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Financial FAQs

Conference Board

One economic growth measure acknowledged by market professionals but few else is the Conference Board’s Index of Leading Economic Indicators (LEI) that attempts to forecast future economic activity. And it is signaling an upcoming recession, according to its director.

“The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The six-month growth rate of the LEI fell deeper into negative territory in September, and weaknesses among the leading indicators were widespread. Amid high inflation, slowing labor markets, rising interest rates, and tighter credit conditions, The Conference Board forecasts real GDP growth will be 1.5 percent year-over-year in 2022, before slowing further in the first half of next year.”

So it is predicting contraction later this year: “The negative contributors—beginning with the largest negative contributor—were stock prices, average consumer expectations for business conditions, the ISM® New Orders Index, the Leading Credit Index™ (inverted), and manufacturers’ new orders for nondefense capital goods excluding aircraft,” said the LEI.

The labor market is slowing but it is still tight with initial jobless claims ultra-low, and inflation beginning to decline, which makes it less likely the U.S. slides into recession this year.

Prices are already plunging is many areas not covered by the standard inflation indexes. The New York Federal Reserve has said its September Survey of Consumer Expectations found that respondents projected their spending will rise by 6 percent over the next year, a sharp drop from the 7.8 percent rise predicted in the August survey. The bank noted that decline in spending expectations was the biggest since the survey began in 2013, while inflation expectations are holding steady, even declining slightly in the near term.

This will be a Federal Reserve induced recession if it materializes. Stock prices and consumer spending are down because of the higher interest rates, with the housing market, another leading indicator, already in recession.

The COVID pandemic and war in Ukraine have thrown a monkey wrench into economic policymaking because inflation reared up so quickly after the worldwide shutdown of economic activity, while governments and Central Banks spent $trillions in various COVID rescue packages in the face of worldwide shortages of goods and services—especially food and energy.

I quoted Adam Tooze, a well-regarded economic historian, last week as sounding the alarm in a recent NYTimes Opinion.

“We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. And raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit capacity and thus reduce future supply”

Yet the Conference Board’s confidence index signals consumers are still upbeat, at least through the holidays, which makes it also less likely we see a downturn this year.

“…purchasing intentions were mixed, with intentions to buy automobiles and big-ticket appliances up, while home purchasing intentions fell,” said the Conference Board. The latter no doubt reflects rising mortgage rates and a cooling housing market. Looking ahead, the improvement in confidence may bode well for consumer spending in the final months of 2022, but inflation and interest-rate hikes remain strong headwinds to growth in the short term.”

In fact, Gross Domestic Product is predicted to grow more than 2 percent in Q3 and slightly less in the fourth quarter. So, no recession is yet in the works—at least this year.

Harlan Green © 2022

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

Popular Economics Weekly

FREDretailsales

Another part of the inflation puzzle is retail sales; probably the most important picture of consumer demand since consumers power some 70 percent of economic activity. Any decline in retail sales helps the Federal Reserve decide when consumer demand for goods and services cools enough to slow rising inflation, and hence interest rates.

So, its good news to see that retail sales dropped sharply in one month—from 15.5 percent in March 2022 to just 5 percent in April 2022 YoY.

That’s also when Putin began his invasion of Ukraine and food and energy prices began to surge. It’s a sign that consumers pay attention to inflation and are cutting back on spending of their own accord.

FREDcpi

What the headlines don’t yet grasp is that retail sales flattened out in April, as did the 40-year spike in the Consumer Price Index, which has risen just 2 percent over the past three months.

Retail sales are now rising at 7.7 percent YoY and are barely keeping up the with the 8 percent inflation rate. Total sales were flat rather than up 0.2% in September as we had expected, said Reuters:

“Retail sales are slowing as spending shifts back to services. Sales at auto dealerships slipped 0.4% last month, while receipts at service stations dropped 1.4%. Furniture store sales fell 0.7%, while those at building material and garden equipment retailers decreased 0.4%.”

A survey from the University of Michigan on Friday showed consumer sentiment improved further in October, but inflation expectations deteriorated a bit as average national gasoline prices moved towards $4 per gallon after falling over the summer.

