Populareconomicsblog

Popular Economics Weekly

MarketWatch.com

“U.S. stocks fell Friday after better-than-expected May payrolls data reinforced expectations for a series of interest rate rises by the Federal Reserve in coming months,” was MarketWatch’s headline re May’s unemployment report.

The employment report showed 390,000 payroll jobs and the unemployment rate holding at 3.6 percent, with almost all sectors adding jobs. Restaurants and hotels added 84,000 jobs in the unemployment report, as summer vacation time approaches. More people are going out to eat, traveling or taking a vacation. Employment also rose by 75,000 at professional businesses, 47,000 in transportation and warehousing and 36,000 in construction.

It was a very good report and a total of 8.1 million jobs have been added to payrolls since January 2020.

So, why did stocks fall with the good news? Friday’s selloff was caused by the fear that the Fed would now raise rates sooner and higher, so markets could no longer rely on almost free borrowed money to trade that had prevailed during the pandemic with the record low interest rates.

Or, markets had not been listening to the Fed’s change in monetary policy. Former Fed Chair Bernanke’s most recent remarks in Barron’s Magazine highlighted just how much the Fed has changed its monetary policies. It now considers its other mandate, full employment, as important as stable prices. It considers inflationary spikes a lesser danger, especially when caused by the current supply-side shocks from factors it has no control over—the pandemic, a Ukrainian war, and China’s COVID problems.

Ever since Paul Volcker’s Fed and the stagflation of the 1970s, the Fed had reacted too quickly to any hint of inflation in raising their interest rates, such as rising wages, “even in the absence of inflation,” said Bernanke. The result was wages and economic growth barely growing above inflation, averaging just 2 percent since then with higher unemployment rates.

The Fed has “foresworn such preemptive strikes” when it initiated its new monetary framework, which it called flexible average inflation targeting, or FAIT, in August 2020, said Bernanke.

So the actual slowdown in job growth could be a good sign, since it might mean less inflationary pressures and thus the need for the Fed to raise interest rates too high too soon.

There was another sign of slowing growth in the service-sector ISM survey as well. One headline reported, “Service-sector expands at slowest pace since early 2021.”

But the ISM index showed that activity dropped only slightly from 56.7 to 55.9, where any number above 55 means very strong expansion. The decline was led by a decline in business activity and slowing supplier deliveries.

The non-partisan Congressional Budget Office (CBO) that ‘scores’ existing legislation for its effect on economic activity concurs with the Fed’s optimistic scenario. It said U.S. economic growth will exceed 3 percent in 2022, while “roaring inflation has topped and will cool each month to around 2 percent by some point in 2024,” according to a government forecast published last week.

All-in-all, we must look beneath the headlines to understand what is really happening this year with the mix of conflicting bad and good news. Unfortunately, the financial markets aren’t helping matters with their fear of what the Fed might do next.

Harlan Green © 2022

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

The Mortgage Corner

Calculated Risk

The financial markets will be watching tomorrow’s unemployment report closely to see if job growth remains strong, or weakens in the face of the many uncertainties plaguing markets, such as soaring inflation and rising interest rates.

Yesterday’s JOLTS report that measured the number of job openings and hires in the Labor Department’s Job Openings and Labor Turnover Survey provides a hint of what’s to come. Most headlines touted that the 11.4 million job openings in May was a “severe” drop from 11.9 million vacancies in April, signaling more weakness.

But the 11.9 million April number was revised from the original estimate of 11.4 million, which really meant that April to May job vacancies were in essence unchanged showing openings and new hires (6.6 million) were still at record levels.

So, I very cautiously predict Friday’s U.S. unemployment report will also look better than predicted, and above initial estimates of just 250,000 new nonfarm payroll jobs in May.

No wonder markets are confused. What does one believe—certainly not the headlines. We would be better when reading between the lines!

The consumer confidence indicators are showing that consumers are also confused but aren’t yet convinced we are headed for a recession, which is probably why consumers have yet to cut back on their spending ways.

The Conference Board Consumer Confidence Index® decreased slightly in May, following a small increase in April. The Index now stands at 106.4 (1985=100), down from 108.6 in April (after an upward revision). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—declined to 149.6 from 152.9 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined to 77.5 from 79.0.

(But) “By contrast, views of current business conditions—which tend to move ahead of trends in jobs—improved. Overall, the Present Situation Index remains at strong levels, suggesting growth did not contract further in Q2,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

The Institute of Purchasing Managers’ ISM Manufacturing Index also climbed, indicating that the manufacturing sector continued to expand, further reinforcing beliefs that the U.S. economy is still in a very robust growth mode.

