEA.

Manufacturing isn’t doing so well, but it makes up much less of GDP. New orders for manufactured goods jumped 5.6 percent in December because of a huge number of new contracts for Boeing passenger planes, but business investment was weak again in another sign of a slowing U.S. economy in the New Year.

If transportation is set aside, new orders fell 0.1 percent last month. What’s more, a key measure of business investment also declined for the second time in four months.

What are the possibilities for growth in 2023? Two S&P surveys showed the U.S. economy got off to a weak start in 2023. Business conditions contracted again in January for the fourth month in a row, but showed signs of improvement,

The S&P Global “flash” U.S. services sector index rose to a three-month high of 46.6 from 44.7 in December, which employs most Americans. The S&P Global U.S. manufacturing sector index, meanwhile, edged up to 46.7 from a 31-month low of 46.2 at the end of last year.

In other words, U.S. consumers are keeping the economy chugging along. Both personal incomes and personal savings are keeping up with inflation, according to the BEA.

Current-dollar personal income increased $311.0 billion in the fourth quarter, compared with an increase of $283.1 billion in the third quarter. The increase primarily reflected increases in compensation (led by private wages and salaries), government social benefits, and personal interest income.

Disposable personal income increased $297.0 billion, or 6.5 percent, in the fourth quarter, compared with an increase of $242.4 billion, or 5.4 percent, in the third quarter. Real disposable personal income increased 3.3 percent, compared with an increase of 1.0 percent.

And the main ingredients of consumer prices continue to decline—gas, food, and housing prices (or equivalent rents, in the case of housing)—which should make disposable incomes go further in household budgets.

This means consumers can maintain their spending ways as inflation continues to decline, particularly in travel and leisure activities, perhaps dodging a recession.

Harlan Green © 2023

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

Financial FAQs

Bls.govearnings

The chorus is growing for the Fed to cease and desist from raising short-term interest rates any further that have raised the borrowing costs of ordinary folk who depend on credit cards and auto loans for most of their purchases.

Why? Average hourly wages of employees are plunging after inflation in spite of the tight labor market, worsening the wage inequality of those workers that the Fed says it wants most to help.

Real average hourly earnings for all employees on private nonfarm payrolls decreased -3.0 percent from May 2021 to May 2022. The change in real average hourly earnings combined with a decrease of 0.9 percent in the average workweek resulted in a –3.9-percent decrease in real average weekly earnings (after inflation is factored in) over this period.

This is while the Consumer Price Index for All Urban Consumers (CPI-U) rose 8.5 percent for the year ending May 2022.

The reality wage-earners face is portrayed in the Bureau of Labor Relations average hourly earnings graph above. Average hourly earnings had soared to +7.6 percent in April 2020 at the beginning of the pandemic, which is what panicked the Fed since they maintain wage costs make up a major part of inflation.

But the inflation problem is due as much to continuing supply shortages, that periodically empty store shelves attest to.

The Fed Governors should recognize that businesses are hiring to meet the need for workers caused in part by the $1.2 trillion infrastructure bill, and Inflation Reduction Act, both designed to increase the supply of things needed in our growing economy.

So two arms of our government are in conflict, and it will be harder today to equalize the demand and supply equation than in past decades. The world was flooded with excess supply from Asian countries for decades that produced more than they could consume under the old free trade policies.

But protectionist policies are growing with post-pandemic economies wanting to protect their domestic producers with higher trade tariffs and lower import quotas. Now many of those cheap imports American consumers relied on will disappear, boosting consumer prices.

Nobel laureate Paul Krugman, who won his Nobel Price on the advantages of comparative trade policies—by countries concentrating on what they produce best—is even sounding the alarm that further rate increases could exacerbate wage inequality.

He cites Princeton economist David Autor’s recent study:

“For the first time in decades, wage inequality is falling. Real wages are rising among young, low-skilled workers and workers at the bottom of the wage distribution. While it is tempting to attribute the change to tighter labor markets, this may be an oversimplification.”

Given that the Fed Governors are saying they want to dampen hiring in the red-hot labor market, wage-earners will continue to take the hit.

And what are we to make of a predicted jump in fourth quarter GDP growth? We will know Thursday with the initial estimate of fourth quarter GDP growth is released.

The Atlanta Fed’s GDPNow prediction of Q4 growth was just increased to 3.5 percent and had been holding steady as more positive economic data came in. This could mean much stronger growth in early 2023 as I said in earlier blogs.

US economic growth is leading the recovery from the COVID pandemic. With the Ukraine War, declining world trade due to supply bottlenecks and growing protectionist trade policies, is the Fed doing the right thing?

Harlan Green © 2023

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