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Calculated Risk

Calculated Risk’s graph of the Labor Department’s Weekly Initial Unemployment Claims could tell us all we need to know about our economic health. It’s good and getting better. Claims are at a record low once again—just 213,000 filed initial claims for unemployment compensation the past week.

Why are so few workers applying for unemployment compensation? It’s a sign of workers’ optimism, of their economic health, at the same time there is a record number of job vacancies—11.2 million at last count. The Calculated Risk graph shows that claims dipped this low once before briefly in 1970 and have only returned to that low since the pandemic.

In the week ending September 10, the advance figure for seasonally adjusted initial claims was 213,000, a decrease of 5,000 from the previous week’s revised level, said the DOL. The previous week’s level was revised down by 4,000 from 222,000 to 218,000. The 4-week moving average was 224,000, a decrease of 8,000 from the previous week’s revised average.

Yet Wall St traders and others—including major economists such as Harvard Prof Larry Summers—are convinced that a potential recession lies ahead because inflation will be difficult to tame until growth slows, and jobs are lost. They see a red-hot demand fueled by years of the Fed’s easy money policies (and pandemic aid) continuing to push up the demand for goods and services over a prolonged period—perhaps into the next year.

Then why are consumers continue to shop, barely reacting to the sky-high inflation rate? Maybe they don’t believe it will last. It’s as if they are gaining optimism that the worst is over and a bright future lies ahead—post-pandemic, post-Ukraine War, and even soaring food prices.

There is some indication that even food and energy prices are falling, as the Ukrainian economy recovers from Putin’s ‘shock and awe’ invasion that hasn’t caused the Ukrainian economy to fold. The NY Times’ Paul Krugman has pointed out that food prices should continue to decline per the UN’s Food and Agricultural Index.

“The FAO Food Price Index* (FFPI) averaged 140.9 points in July 2022, down 13.3 points (8.6 percent) from June,” said the FAO, “marking the fourth consecutive monthly decline. Nevertheless, it remained 16.4 points (13.1 percent) above its value in the corresponding month last year. The July decline was the steepest monthly fall in the value of the index since October 2008, led by significant drops in vegetable oil and cereal indices, while those of sugar, dairy and meat also fell but to a lesser extent.”

And the just released preliminary University of Michigan sentiment survey for September shows increased optimism about their future, as I said last week. A survey of consumer sentiment rose to 59.5 in September and hit a five-month high, probably reflecting public relief at falling gas prices. Sentiment moved up from 58.2 in August.

More importantly, the survey’s reading of one-year inflation expectations dropped to 4.6 percent, the lowest since September 2021, from 4.8 percent in August. The survey’s five-year inflation outlook slipped to 2.8 percent, falling below the 2.9 percent-3.1 percent range for the first time since July 2021.

The higher optimism also contributed to the robust retail sales report out last week with sales up 9.1 percent in a year, just enough to cover the inflation spike. So-called core sales rose 0.3 percent last month when gas station and auto sales are taken out.

Sales at motor vehicle and parts dealers led all categories, rising 2.8 percent, helping to offset the 4.2 percent decline in gas stations, whose receipts tumbled as prices fell sharply. Online sales also decreased 0.7 percent, while bar and restaurant sales rose 1.1 percent.

Every-day commuters seem to be returning to their workplaces as well—especially in New York, reports the NY Times, with subway traffic back up to 50 percent from 38 percent during the pandemic; restaurants are busy again (per retail report), and subways and commuter railroad occupancy is also up.

In fact, more employees are returning to their jobs in most age categories, with even working-age adults returning to pre-pandemic participation rates, says former White House economic advisor Justin Fox in a Bloomberg article.

“One thing that stands out here is the apparently limited labor market impact of Long Covid,” said Fox. “Lingering effects of Covid-19 are real, and may afflict millions of Americans, but the fact that every under-60 age group but two has higher labor-force participation and employment rates than before the pandemic seems to indicate that Long Covid isn’t keeping significant numbers of working-age Americans out of the workforce.”

