What Recession--Part II?

 Financial FAQs

Orders for U.S. durable goods—long-lasting goods such as computers and cars rose in March, and business investment rebounded after the first decline in a year, signaling that the U.S. economic activity is still on a growth path, despite the Ukraine invasion and record inflation. Who knows what will happen with energy prices?

Orders advanced for the sixth time in the last seven months. What’s more, the initially reported 2.2 percent decline in new orders in February was revised to show a smaller 1.7 percent drop, the government said Tuesday.

Businesses are investing more (see graph) because they are upbeat about future growth.

FREDBusinessinvestment

And inflation may be peaking with the Federal Reserve’s preferred inflation gauge—the PCE index. Over the past 12 months, the personal consumption price index has climbed 6.6 percent, up from 6.4 percent in February, the government said Friday. That’s the steepest increase since 1981.

Yet a narrower measure of inflation that omits volatile food and energy costs, known as the core PCE, rose by just 0.3 percent in March for the second month in a row. That matched the Wall Street forecast. What’s more, the rate of core inflation in the past year slipped to 5.2 percent from 5.3 percent, marking the first month-to-month decline in more than a year.

This is huge folks. It’s almost as if U.S. businesses don’t see problems ahead with energy shortages because of a prolonged Ukrainian war—for the U.S. economy, at least. Business investment has increased 10 percent in the past year and there’s little evidence that companies are sharply cutting back.

And consumers’ strong demand for durable goods is a sign they are not so pessimistic. While some data from the Conference Board’s consumer confidence survey showed a dip in consumer confidence this month, households were eager to buy big-ticket items like motor vehicles, television sets and clothing dryers within six months.

Consumers were also inclined to buy a house, despite surging mortgage rates and record home prices.

“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. Vacation intentions cooled but intentions to buy big-ticket items like automobiles and many appliances rose somewhat.”

The Conference Board’s Index of Leading Economic Indicators (LEI) is another measure that is showing strong growth ahead, despite the growing pessimism among economists that those ‘headwinds’ we’ve talked about (interest rates, energy shortages, inflation, war, etc.) could slowdown growth or bring it to a screeching halt sometime next year.

The ten components of The Conference Board Leading Economic Index® for the U.S. cover a broad swath of economic activity, including: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM^® Index of New Orders; and even Building permits for new private housing units.

And all components continue to trend upward.

ConferenceBoard.org

“The US LEI rose again in March despite headwinds from the war in Ukraine,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “This broad-based improvement signals economic growth is likely to continue through 2022 despite volatile stock prices and weakening business and consumer expectations. The Conference Board projects 3.0 percent year-over-year US GDP growth in 2022, which is slower than the 5.6 percent pace of 2021, but still well above pre-covid trend.”

So, by investing in their future, businesses are betting on a better future for Americans.

Harlan Green © 2022

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

Home Construction Catching Up

 The Mortgage Corner

Calculated Risk

Calculated Risk’s Bill McBride says the most residential units are under construction since 1973, as can be seen in his Calculated Risk graph.

“Combined, there are 1.622 million units under construction. It is the most since February 1973, when a record 1.628 million units were under construction (mostly apartments in 1973 for the baby boom generation).”

And privately‐owned housing starts (new construction) in March of this year were at a seasonally adjusted annual rate of 1,793,000, which should keep builders and homebuyers satisfied for the rest of this year, at least. 

New starts are 0.3 percent above the revised February estimate of 1,788,000 and 3.9 percent above the March 2021 rate of 1,725,000.  Single‐family housing starts in March were at a rate of 1,200,000; this is 1.7 percent below the revised February figure of 1,221,000. The March rate for units in buildings with five units or more was 574,000.

Housing construction should now begin to catch up to demand. Many of the single-family and rental unit completions were held up by supply delays during the pandemic that are finally beginning to ease as the pandemic has eased.

Builder confidence is still high for newly built single-family homes, though it moved two points lower to 77 in April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This is the fourth straight month that builder sentiment has declined, but it is still above the 60s index confidence levels that prevailed in earlier decades.

But there are still problems with rising interest rates that makes everything more expensive and knocks many first-time buyers out of the housing market with limited incomes.

“The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said NAHB Chief Economist Robert Dietz.

Mortgage interest rates have jumped more than 1.9 percentage points since the start of the year and currently stand at 5 percent, the highest level in more than a decade, as can be seen with the FRED graph of historical 30-yr conforming fixed rates. They were as low as 2.5 percent in the past 2 years during the pandemic.

FRED30yrfixed

This is while existing-home sales decreased 2.7 percent between February and March, dropping to a seasonally-adjusted, annual rate of 5.77 million, the National Association of Realtors said Wednesday. It was the second consecutive month in which sales fell. Compared to a year ago, sales were down 4.5 percent.

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, chief economist for the National Association of Realtors, said in the report. “Still, homes are selling rapidly, and home price gains remain in the double-digits.”

Yun now predicts that home sales will contract by 10 percent in 2022, as surging mortgage rates curb home-buying demand and home-price growth. With slower demand, the inventory of unsold existing homes increased to 950,000 as of the end of March. That would support 2.0 months at the monthly sales pace, which is still way below the 4-6 month supply available, historically.

So, we will depend on the construction of more rental units, apartments, to satisfy the continued demand for housing in years to come, just as we did in the 1970s for the growing population of baby boomers.

Harlan Green © 2021

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

What Recession?

 Financial FAQs

FREDretailsales 

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 optimistic 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.

So 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,

UofMichigan

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.

So 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

What Is the New Normal?