Economic activity in the manufacturing sector grew in May, with the overall economy achieving a 24th consecutive month of growth, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®, said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

Oh yes, and the weekly initial unemployment claims which give the most immediate picture of the jobs market fell by 11,000 last week to 200,000, reflecting the lowest layoffs on record and the strongest labor market in decades.

New filings slid to a 54-year low of 166,000 in March and have hovered near 200,000 since the beginning of the year, government figures show.

So, who or what should one believe about the jobs market? We will know more tomorrow morning with the release of the Labor Department’s ‘official’ May unemployment report.

Harlan Green © 2022

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

Financial FAQs

FREDpersonalconsumption

The Federal Reserve’s Personal Consumption Expenditures Index (PCE), its preferred inflation indicator, rose just 0.2 percent in April to mark the smallest increase in a year and a half, aided by a decline in gas prices.

The rise in the so-called personal consumption price index was the smallest since November 2020 and is cheering the financial markets as a first sign that the inflation burden may be easing.

The rate of inflation over the past year, based on the PCE, slowed to 6.3 percent in April from a 40-year high of 6.6 percent in March. It was also the first decline in a year and a half.

This is while consumers’ personal consumption expenditures have risen 6 percent in a year—see the above FRED graph. This graph in one picture shows how much consumer spending has skyrocketed since the pandemic—after just 2 percent average annual growth rates since the Great Recession. It is the highest spending increases since 1980 caused by the record inflation of the 1970s.

But maybe inflation will not be such a problem this time? If inflation continues to moderate—despite the Ukraine war and China’s slowdown—consumers could continue to be the engine of growth without the sky-high inflation of the 1970s that plagued Americans, then. Most of the supply shortages are temporary shocks caused by the pandemic and above-mentioned issues. The U.S. now leads even China (temporarily) as the world’s fastest growing economy while China wrestles with its own COVID crisis.

That is the big question. Corporations have been reporting record profits, and able to pass most of their increased product costs onto consumers. Will they continue to hire more workers at the torrid pace since the pandemic recovery, which will keep consumers happy and continuing their spending ways?

The number of Americans filing new claims for unemployment benefits fell more than expected last week as the labor market remains tight amid strong demand for workers despite rising interest rates and tightening financial conditions.

And with a record 11.5 million job openings at the end of March, layoffs are likely to be minimal and people who lose a job can easily find another one.

The minutes of the Fed’s May 3-4 meeting published on Wednesday showed officials commenting that “demand for labor continued to outstrip available supply across many parts of the economy and that their business contacts continued to report difficulties in hiring and retaining workers.” Many expected the labor market to remain tight and wage pressures to stay elevated for some time.

We must now wait to see what the Fed’s push to raise interest rates will do to future growth. Will it slow consumers spending and help to slow the prices increases further, and avert re-occurrence of a 1970’s-style stagflation?

Harlan Green © 2022

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

Popular Economics Weekly

The panic selling in financial markets of late is in part because first quarter 2022 GDP growth contracted after last year’s huge 5.6 percent growth surge, triggering worries of an imminent recession.

The U.S. economy shrank by a 1.5 percent annual rate in Q1, new government figures show, largely because of a record trade deficit. And corporate profits fell for the first time in five quarters.

But corporate profits are still at record levels, up 12.5 percent YoY, and GDP is still growing 10.5 percent annually. So quarterly statistics that financial markets follow can fluctuate wildly, which isn’t very helpful in looking at longer term trends.

BEA.gov

The BEA attributes the first quarter decline in GDP to temporary factors and most economists predict a second quarter resumption in economic activity.

“In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country,” said the BEA. “Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”. 

In fact, the non-partisan Congressional Budget Office (CBO) that ‘scores’ current legislation for its effect on economic activity said U.S. economic growth will exceed 3 percent in 2022, while “roaring inflation has topped and will cool each month to around 2 percent by some point in 2024,” according to a government forecast published Wednesday.

The CBO estimated that real gross domestic product, or GDP, will be driven by consumer spending and demand for services, according to the report. It revised its estimates for GDP growth in 2023 and 2024 upward to 2.2 percent and 1.5 percent, respectively.

“In CBO’s projections, the current economic expansion continues, and economic output grows rapidly over the next year,” the CBO said in its report. “To fulfill the elevated demand for goods and services, businesses increase both investment and hiring, although supply disruptions hinder that growth in 2022.”