“Continued uncertainty over the future trajectory of prices, economies, and financial. markets around the world indicate a bumpy road ahead for consumers,” said survey director Joanne Hsu. “The median expected year-ahead inflation rate rose to 5.1%, with increases reported across age, income, and education. Last month, long run inflation expectations fell below the narrow 2.9-3.1% range for the first time since July 2021, but since then expectations have returned to that range at 2.9%.”

It looks like consumers via their spending habits will know and be the first to tell the Fed when the inflation dragon has been tamed.

Harlan Green © 2022

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

Financial FAQs

FREDcapex

The rumblings of an oncoming disinflationary spiral are becoming louder. And it may be as difficult to tame as the current inflationary spike that so worries the Federal Reserve.

What is disinflation as opposed to outright deflation? It’s when prices are still rising but at a lower inflation rate, vs. outright deflation when prices are falling, which occurs during a recession. Deflation last happened during the Great Recession and busted housing bubble.

The COVID pandemic and war in Ukraine have thrown a monkey wrench into economic policy-making because inflation reared up so quickly after the worldwide shutdown of economic activity, when governments and Central Banks spent $trillions in various COVID rescue packages in the face of worldwide shortages of goods and services—especially food and energy sources

The problem is how to cure inflation without causing a recession, since raising interest rates too rapidly harms future economic investment, particularly capital expenditures (capex), as well as consumer spending. Capex investment has abruptly declined after its rapid rise post-COVID, per the above FRED graph.

Adam Tooze, a well-regarded economic historian, is one of the loudest sounding the disinflation alarm in a recent NYTimes Opinion.

“We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. And raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit capacity and thus reduce future supply”

Former Fed Chair Ben Bernanke, one of three economists just awarded the 2022 Economics Nobel Prize, is contributing to the chorus. He warned that our Fed’s attempt to “fine tune” economic stability risks with interest-rate policies was not a good idea. “I don’t think we understand that well enough, except in perhaps extreme conditions, to try to fine-tune financial stability using monetary policy,” he said when interviewed at the Brookings Institute.

What is our Federal Reserve to do when the Produce Price Index for raw materials and wholesale goods that came out today is still rising? The increase in wholesale prices over the past year is up 8.5 percent, down slightly from 8.7 percent in the prior month. Inflation is still running near a 40-year high.

But prices are already plunging is many areas not covered by the standard inflation indexes. The New York Federal Reserve has said its September Survey of Consumer Expectations found that respondents projected their spending will rise by 6 percent over the next year, a sharp drop from the 7.8 percent rise predicted in the August survey. The bank noted that decline in spending expectations was the biggest since the survey began in 2013, while inflation expectations are holding steady, even declining slightly in the near term.

Adam Tooze’s plea echoes what many economic planners worry about. It’s taken more than two years to bring the COVID pandemic under control. Why not give the world’s economies more time to recover?

Harlan Green © 2022

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

Popular Economics Weekly

 MarketWatch

Job growth is slowing, but is it enough to call off the inflation hawks, including Federal Reserve Governors, from wanting more rate hikes?

The U.S. Economy is still fully employed for those wanting to work; with a historically low 3.5 percent unemployment rate, 263,000 nonfarm payroll jobs, and hourly wages rising at 5 percent in September’s unemployment report.

It was the smallest jobs gain in 17 months, and we are back to pre-pandemic levels of employment, but inflation is still high because of the Ukraine War and a shortage of goods and services. The so-called supply-chain shortages really mean there is still a worldwide supply shortage, though now there are now plenty of trucks, ships, and planes to deliver them.

Almost all business sectors continued hiring, and people continued to travel and dine out in large numbers, as hotel, restaurants and other companies in the hospitality business created 83,000 new jobs, reflecting strong demand for services such as travel and recreation.

Hiring also rose sharply in health care and professional businesses. Manufacturers added 22,000 jobs and construction firms hired 19,000 people.

All this activity is keeping prices from falling fast enough to please the hawks, but do we even have much choice in the matter? Noted market strategist Jim Paulsen of the Leuthold Group has done research on the history of such inflationary spikes, and they all pretty much behave the same, regardless of monetary policy.

MarketWatch

His graph shows that inflation spikes have come down as fast as they rose. Paulsen maintains this is therefore an excellent buying opportunity for investors because it’s now possible to predict approximately when the inflation surge ends and interest rates decline, which tend to follow inflation trends.

