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Retail sales are rising 5.5 percent YoY, which is a sign that the economy is still booming, and the possibility of a recession years away. That is, if inflation begins to taper of its own accord, which consumers think it will, despite the Ukraine war-induced sanctions.

Former Treasury Secretary Larry Summers doesn’t think it will, which is why he says a recession is “the most likely thing” partly because the Federal Reserve “is going to have to keep going [in its effort to subdue inflation] until we see disinflation.”

Summers has been the main inflation hawk, whereas Janet Yellen the current Treasury Secretary and past Chair of the Federal Reserve was more upbeat that the U.S. economy could escape a recession as it begins to raise interest rates.

Half of the inflation number is volatile gas prices. Gas sales rose 8.9 percent in the retail report, pushing up gas prices more than 8 percent, while auto sales fell -1.9 percent, signaling that car makers are catching up to demand and car prices moderating.

Even though the inflation rate has soared to 8.5 percent, consumers are increasingly optimistic about their future. The University of Michigan’s gauge of consumer sentiment rose in April to 65.7, a more than 10 percent increase from March’s reading of 59.4,

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Consumer Sentiment jumped by a surprising 10.6% in early April, although it remained below January’s reading and lower than in any prior month in the past decade, said the University of Michigan’s press release. Nearly the entire gain was in the Expectations Index, which posted a monthly gain of 18.0%, including a leap of 29.4% in the year-ahead outlook for the economy and a 17.2% jump in personal financial expectations. 

The reason for their increasing optimism was plentiful jobs and rising wages. Consumers under the age of 45 expect a 5.3 percent increase in their wages this year, almost enough to keep up with inflation expectations.

“Consumers still anticipate that the national unemployment rate will inch downward, acting to improve consumers’ outlook for the national economy,” Richard Curtin, the survey’s chief economist wrote. 

U.S. Treasury Secretary Janet Yellen is also more cautiously optimistic than Larry Summers re the inflation outlook. She said on Wednesday the Federal Reserve would need luck and skill to maintain a strong labor market while bringing inflation down, or in economists’ terms to engineer a “soft landing.”

“It has been done in the past. It’s not an impossible combination,” Yellen said, during a talk at the Atlantic Council. Yellen said she was more worried about the prospects of a recession in Europe given the impact of the war in Ukraine than one in the U.S..

Americans anticipated gasoline prices to remain steady over the next year, which is in line with their overall outlook that inflation will moderate, said the sentiment survey. Americans’ expectations for overall inflation over the next year held steady at a 5.4 percent inflation rate in March while expectations for inflation longer term over the next five years has remained at 3.0 percent for many months.

Another reason for optimism concerning a “soft landing” as the Fed begins to raise interest rates, is that industrial production is soaring, which also helps bring down inflation.

The Federal Reserve just reported that industrial production jumped 0.9 percent in March. and February’s gain was revised up to 0.9 percent from the initial estimate of a 0.5 percent increase. For the first quarter, output was up at an 8.1 percent annual pace, with the output of motor vehicles and parts up 7.8 percent in March.

Supply chains are beginning to catch up to demand, another reason that inflation may moderate, and consumers’ optimism is warranted. But it will require considerable  “luck and skill” to avoid a recession, as well as a favorable outcome to the war in Ukraine.

Harlan Green © 2022

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

Financial FAQs

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U.S. service sector activity that powers two-thirds of economic activity above graph) is surging more than ever, according to the Institute of Supply Management non-manufacturing survey. It is growing per 58.3 percent of managers surveyed, with the index for employment and new orders even higher. New orders rose 4 points to 60.1 percent, and production activity also edged higher.

“In March, the Services PMI® registered 58.3 percent, a 1.8-percentage point increase compared to the February reading of 56.5 percent. The 12-month average is 62.3percent, which reflects consistently strong growth in the services sector. The March reading indicates the services sector grew for the 22nd consecutive month after two months of contraction and 122 months of growth before that. A reading above 50 percent indicates the services sector economy is generally expanding; below 50 percent indicates the services sector is generally contracting.”

So this doesn’t look like impending stagflation, the wage-price spiral that happened in the 1970s and pushed inflation to record highs, while growth came to a standstill.

Pundits and some banks that forecast a future wage-price spiral seem to have forgotten that it took consecutive Arab (OPEC) oil embargos in the 1970s causing gasoline shortages and long lines at gas stations for almost a decade to make that happen.

Whereas the Ukraine war and its concomitant sanctions are less than two months old. Why should we even be worrying about prolonged inflation, and what the Fed might do to tame it, when we don’t know whether this war will last for months, or years, and what will be needed to win it?