 Popular Economics Weekly

FREDcpi

What will the future look like with the COVID-19 pandemic about to end, and a possible new cold war with Russia just beginning? It is a time when governments come to the rescue. We’ve seen it happening with the demise of COVID-19 due to the development of miraculous vaccines that only governments can research and fund.

But it also means consumers have been given more money to spend, which has resulted in the highest monthly inflation numbers since 2005.

The consumer price index jumped 1.2% last month, driven by the higher cost of gasoline, food and housing,  the government said Tuesday. It was the largest monthly gain since Hurricane Katrina in 2005 and resulted in the highest annual increase in 40 years, crimping the spending of consumers and investments of producers.

Scary as that may be, the FRED graph shows that it has been higher in 1974 and 1980 during the Arab oil embargos when it rose to 14 percent, per the FRED graph. Inflation is also happening with commodities such as wheat and oil because of the sanctions against Russia for invading Ukraine and threatening the West with nuclear weapons if NATO interfered with Putin’s wholesale destruction of another country.

We are also seeing how the EU, US and Japanese governments have come together to aid Ukraine. But all of this takes lots of money, which only governments can spend, as I said. It took $trillions to vanquish the pandemic, and we see with the proposed 2022-23 fiscal year budget of $5.8 trillion what must be done to keep the US on a strong growth path.

It really means the transfer of more wealth from the private sector via higher taxes to pay for programs that promote more jobs and protect Americans from economic disruptions that may be caused by the Ukraine war.

For instance, the proposed budget includes a so-called “billionaire tax” that would apply a minimum tax rate of 20 percent to both the income and unrealized capital gains of households with a net worth over $100 million. The tax is projected to raise $360 billion over 10 years — more than half of it from billionaires that have prospered the most since the Great Recession of 2007-09.

To emphasize that wealthy Americans can afford higher taxes, the Times interviewer mentioned that some 130 new American billionaires were created just from 2020 to 2021.

French economist Thomas Piketty, author of the best-selling Capital in the Twenty-First Century, and sure to be a future Nobel Prize-winner in Economics, stated recently in a NY Times Magazine interview, “…the period of maximum prosperity of the U.S. economy in the middle of the century was a period where you had a top income tax rate of 90 percent, 80 percent, and this was not a problem because income gaps of 1 to 100 and1 to 200 are not necessary for growth.”

The income gaps have risen to more than 300 to 1 for CEOs vs. their employees during the 1980s as inequality levels grew to what they are today. We cannot possibly pay for the programs needed to protect Americans if such levels of inequality continue. That is already happening with the 5.6 percent annual rise in average hourly wages, with transportation, leisure and retail trade employees’ average wages rising even faster, as we said last week.

I said last week that now isn’t the time to worry about inflation or the Fed engineering a soft landing, or any ‘landing’ at all. It is precisely during such uncertain times that we need elevated growth and a government that steps up, while partisan politics step down, even with an upcoming election in November.

Harlan Green © 2022

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

What Stagflation?

 Financial FAQs

TradingEconomics

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," said Anthony Neeves, Chair of the Institute for Supply Management^®. "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 embargoes 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

Strong Job Growth Continues

 Popular Economics Weekly

MarketWatch

The unemployment rate slid to 3.6 percent in March from 3.8 percent in February, the government said Friday. The big news was that with an additional 431,000 nonfarm payroll jobs added in March, a total of 2.273 million jobs have been created over the past four months. This is the fastest payroll increase since 1939.

I find little that foretells trouble ahead in the Labor Department’s jobless survey. Job growth is surging, and this will help bring down inflation because more people are returning to work, so more will be produced, easing supply-chain worries.

Rising wages are also helping consumers—the annual average is up 5.6 percent—since most of the wage increase is for service workers that need it the most.

MarketWatch’s Andew Keshner listed those sectors where wages rose faster than the inflation rate:

• In transportation and warehousing jobs, the year-over-year growth rate in hourly earnings was 7.9%. Paying an average hourly rate of $27.79, these workers have been much-needed with e-commerce sales booming and supply chains trying to unsnarl.
• In leisure and hospitality jobs, the year-over-year growth was even higher, at 11.8%. Hotels, restaurants and bars kept staffing up, accounting for roughly one-quarter of all the March jobs gains and paying an average $19.68 an hour in March.
• Jobs in retail trade saw 6.5% average hourly earnings growth, paying an average $22.89 per hour. This sector includes work in everything from grocery stores to gas stations, clothing, hardware and more.
• Jobs in “professional and business services” had a 6.6% increase, paying an average $38.18 an hour. In March, this sector — covering all sorts of white-collar work from accountants and lawyers to call centers and administrative staff — added 102,000 jobs.

Calculated Risk

It has been one of the fastest recoveries since the 1981 recession per Calculated Risk’s graph (red line on graph), despite the one-month-old Ukraine war. The U.S. economy was going strong before the pandemic and has almost returned to its pre-pandemic level of February 2020; in part because the recession lasted just two months—March to April 2020.

We are already seeing what a ‘new normal’ might look like in the years to come. Government has had to step up spending to tame the pandemic, just as it did during Roosevelt’s New Deal to recover from the Great Depression. Now, President Biden’s proposed $5.8 trillion budget for the 2023 fiscal year must address what might become a prolonged European war.

“Budgets are statements of values, and the budget I am releasing today sends a clear message that we value fiscal responsibility, safety and security at home and around the world, and the investments needed to continue our equitable growth and build a better America,” said President Biden on its release.

Now isn’t the time to worry about inflation or the Fed engineering a soft landing, or any ‘landing’ at all. It is is precisely during such uncertain times that we need elevated growth, and a government that steps up while partisan politics step down, even with an upcoming election in November.

Harlan Green © 2022

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