One reason the CBO has become more optimistic about stronger growth—the shrinking budget deficit from the increased activity.

The U.S. budget deficit will shrink dramatically to $1.036 trillion for fiscal 2022 from $2.775 trillion last year as a strong recovery prompts a surge in revenues and lower outlays, but slowing growth will start to reverse the trend due to higher inflation and rising interest rates, the Congressional Budget Office said.

FREDcorpprofits

U.S. corporations are making record profits as a percentage of GDP—in fact, the highest profits since World War Two, per the St Louis FRED historical graph from 1950 that I discussed in my last blog. During the pandemic it dropped briefly to 8 percent of GDP, but quickly rose to its current 11.2 percent, the best on record.

And consumers are still shopping as if there’s no tomorrow, so the saying goes, that make up some 70 percent of economic activity. So once again, why should investors be held hostage by shorter-term, quarterly projections that only become valid over the longer term, anyway?

Harlan Green © 2022

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

Financial FAQs

FREDretailsales

The St Louis Federal Reserve graph of April retail sales tells us more than a thousand words that there is no imminent recession. Maybe not even next year either, because consumers continue to shop, with auto sales up 2.2%, restaurants and bar sales up 2% in the month.

Gas station sales were down -2.7% because gas prices eased during a war that is about energy supplies. Consumers are shopping as if there is no war or another COVID scare., or supply shortages

The gray bar in the graph is the very short March-April 2020 recession. Consumers have ignored the pundits and doom-sayers since then, ans the inflation hawks that said consumers wouldn’t continue to boost economic growth, which now looks to be on the upswing after the Q1 plunge in Gross Domestic Product.

Sales at U.S. retailers rose a huge 0.9% in April. And the increase in sales in March, was raised to 1.4% from an original 0.7%, the government reported Tuesday.

What does the surge in auto sales and leisure activities tell us? There’s a lot of pent up demand from Americans that don’t want to stay at home any longer with jobs plentiful and salaries surging. Why should they?

Consumers also seem to be ignoring their own consumer confidence surveys, which say they are pessimistic about the future. Both the Conference Board and University of Michigan indexes have been trending downward, of late, because of the fears of rising inflation.

“Consumer sentiment declined by 9.4% from April, reversing gains realized that month,” said Richard Curtin, Director of the U. of Michigan survey. “These declines were broad based–for current economic conditions as well as consumer expectations, and visible across income, age, education, geography, and political affiliation–continuing the general downward trend in sentiment over the past year.”

The Conference Board’s was more in line with actual behaviors. ““Consumer confidence fell slightly in April, after a modest increase in March,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index declined, but remains quite high, suggesting the economy continued to expand in early Q2. Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump, and the war in Ukraine.”

But both surveys don’t seem to reflect the ebullient behavior of actual consumers. So once again, we have to take any survey with that grain or two of salt by looking at actual behavior.

We are at a classic top of the business cycle when the demand for products and services is sky high and all the factors that restrict supply are causing red hot inflation numbers, as I said last week.

That hasn’t changed, but with summer and vacation travel looming, it doesn’t look like consumers are bothered by rising prices. That could change, of course, as the Fed begins to raise interest rates further.

So why are consumers misbehaving, ignoring their own sentiment surveys? The most obvious answer is we are at full employment and salaries are rising, as I said.

The unemployment rate remained unchanged at 3.6 percent and 428,000 more jobs were created in April, according to the US Labor Dept. so no real sign of weakening employment, one of the first signs of a recession. Industrial production and business investments are also high and show little signs of slowing.

Recessions take a long time to happen, I also said last week, so we need to read what consumers do, if we want to know more, rather than what they say.

Harlan Green © 2022

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

Popular Economics Weekly

FREDcpiindex

The St Louis Federal Reserve graph tells us what is going on with April’s plunge in the Consumer Price Index. It’s due to a moderation of soaring gas prices. But food, shelter, and supply shortages haven’t moderated that have also pushed prices higher.

So, how long will such inflation persist that is terrifying everyone?

The consumer price index rose just 0.3 percent last month, the government said Wednesday, matching the smallest increase in eight months. The yearly rate of U.S. inflation fell to 8.3 percent in April to mark the first decline in eight months.

Grocery prices have increased 10.8 percent in the past year, the biggest surge since 1981.The cost of rent and housing both rose sharply again in April and helped explain the big increase in the core rate of inflation.

