Populareconomicsblog

Financial FAQs

The current headlines would have us believe the bipartisan $1.9 trillion American Rescue Plan and $1.2 trillion American Infrastructure Investment and Jobs Act approved overwhelmingly by both Democrats and Republicans in 2021 will cause prolonged inflation and perhaps lead to a recession.

What the twin 2021 bills have done instead is create record employment, with full employment achieved 26 months after the COVID recession, vs. the 76 months it took to reach full employment after the Great Recession, which was because congress shortchanged the prior recovery with too little aid.

EPI.org

Former Fed Chair Ben Bernanke said on Fareed Zakaria’s GPS Sunday that he doubts the current inflation surge might turn into another stagflationary episode. The 1970’s stagflation was caused by 14 years of high inflation, whereas we are suffering from just 6 months of higher inflation, after 40 years with very little inflation since the 1970s.

A recurrence of the stagflation of the 1970s is only possible if rising interest rates engineered by the Fed cause a prolonged slowdown in business activity and consumers spending. The 1970’s inflationary spiral was caused by policies that enabled workers to push up wages every time there was a spike in inflation. Workers’ salaries today are barely keeping up with inflation and declining, rather than staying ahead of it.

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

May’s U.S. CPI surge of 8.6 percent was concentrated in three categories: airfares, used car prices and shelter costs, all in the service industries. Most of the inflation to date is in the goods sector. Surging shelter costs will be the most worrisome trend and that the Fed will watch most closely.

Higher inflation is occurring all over the world from the same factors, which signals that it’s mostly about rising food and energy prices affected by panicky traders worried about food and energy shortages. For example, Russia’s inflation rate is currently18 percent, Turkey’s 70 percent and the EU inflation rate is 8 percent.

The Russian invasion of Ukraine and the sanctions that it triggered account for more than a third of the 40-year high CPI annual inflation of 8.6 percent, according to Mark Zandi, chief economist at Moody’s Analytics, as reported by MarketWatch.

The real question is whether longer term inflation is embedded in consumers’ expectations as happened in the 1970s, which took 14 years, as Bernanke said. But that would mean the so-called ‘supply-shocks’ from COVID, China, and the Ukraine war that are the main cause of the current inflation surge don’t eventually subside, and doesn’t seem likely.

Harlan Green © 2022

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

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