Why shouldn’t consumers be in the know since they account for 70 percent of economic activity? Maybe the experts should listen to those with day-to-day jobs that vote with their feet, have their ears closest to the ground, to know how the economy is trending.

Harlan Green © 2022

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

Financial FAQs

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What is worse, inflation rates, say, of 4 to 5 percent—slightly above historical averages, and average gas prices maybe $3.50 per gallon as they are today—or raising short term rates enough to make consumers pay more and job losses mount?

That is essentially the devil’s bargain the Fed seems to be offering Americans by Fed Chair Powell insisting that, “Reducing inflation is likely to require a sustained period of below-trend growth,” in his speech to the central bankers and economists gathered at the base of the Grand Tetons.

As financial markets continue to plunge on fears that the Fed will slow down growth so much that it will induce a recession, economists such as Nobel Prize-winner Joseph Stiglitz are warning the Fed may go too far.

“Monetary policy typically affects economic performance with long and variable lags, especially in times of upheaval,” said Professor Stiglitz in a recent Project Syndicate article. “Given the depth of geopolitical, financial, and economic uncertainty – not least about the future course of inflation – the Fed would be wise to pause its rate hikes and wait until a more reliable assessment of the situation is possible.”

“There are several reasons to hold off. The first is simply that inflation has slowed sharply. Consumer price index (CPI) inflation – the measure most relevant to households – was zero in July, and it is likely to have been zero or even negative in August (was 0.1%). Similarly, the personal consumption expenditure (PCE) deflator – another often-used measure based on GDP accounts – fell by 0.1% in July.”

So, the Fed may be looking in the wrong direction (the 1970s) for the causes of inflation. Wages, which were considered the main culprit for rising prices in the 70s, aren’t rising as they did then; have in fact fallen 2.8 percent behind the latest inflation surge.

Why not look at the much more severe and temporary supply-chain disruptions; the Ukraine war, and China’s COVID lockdowns as the major cause for the inflation spike?

Wholesales prices are falling even faster—with the Producer Price Index (PPI) down -0.1 percent in August reported today. The increase in the core prices without the volatile food and energy prices over the past year also slowed to 5.6 percent from 5.8 percent.

It makes more sense that markets should wait for the PPI index to come out before passing judgement on the Consumer Price Index, since the PPI ingredients (such as raw material prices) will tell us how retail (CPI) prices are trending. But, no, financial markets work on the hair-trigger principle, are too impatient in the one-click digital markets with their herd mentality to wait another day for the PPI results.

Counterbalancing rising inflation is also the super-strong Dollar making import prices cheaper for consumers and industrial materials. The dollar index, which tracks the greenback against its peers, was up 1.5 percent at 109.85 in its biggest one-day percentage gain since March 2020 after the CPI report.

Market traders and even retail players in financial markets have to be experiencing whiplash with Fed Governors continually pronouncing their take on current inflation conditions.

Yesterday’s 1200-point drop in the DOW and 100 plus point drop in the S&P indexes should be a lesson for traders to take their finger off the trigger more often and not keep firing indiscriminately at such a moving target as U.S. stock and bond prices.

It’s difficult to steer in the right direction when eyes are focused on the rearview mirror and stagflation fears of another era.

Harlan Green © 2022

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

Financial FAQs

FREDserviceemployees

Doomsayers, such as historian Niall Ferguson, may be doing the Federal Reserve’s job by predicting a recession or worse in the coming year. Their dire warnings are causing plunging stock prices for starters. And oil prices are plummeting as well, with WTI oil prices down to $83 per barrel at this writing.

Dr. Ferguson warned last Friday that the world is sleepwalking into an era of political and economic upheaval akin to the 1970s — only worse.

“The ingredients of the 1970s are already in place,” Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University, told CNBC’s Steve Sedgwick.

“The monetary- and fiscal-policy mistakes of last year, which set this inflation off, are very alike to the ’60s,” he said, likening recent price hikes to the high inflation of the 1970s.

The U.S. economy is doing well, in spite of the doomsayers, as illustrated by the FRED graph above showing employment in the service-sector that employs most American workers holding up (gray bar is last recession).

