Populareconomicsblog

The Mortgage Corner

There is a growing optimism Jerome Powell’s Fed can engineer a so-called soft landing with its restrictive monetary policies, which means avoid an outright recession.

Why? First quarter 2023 GDP growth is predicted to be positive following strong Q3 and Q4 growth in 2022, and we are still fully employed. This is in part because the US economy has recovered faster from the pandemic than other countries.

But the Federal Reserve’s last attempt to engineer a soft landing with a 2 percent inflation target resulted in the Great Recession, the worst worldwide downturn since the Great Depression.

Alan Greenspan, the Fed Chairman and his Fed Governors at the time thought that if they raised the overnight Fed funds rate slowly enough, they could tame inflation while avoiding a recession.

The funds rate was raised in increments of 0.25 percent 16 consecutive times in a vain attempt to mitigate what actually occurred. It was an example of the Fed wanting to have its cake and eat it too.

It was a different time, however. Inflation soared then because the GW Bush administration in 2001 took their hands off regulations, allowing the falsification of credit ratings, while cutting taxes to create the first $trillion budget deficit in our history.

And many traders are under what may be a similar illusion; that a so-called ‘soft landing’ is achievable with the Fed holding to its 2 percent inflation target.

However, because inflation measures have never had more than plus or minus 2 percent accuracy, pressing for a 2 percent target could bring actual inflation to zero, which is tantamount to a recession.

This fact was explicated by David Wheelock, a St. Louis Fed group vice president and deputy director of research, in a 2017 podcast.

“The price indexes that are used to estimate inflation don’t necessarily include all goods and services in an economy. Furthermore, these indexes have a slight upward bias. So, when the observed rate of inflation is, say, 1 or 2 percent … the true measure is actually probably lower than that, closer to zero.”

FREDpce

Another well-known fact is that prices plunge substantially during recessions when consumers slow spending, which is portrayed in the above FRED of personal consumption expenditures, our best measure of consumer spending.

Consumption only dipped below zero once since 1950, during the 2007-09 Great Recession that was worldwide, as I said. All other recessions (gray bars in graph) showed a consumption drop that was quickly mitigated by the Fed reversing course and dropping their interest rates.

So what is different this time? The last recession lasted just two months—from Mar-April 2020—caused by the first worldwide pandemic in 100 years that shut down economic activity completely, rather than an over-heated economy.

The inflation rate quickly dropped to zero, but took off as quickly because of the $trillions in pandemic aid, igniting the latest inflation surge. Other countries are taking longer to recover, and so the supply-chains are playing catchup to the surging demand for more goods and services.

When will a new equilibrium between supply and demand be established? It’s hard to say with a fully employed economy and consumers so willing to spend.

Larry Summers is the preeminent inflation hawk, though he has softened his rhetoric of late as inflation has subsided. I repeat a recent quote of his from Bloomberg news that has been scaring financial markets.

“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 recent speech in London. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on an outmoded thesis of classical economic theory left over from the inflationary spiral of the 1970s; suppress demand by suppressing hiring and the labor market with very high interest rates rather than wait for healthier supply-chains.

And supply-chains are recovering. The US Chamber of Commerce just reported for all of 2022 that exports of goods and services increased $453.1 billion to $3,009.7 billion, passing the $3 trillion mark for the first time. Imports of goods and services hit $3,957.8 billion, up $556.1 billion from 2021 and the highest on record.

Increasing supplies should continue to bring down inflation, in other words. But holding to a 2 percent inflation target, though Powell had said the Fed would be flexible, almost guarantees a recession.

Harlan Green © 2023

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

Popular Economics Weekly

FREDretailsales

Now we have retail sales also surging in January, on the heels of a terrific unemployment report and Atlanta Fed’s GDPNow estimate of higher first quarter economic growth.

Retail sales that make up half of consumer spending rose more than 3 percent in January, almost double early estimates. Consumers are going out more than ever with most of the US freezing, ignoring predictions of an oncoming recession, or calls by the Federal Reserve for businesses to cut back on hiring.

It’s as if the public is listening to a different song, a more optimistic tune that trumpets the U.S. economy and their finances are just fine.

Sales rose in every major category, led by department stores. Receipts leapt almost 18 percent, the biggest jump since the reopening of the U.S. economy in May 2020 after the early onslaught of the coronavirus.

One closely watched category is bars and restaurants, the only service sector in the retail report. Restaurant sales soared 7.2 percent last month after falling slightly in the last two months of 2022.

Sales of new vehicles and parts, a volatile category, jumped 5.9 percent last month. That’s the biggest increase in 22 months, and signals Americans want to travel more than ever.

Since retail sales aren’t adjusted for inflation, it also means consumers have enough cash and savings to keep up with inflation, while it is declining.

Retail CPI inflation is 6.3 percent higher YoY in January, down from its 9 percent high in June 2022. And it has risen just 2 percent since last June. The cost of gasoline rose 2.4 percent in January and gave a boost to the headline CPI reading.

Prices have subsided in February, however, as more refineries that were shut down for maintenance are coming back on line.

Grocery prices have risen 11.3 percent in the past year, but have come off their peak. They rose 0.4 percent in the first month of the new year. That was the smallest increase in 17 months, however, and a good sign for the prospects of slowing, even while inflation is falling.

And that is the real conundrum puzzling economists. What is the real cause of inflation? How can it be falling while consumers buy more than ever? The increased demand isn’t pushing up prices, in other words.

Instead, it looks like supplies are catching up in a big way. Asian economies like China are pumping out more products than ever, revitalizing the supply chains that were cut short by the pandemic.

So instead of focusing on suppressing the demand for goods and services by attacking employers and workers’ rising wages with higher interest rates, why not listen to the music in consumers’ ears heralding a rising abundance and better New Year?

Harlan Green © 2023

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

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