Populareconomicsblog

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

The Mortgage Corner

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

FREDppi

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