The ISM’s service-sector index that measures business conditions at companies such as restaurants and hotels rose to 56.9 percent in August from 56.7 percent in the prior month, the Institute for Supply Management said Tuesday. It is the highest level since April.

“In August, the Services PMI^® registered 56.9 percent, 0.2 percentage point higher than July’s reading of 56.7 percent,” said Anthony Nieves, Chair of the Institute for Supply Management^® (ISM^®) Services Business Survey Committee. “The Business Activity Index registered 60.9 percent; an increase of 1 percentage point compared to the reading of 59.9 percent in July. The New Orders Index figure of 61.8 percent is 1.9 percentage points higher than the July reading of 59.9 percent.”

Yet inflation is already moderating with average gas prices below $4 per gallon and both the Consumer Price Index and Producer Price Indexes down from their highs.

Such fears generated by the doomsayers—with little to go on except past history rather than present conditions—are doing as much to bring down inflation as the Fed’s hawkish comments that they will continue to push up rates until inflation is tamed.

This is also indicated by the various surveys that measure consumers’ future inflation expectations, such as put out by the University of Michigan’s sentiment survey. Future expectations of CPI inflation have averaged 3 percent since 2012 when the survey was first conducted.

“The median expected year-ahead inflation rate was 4.8%, down from 5.2% last month and its lowest reading in 8 months,” said the UMich survey’s Director and Chief Economist Joanne Hsu. “Uncertainty over expectations rose considerably, particularly among lower-educated consumers. Long run expectations came in at 2.9%, remaining within the 2.9-3.1% range seen in the past year (actually since 2012 per its chart).

So, all the bad news about a possible recession may be good news for economic growth, and consumers, if it keeps the Fed from putting too much pedal to the interest rate metal, as the saying goes. The Fed may not have to keep boosting short-term rates if they see consumers and producers pulling back as demand cools.

Such remarks from recognized pundits are enough to recall the draconian measures taken by former Fed Chairman Paul Volcker’s Fed that raised its overnight rate to 20 percent to combat the 1970’s era inflation, causing two subsequent recessions in the 1980s.

So, Fed Chair Powell’s Fed doesn’t have to fight inflation on his own. There’s help on the way from those pessimists who won’t see what is staring them in the face—an economy still recovering from the worst pandemic in 100 years.

Maybe it will keep the Fed from raising interest rates much further?

Harlan Green © 2022

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

Financial FAQs

FREDcpiinflation

Fed Chair Jerome Powell just said Americans must now feel the pain if the Fed is to bring inflation back to its long-term 2 percent annual target. But why 2 percent? It was the inflation rate that prevailed since the end of the Great Recession, which resulted in higher unemployment and less than 2 percent annual economic growth—not enough growth to lower the unemployment rate to what it is now—3.5 percent.

And directly targeting short-term interest rates, which harms consumer spending and borrowing the most, it may be record corporate profits doing the most damage in boosting inflation and must be tamed.

In fact, it was difficult work to bring the inflation rate back to 2 percent even then, after the busted housing bubble, since the danger was too-low inflation and the danger of disinflation, or even deflation at the time, because Asian countries could produce an oversupply of consumer goods, keeping prices low and more American workers unemployed.

Now we have too high inflation because the COVID pandemic closed economies that produced those cheap supplies, so we have the supply and supply-chain problems with a Ukraine-Russian war adding to the scarcity.

In addition, corporate profits are at all-time highs. MarketWatch economist Rex Nutting highlighted the record growth in profits since World War Two:

“After-tax corporate profits rose at a 41% annual rate after inflation in the second quarter of the year and have risen at a 17% annual pace since the pandemic recession ended two years ago. Meanwhile, the inflation-adjusted purchasing power of individuals’ after-tax income has fallen for five quarters in a row.”

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In fact, it has been at the expense of workers’ salaries, says Nutting. The data show that hourly compensation declined at a -1.5 percent annual rate in the first half of the year after adjusting for inflation and is now down -2.3percent since the end of the pandemic recession.

