Inflation Cooling, Manufacturing Stays Hot

 Financial FAQs

FREDpce

Inflation hawks that keep calling for more Fed rate hikes see a recession coming. But what if inflation is already beginning to decline?

The rate of inflation over the past year was unchanged at 6.3 percent in May. The yearly rate has backed off a little after touching a 40-year high a few months ago.

But the core rate of inflation that omits more volatile food and energy prices slowed to 4.7 percent in the 12 months ended in May from 4.9 percent in April and a 40-year high of 5.2 percent in March. What’s more, the inflation readings in the core PCE rate from February through May were the smallest since the end of 2020, reports the BEA.

This is huge folks, as households spent less and even the more volatile food and energy prices are subsiding. Consumers do know how to self-correct. They buy less and travel less with such high inflation, thus reducing the demand that elevates prices.

Meanwhile manufactures are upping their capital expenditures instead of cutting back for fear of a slowdown in economic growth.

Their so-called capital expenditures are up 13.9 percent in a year, a volume not seen since the 1980s, in a sign that supply bottlenecks are easing.

One reason is orders at U.S. factories for long-lasting goods such as new cars or heavy machinery rose 0.7 percent in May, a stronger than expected reading that showed manufacturers still had plenty of demand for their products even amid signs the economy was slowing. It was the seventh gain in the last eight months, the government said.

This contrasts with the third and last estimate of Q1 2022 GDP growth that was revised downward to minus -1.6 percent, when it had grown 6.9 percent in last year’s fourth quarter.

BEA.gov

The decline in Q1 GDP was mainly due to a massive rise in imports overshadowing a slowdown in exports. Import totals are subtracted from exports in the GDP tally. There was also some reduced consumer spending, as government COVID subsidies have subsided.

But manufacturers and other businesses are restocking their inventories, which will probably boost Q2 economic growth back into the positive column, though economists are uncertain how much.

The surging inflation that is causing so much pain at the gas pump and grocery stores is, after all, a sign of the red-hot growth of consumption outstripping supplies. Many American refineries had also shut down due to decreased consumption during the pandemic and gas prices that hit rock bottom.

Why such wild gyrations in growth? It seems uncertainty over what the Fed will ultimately do to tame inflation is causing the current instability. Will it raise interest rates too high too fast, and cause consumers to close their wallets?

Former Fed Chair Ben Bernanke believes that inflation will not become embedded longer-term, because the ‘70s stagflation was caused by 14 months of rising prices, whereas it has been rising for six months in the current cycle.

One reason for such business optimism is corporations have been reporting record profits, and able to pass most of their increased product costs onto consumers. They are using some of the record profits to hire more workers, because their markets are continuing to expand.

Let’s hope the Fed reads the inflation tea leaves correctly and doesn’t overreact.

Harlan Green © 2022

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

Developing a Livable Community

 Answering Kennedy’s Call

What are the requirements for a livable community? I will be posting excerpts from my new memoir, Building Community Answering Kennedy's Call, just out on Amazon. 

As recently as 2005, the Institute of American Architects said that

“. . . broadly speaking, a livable community recognizes its own unique identity and places a high value on the planning processes that help manage growth and change to maintain and enhance its community character.”

The Goleta Valley still had a rural feeling. It had been settled by immigrant farmers after the Civil War when the huge Spanish rancheros—made up of tens of thousands of acres—were broken up following an especially severe drought that killed the livestock that were the livelihood of the earliest settlers. Now it was a valley filled with lemon and avocado groves.

But a battle had erupted between developers building new subdivisions and environmentalists who wanted to keep the valley as rural and agricultural as possible. The developers had been winning until the environmentalists succeeded in passing a water moratorium that stopped new building projects that didn’t have existing water allotments.

I became involved with community events like the Lemon Festival and July 4^th celebrations, where I met residents who wanted to live in a unique community. Many of them had already made several attempts to form their own city to control its development.

I thought the Goleta Valley, an area with more than 50,000 inhabitants, should become a city. Its revenues for needed improvements were spent elsewhere in the county rather than for the benefit of the Valley. And Goleta continued to attract high tech businesses due to its closeness to the top-ranked physics and engineering schools of the University of California’s Santa Barbara campus.