An inflation cycle usually takes approximately 12 months from its beginning to end, so since this inflation spike began in April-May, we should see inflation returning to a normal range by next April-May.

And he sees inflation already subsiding:

• CL.1, 3.36% are down 30% from June. A gallon of gasoline has fallen 23% since peaking in the same month. Energy is central to the economy, so its price has a big impact on the prices of almost everything. Plus, there is a psychological angle.
• CSGP, -1.89%, a great source of data on real estate trends and analytics. “We’re seeing a complete reversal of market conditions in just 12 months, going from demand significantly outstripping available units to new deliveries outpacing lackluster demand,” says Jay Lybik, CoStar’s director of multifamily analytics.
• TGT, -1.96% grabbed headlines in early June when it reported it will have to cut prices to clear inventories. Nike NKE, -2.27% followed suit last week. Those two are not alone in over-ordering merchandise, expecting the pandemic-induced consumer preference for goods over services to continue. This inventory clearing will show up in headline inflation numbers soon.

And consumer surveys already show consumers becoming more confident about the future with inflation expections now below 3 percent over the next five years.

This should be enough to convince inflation hawks to ease up on their inflation fears, amd the Fed to pause and see what the holdays bring. Consumers and businesses seem to be tolerating the moderate Fed rate hikes to date. And there’s no hurry to reverse course, unless prices begin more dramatic declines leading to disinflation, or outright deflation. Why not show patience, Fed Chairman Powell, as consumers seem to be doing and enjoy the holidays!

Harlan Green © 2022

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

Financial FAQs

AtlantaFed

Economists are beginning to predict third quarter grow domestic product (GDP) growth will turn positive after two quarters of negative growth, maybe ending thoughts of a recession occurring next year.

The U.S. trade deficit fell in August to a 15-month low of $67.4 billion, mainly because exports were the second highest on record, which adds to gross domestic product income, while imports dropped 1.1 percent to $326.3 billion, which subtracts from national income, marking the lowest level since early 2021.

The difference between imports and exports is part of the gross domestic product calculation, and the actual deficit between imports and exports narrowed 4.3 percent from $70.5 billion in July, the government said Wednesday. It was the fifth decline in a row.

Why? The U.S. economy has recovered from the COVID pandemic much more quickly than other countries. It should mean solid economic growth will continue, especially since inflation is beginning to decline.

Keep in mind the naysayers believe the Fed will boost interest rates too high, as has happened in the past; such as when former Fed Chair Volcker boosted interest rates so much it caused two back-to-back recessions in 1981-82.

The Atlanta Federal Reserve, noted for its Gross Domestic Product predictions, has also come out with a very optimistic third quarter prediction of economic growth, after the first two quarters of negative growth in 2022.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 2.7 percent on October 5, up from 2.3 percent on October 3,” said the Atlanta Fed in its press release. It’s a technical analysis mainly intelligible to economists, and highlights the difference from the negative first and second quarter GDP growth.

BEA.gov

The Atlanta Fed calls it a GDPNow estimate, so it won’t be confused with official U.S. Federal Reserve prediction of Q3 GDP growth, which will come out a month later and is lower at the moment.

Their GDPNow estimate was adjusted upward very abruptly, apparently not anticipating the fast U.S. recovery, especially in exports that add the most to economic growth, as I said, along with inventory buildup (i.e., higher investment). The GDPNow estimate flagged the pickup in exports announced in the final Q2 GDP estimate as well as strong consumer spending.

There are strong indications that inflation is subsiding everywhere, as I’ve been saying, mainly because so much of it was caused by supply-side shocks due to the pandemic and the Ukraine war.

Nobel Laureate Paul Krugman wrote in a recent NYTimes Op-ed that he believes long term there will be a return to lower interest rates and inflation once things calm down.

“Many commentators have asserted that the era of low interest rates is over. They insist that we’re never going back to the historically low rates that prevailed in late 2019 and early 2020, just before the pandemic — rates that were actually negative in many countries.

“But I don’t see that happening. There were fundamental reasons interest rates were so low three years ago. Those fundamentals haven’t changed; if anything, they’ve gotten stronger. So it’s hard to understand why, once the dust from the fight against inflation has settled, we won’t go back to a very-low-rate world.”

Let us see if those “fundamental reasons” haven’t changed, and we can return to a more peaceful world.

Harlan Green © 2022

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