Populareconomicsblog

Financial FAQs

Calculated Risk/Census Bureau

Why do consumers keep spending with so much news warning of an impending recession? Well, because we’re not even close to a recession yet. NYTimes columnist and Nobel laureate Paul Krugman has been puzzling over it as well.

“America hasn’t yet brought inflation back to prepandemic levels, and we may yet have a hard landing. But so far, at least, we’ve had a stunningly successful recovery from the Covid shock.”

Retail sales are up 3.1 percent YoY, though slowing from its prior highs since the pandemic as shown in the above graph.

“Advance estimates of U.S. retail and food services sales for April 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $686.1 billion, up 0.4 percent (±0.5 percent) from the previous month, and up 1.6 percent (±0.7 percent) above April 2022. Total sales for the February 2023 through April 2023 period were up 3.1 percent (±0.4 percent) from the same period a year ago.”

Consumers won’t let up their spending ways anytime soon with summer approaching, schools are out, and leisure activities still the favorite thing to do.

For instance, so-called nonstore retailers (Internet) were up 8.0 percent (±1.2 percent) from last year, while food services and drinking places were up 9.4 percent (±2.5 percent) from April 2022, a sign that consumers haven’t yet spent those excess savings accumulated during the pandemic.

I am also puzzled by the disconnect between perceptions and reality. Americans know employment is at a record high, even with the baby boomer retirement, and wage increases are keeping up with rising prices.

It could be the debt-ceiling debate and constant bickering between political parties are unnerving the average citizen. Or the Federal Reserve interest rate increases while hammering on the dangers of inflation.

And I believe we are still suffering a hangover from the COVID-19 pandemic that shut down the world economy, a multi-year shock to our collective psyche that will take years to recover from.

The hyper-partisanship and distrust of institutions, including the Federal Reserve, can’t be helping, either.

The uncertainty of a better future is also affecting public opinion—caused by a hot Russian war, a Chinese cold war, a broken border, supply disruptions; you name it.

This contrasts with economic reality. Industrial production increased a very large 1.0 percent in April with motor vehicle production surging 9.3 percent after declining 1.9 percent in March. And the Atlanta Federal Reserve’s GDPNow model predicts 2.6 percent GDP growth in the second quarter after Q1 growth of 1.1 percent

Manufacturing production has been in a 6-month slump, so maybe it is climbing out of its own recession? (There’s that word again.) So what should we make of the bumpy economy we are riding?

Above all, I believe there’s a general anxiety weighing on Americans over their future. Too much change is uncomfortable, but still bearable. What will happen in generations to come?

Harlan Green © 2022

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

Financial FAQs

BLS.gov

April’s Producer Price Index for final demand confirmed the wholesale cost of goods and services has already returned to a 2 percent range, which should enable Fed officials to say the battle against COVID-induced inflation is almost won. But will they?

“The Producer Price Index for final demand advanced 0.2 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported yesterday. On an unadjusted basis, the index for final demand moved up 2.3 percent for the 12 months ended in April.”

April’s Consumer Price Index slowing as well, showing retail prices dropping to a 4.9 percent inflation rate yesterday. It means other factors are keeping retail inflation higher than the wholesale cost of materials.

The so-called PPI should be a more accurate measure of inflation, since it reflects the downward trending costs of stuff that goes into retail goods and services.

Supply chains are being replenished, in other words. Retail inflation has remained higher because corporations today are making record profits by padding their profit margins. They took advantage of the sudden supply shortage during the COVID pandemic.

But as supplies are replenished—particularly in the Asian countries including China that produce most consumer goods—wholesale prices have fallen sharply, forcing corporations to lower their profit margins to a more normal level.

Average hourly wages of employees are also rising faster than normal (4.4 percent), and now the Fed considers higher wages to be the main inflation danger. So, it has prolonged their tightening cycle because it wants corporations to cool the red hot labor market.

Some 80 percent of wholesale costs was in the service sector that caters primarily to consumers that love their leisure activities such as travel and dining out. Over one-third of the April advance in the index for final demand services can be traced to a 4.1-percent rise in prices for portfolio management. The indexes for food and alcohol wholesaling, outpatient care (partial), loan services (partial), hospital inpatient care, and guestroom rental also moved higher.

We can now see clearly why consumers are fearing a recession. The University of Michigan sentiment survey plunged because of such fears.

“Consumer sentiment tumbled 9% amid renewed concerns about the trajectory of the economy, erasing over half of the gains achieved after the all-time historic low from last June,” said survey director Joanne Hsu. “While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff.”

The Fed must pause any further rate hikes while congress works out some kind of debt ceiling compromise. Inflation will continue to plunge in the meantime, which should bring down retail prices as well.

Harlan Green © 2022

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

Financial FAQs

FREDretailsales

Treasury Secretary Janet Yellen said in a recent Fareed Zakariah interview on CNN that she thought an economic soft landing was possible, despite warnings that the recent bank failures could cause banks to tighten in their lending criteria, contributing to a slowing economy.

That is already happening. Retail sales in March posted the biggest decline in four months, largely because of lower auto and gasoline sales. Rising interest rates make car loans more expensive, for starters.

Retail sales aren’t inflation adjusted, so it means an even larger drop if inflation is factored in. Restaurants and bar sales also declined, a sign that consumers are spending less on leisure activities.

In fact, the decline in retail sales was widespread. Receipts at auto dealers dropped 1.6 percent. Furniture store sales fell 1.2 percent, while receipts at electronics and appliance stores tumbled 2.1 percent. Sales at building material and garden equipment supplies dealers plummeted 2.1 percent.

It is a sign that consumers are beginning to seriously cut back on spending, which affects other sectors. The Fed showed manufacturing production dropped 0.5 percent in March after increasing 0.6 percent in February. Durable goods lasting more than three years have been down the past two months.

All of this has been hurting consumer sentiment, despite Americans being fully employed and the percentage of working-age adults entering the workforce are back up to pre-pandemic levels. The index, produced by the University of Michigan, rose from 62 in March to 63.5 in April, from a four-month low.

“While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run,” said survey director Joanna Hsu.

Inflation is beginning to seriously worry consumers, in other words. One-year inflation expectations increased 4.6 percent in the year ahead, up from 3.6 percent in the prior month, said the Univ. Michigan survey. But in the longer run, expectations were unchanged. Americans think inflation will average 2.9 percent annually in the next five years.

So, when will the Fed pause in its rate hikes? 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, as reported last week. 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.

Is Janet Yellen right, and will it be a soft landing?

Harlan Green © 2022

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