So, Fed Chair Powell may be barking up the wrong money tree when he said it might cause substantial pain to consumers and businesses. What if it isn’t rising wages, but corporate profits that are enabling corporations to boost prices, rather than paying their employees more?

“Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he added.

Consumers’ personal consumption expenditures barely keep up with rising prices, which means they will have little effect on future inflation. Personal Consumption Expenditures were up just 0.1 percent in July, vs. being as high as 8.6 percent in April 2021 when their pockets were bulging with the pandemic relief payments.

So let’s not blame the consumer for the inflation that the Fed wants to tame, whoare fighting so many other battles. The new Inflation Protection Act enacting a minimum 15 percent tax rate on corporations and one percent on stock buybacks will hurt those that can afford it–record corporate profits that puts the blame game where it belongs.

The Fed should also continue downsizing their holdings of securities. Just selling some of their $4 trillion plus in Treasury securities ($4.97 trillion on June 8) could raise interest rates more gradually, thus avoiding the danger of inducing another recession.

On June 1, 2022, the Federal Reserve initiated the process of reducing the size of its balance sheet to address rising inflation. According to a May press release, the Fed will initially cap its monthly purchase of Treasury securities at $30 billion for June, July and August – for context, the Federal Reserve purchased an average of $80 billion in Treasury securities per month between March 2020 and March 2022. The cap is set to increase to $60 billion in September and will likely remain at that level through the end of calendar year 2023. The Federal Reserve will also reduce its holdings of mortgage-backed securities over the coming months.

Maybe its businesses that should be feeling more pain, rather than workers?

Harlan Green © 2022

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

Popular Economics Weekly

BEA.gov

It looks like the slowdown in US economic growth may end as quickly as it began. Second quarter economic growth was slightly less negative in the BEA’s second estimate of GDP growth, because key drivers of growth have been increasing in the latest months.

The Bureau of Economic Analysis press release said, “Real GDP decreased less in the second quarter than in the first quarter, decreasing 0.6 percent after decreasing 1.6 percent. The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by a larger decline in private inventory investment, a slowdown in consumer spending, and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated.”

What this means is that the red-hot job market (528,000 new nonfarm payroll jobs in July), and 1.5 percent increase in consumer spending in Q2 (that makes up some 70 percent of economic activity) have kept our economy from falling into a deeper slowdown, or recession—whatever economists want to call it.

The point is the ‘slowdown’ was so mild and corporate profits high enough that corporations continued to hire rather than fire, and consumers chose to spend rather save during the inflationary surge.

“The number of people who applied for unemployment benefits last week fell to a one-month low of 243,000, indicating layoffs remain near record lows and that a tight labor market is keeping the U.S. economy moving forward,” said MarketWatch’s Jeffrey Bartash.

The Atlanta Federal Reserve’s third quarter estimate, GDP Now estimate ranges from 1.3 to 2.5 percent growth. I will take either of those numbers, as it signals good months of growth ahead, no matter what the Fed Governors do to bring down inflation.

Continued growth depends in part on how consumers flush with savings continue to react to inflation. Most surveys of their expectations say that they don’t see a prolonged inflation, in part because it’s easy to see that the Ukraine war will eventually end that is pushing up food and energy prices, and supply-chain constrictions will ease as other countries recover from the COVID pandemic.

UnivMichigan

China is having especial difficulties in recovering from the pandemic, in part because it is run by an extremely dictatorial communist party that believes it can only hold onto power by suppressing any signs of COVID symptoms with draconian lockdowns, just as it suppresses its populace in other ways to prevent it from looking weak in the public eye.

In fact, inflation is already declining, mainly because world oil prices have plunged, and food prices may also soften with the good news that grain shipments from the Ukraine have finally begun.

U.S. consumers’ are also expecting lower inflation in a year and three years, a New York Federal Reserve survey showed on Monday, as reported by Reuters, indicating U.S. central bankers might be winning the fight to keep the outlook for price growth as they battle to tame high inflation

So, the latest data seem to show economic growth will finally have a tailwind to propel it, rather than the headwind it’s been experiencing since January.

Harlan Green © 2022

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