Predictions of a looming recession are premature, so say the least. Both the service and manufacturing sectors are booming, while supply chains are struggling to catch up and replenish inventories.

This is while the jobs market is red hot with more returning to work. New U.S. jobless claims matched a 54-year low of 166,000 in early April, for instance — the second lowest reading in history— during a period of remarkably strong hiring and the lowest layoffs on record.

The ISM’s service sector employment index increased to 54% from 48.5%. Businesses got no relief from inflation, however. The prices-paid index moved up to 83.8% from 83.1%, just a tick below a record high.

What will help to tame the inflation tiger? More workers returning to work will increase production, replenishing inventories. And governments will be increasing their spending, as well, due to the Ukraine war. This will stimulate further production increases.

MarketWatch columnist Jeffry Bartash maintains what was called the “Great Resignation” is over, a time since the pandemic when workers were reluctant to return to work.

“To be sure, Americans have been saying “I quit” in record numbers,” said Bartash. “Almost 57 million people left jobs — many more than once — in the 14-month period from January 2021 to February 2022. That’s a 25% spike vs. a similar time span before the pandemic.”

The hiring wave began more than a year ago. The U.S. added 431,000 new jobs in March, the government said last week, extending a streak of large job gains going back to the start of 2021. The unemployment rate also sank to 3.6 percent last month — just a tick above a 53-year-low — from nearly 15 percent just two years ago.

“All of the hiring took place against the backdrop of high covid cases and the reluctance of millions of formerly employed people to return to the labor market. Hiring might have taken place even faster, economists say, if the pandemic had petered out and generous government unemployment benefits were ended sooner,” continued Bartash.

So maybe we can endure a bit more inflation if the red hot demand that’s causing it is bringing more people into the workforce and helping Ukraine to win its war?

Harlan Green © 2022

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

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FREDretailsales

How much longer will inflation be a problem, even with the Ukraine invasion and soaring gas prices? Retail sales can tell us something about inflation because it powers a major part of economic activity.

February retail sales increased just 0.3 percent, after rising 4.9 percent in January, because consumers cut back on spending. This is what consumers tend to do when things get more expensive, which helps to bring down overall inflation.

Retail sales have risen 15.9 percent YoY, as consumers with lots of savings have been demanding more than supply-chains can provide, hence the soaring inflation rate of late. But, sure enough, once consumers felt pinched, they cut back in February, which should cause inflation to fall below the current 7.5 percent annual rate that is making everything more expensive.

In fact, the wholesale Producer Price Index of materials that go into finished products in the Consumer Price Index has weakened. The so-called core rate without surging gas and auto prices rose just 0.2 percent in February, the lowest climb in 15 months, which might be a sign that supply chains are opening up.

This should also dampen speculation of an abrupt halt to economic growth, which some pundits believe will occur because the Fed is beginning to raise interest rates at the same time as the Ukraine invasion sanctions on everything Russian-owned are also boosting commodity prices.

Consumers believe prices will continue to rise sharply over the next year, which should continue to restrain spending, with inflation averaging 6 percent, according to a survey by the New York Federal Reserve. That’s up from 5.8 percent in January and matches the highest level on record.

But median three-year ahead inflation expectations ticked up just 0.3 percentage point to 3.8 percent, while remaining below its November and December 2021 levels of 4.2 percent and 4.0 percent, per the NY Fed

So how could the incoming sanctions bring on another recession, so soon after the pandemic recovery? Former Treasury Secretary Larry Summers believes the Federal Reserve has waited too long to raise interest rates, and so must now overreact to play catch up and bring down soaring inflation, but also halt economic growth. And Canadian economist David Rosenberg believes Fed Chair Powell will turn into another Paul Volcker, who raised interest rates into double digits in the early 1980s that brought on two recessions.

However, I am in former Fed Chair Ben Bernanke’s camp, who successfully led us out of the Great Recession in 2009 by not raising interest rates too quickly, and in fact increased liquidity for businesses and individuals with the various Quantitative Easing programs while keeping inflation in the 2 percent range.

So who is right? Should we be tightening credit with the looming commodity shortages and even higher prices? I don’t think so, as it only lessens demand rather than stimulates the supply side shortage that is the core problem.

We must find replacements for the loss of Russian oil and commodities, such as wheat and corn. It means following Ben Bernanke’s lead by keeping interest rates low to give consumers and businesses the cushion they will need to weather the latest economic storm

Harlan Green © 2022

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