Over the past year the cost of shelter has climbed 5.1 percent to mark the largest gain in 40 years. Shelter costs account for a third or more of a typical household budget. There are shortages everywhere, and such so-called ‘supply shocks’ are the cause of soaring inflation, mainly caused by the pandemic. Another ‘supply shock’ has been the reluctance of workers to return to work after the pandemic, causing a slowdown in production.

One year ago prices were at rock bottom, as were interest rates. Today, the demand by consumers and businesses (flush with cash and cheap loans) for goods and services has gotten ahead of supply chains, in other words. But sooner or later supply will catch up as businesses recover from the pandemic, and demand will slow because rising prices cause spending to slow.

So, is this panic time for the Fed to be jacking up interest rates drastically? No, as I said recently. The Ukraine war and China’s COVID are adding to the supply shocks as well, which is another temporary phenomenon.

Too much government aid that is putting too much money in consumers’ pockets is the conservative answer to bring down inflation, which means they really want to cut back on government spending, in spite of the voting for all the aid packages, including the latest infrastructure bill that will create more high wage jobs.

It is the wrong thing to do at this time, since more government spending is spurring higher production, as well. That’s why Fed Chair Powell said recently he was confident that just two rate hikes of 50 basis points each should be enough to slow inflation for the rest of this year. It should also tame fears about future rate increases, by assuring their predictability.

It also looks like the cost of wholesale goods and services has also peaked, as it rose a milder 0.5% in April vs the prior month. In March, wholesale prices had jumped 1.6% largely because of a surge in oil prices. The increase in wholesale prices over the past year, meanwhile, slowed to 11% from 11.5%, the government said Thursday.

So why the sudden recession fears? Such fears defy both logic and history. Serious recessions take a long time to manifest, as I also said recently.

It took two years under Chairman Greenspan to ring on a recession. The Fed raised its rates 16 times over that term after holding rates below the inflation rate for too long in early 2000, causing the Great Recession. The so-called stagflation wage-price spiral of the 1970s was 10-year period when energy prices soared. That took more years and multiple recessions before Fed Chair Volker brought down inflation by raising interest rates into the double digits.

No one wants that to happen now, of course. Even more important is the recovery from a lingering pandemic, and aiding Europeans in winning their war in Ukraine. Russia is in many ways a failed state with a steadily shrinking economy, a massive brain drain of its best and brightest, and a dictator who believes he is reviving a Czarist Empire from another century.

The world’s economies are still rehabilitating and the patient will require considerable longer term care to bring it to a full recovery.

Harlan Green © 2022

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

Popular Economics Weekly

NBER.org

We are at a classic top of the business cycle when the demand for products is sky high and all the factors that restrict supply are causing red hot inflation numbers. The Federal Reserve then must per its mandate to balance employment with price stability step in to restrict credit by raising short-term interest rates, among other measures.

What happens next will determine how high the Fed pushes interest rates to ‘tame’ the inflation tiger, and whether it causes another recession.

What the pundits who predict such things seem not to keep in mind is there are many parts that make a recession, which take a lot of time to happen (see wide spacing between gray bars that indicate recessions in NBER employment graph.).

For instance, there was no recession between 1983 to 1991, and a record 10-year expansion from 1991 to 2001.

The National Bureau of Economic (NBER) is the actual arbiter of recessions, and it says: “The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies.”

Most of the indicators, including employment, consumer spending and industrial production, don’t indicate much of an impending slowdown.

MarketWatch

The unemployment rate remained unchanged at 3.6 percent and 428,000 more jobs were created in April, according to the US Labor Dept., so no real sign of weakening employment, one of the first signs of a recession. Industrial production and business investments are also high and show little signs of slowing. Consumer spending is red hot and may suffer most from rising interest rates.

But the real test will be if many of the supply chain shortages can be circumvented, from chip makers who failed to predict the soaring demand for motor vehicles, to a war in Ukraine causing food shortages. And we still have the tail end of the coronavirus pandemic affecting China, a supplier of much of the world’s cheap products.

Under Chairman Greenspan, the Fed raised its rates 16 times over two years, after holding rates below the inflation rate for too long in early 2000, causing in part the housing bubble while allowing the negative interest ‘liar’ mortgages that brought down Lehman Brothers and caused the Great Recession.

And the number of job openings is at a series high of 11.5 million on the last business day of March, although little changed over the month, the U.S. Bureau of Labor Statistics reported on Tuesday. Hires, at 6.7 million, were also little changed while total separations edged up to 6.3 million.

So recessions take a long time to happen, in general, and there are much more important priorities now, including aiding Ukraine in its war with Russia and continuing to fight the pandemic.

Harlan Green © 2022

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