The unplanned expansion had not been preserving the open spaces and pedestrian-friendly commercial centers that residents and sustainable development principles required. The third largest oil spill in U.S. history (behind the Gulf of Mexico and the Alaska oil spills) occurred in the Santa Barbara Channel in 1969. More than three million gallons of crude oil leaked from a deep water well and coated 35 miles of South Coast beaches for months, requiring massive cleanup.

The oil spill mobilized the whole South Coast community, searing the memories of those living there, helping to spawn the national environmental movement.

Goleta had a wonderful history, from its earliest Chumash Indian inhabitants to its discovery in the 1500s by Spanish explorer Juan Cabrillo, which led to the founding of California’s mission system. It then became known as “The Good Land”, an agricultural paradise named by a local historian for its abundant and fruitful soils and climate.

But as a bedroom community to Santa Barbara, the Goleta Valley had no real community organization of its own other than the Goleta Valley Chamber of Commerce. It needed an established entity to ask for what was needed to improve the valley’s aging and dilapidated infrastructure, and to reduce chaotic development. More public transportation, water resources, and just smart community planning were needed to mitigate the effects of a growing population.

There was much opposition to any organizing effort that would create more than a bedroom community in the Goleta Valley. There were those who wanted to “belong” to the City of Santa Barbara so their property values would be the beneficiary of Santa Barbara property values. They wanted no part of a new, more rural city. Then there were the environmentalists that tended to cluster around UC Santa Barbara with its strong environmental studies program. They were afraid a new city would encourage more development.

But in fact, being unincorporated didn’t prevent development: property owners and developers had only to convince one County Supervisor that represented a larger area, rather than a city council responsible for the entire community.

Goletans couldn’t agree on what was unique about their own community. Was it a farming culture, bedroom community, or just funky adjunct to UC Santa Barbara? Many thought that, with prosperous Santa Barbara next door, what was the need for another city on the already crowded South Coast? Hence the impasse that had defeated earlier cityhood attempts.

The first step in building a livable community, in my view, had to be creating a town center that could focus planning efforts, and Old Town Goleta seemed just the place to do it. Old Town had been the historical center of the Goleta Valley with stores, a saloon, and a blacksmith for farmers in the early days.

There were marsh lands and the large Goleta slough to the south. Goleta Valley and Santa Barbara have the only southern facing coastlines in California due to a geological quirk. Early schooners could sail into what was then a bay at high tide, refill their water caskets at a natural spring where UC Santa Barbara is now located, and even dock near Old Town’s center.

Spanish explorers in the 1700s who were looking for mission sites originally thought it could be an ideal site for a mission, as a large island in the center of the slough had originally held five indigenous Chumash Indian villages and was surrounded by water making it easily defensible. But when the Spaniards returned several years later during a drought, there was very little water to protect it. So, they chose to build the mission in Santa Barbara, which had no natural harbor but a seasonal creek that could provide an adequate water supply.

Old Town, with its own past, could give Goleta Valley residents a sense of their own history and separate community identity. It even had a Community Center that hosted many community activities. An associate County Planner at that time, Dan Gira, also thought Goleta should become a city able to determine its future as part of the County’s General Development Plan update.

The update was required by the state of California to accommodate the changes necessitated by a growing population. I was one of many moving to this beautiful area of the South Coast with its unique climate sheltered by east-west mountains and south facing beaches. Santa Barbara and the South Coast has always been a beautiful and very desirable place to live, and the people kept coming.

The County would apply to the state of California for the formation of a Goleta Old Town Redevelopment District, which would allow some tax monies to be withheld for use in Old Town to upgrade its housing and infrastructure. While I loved the beautiful outdoors and the nature that surrounded us, more housing was needed in Old Town. Many Mexican agricultural workers—mostly undocumented—were living in Old Town because of its cheap rents, but landlords were taking advantage by housing ten to twenty of them in a single dilapidated housing unit.

I had to raise $50,000 in the community: 50 percent of the expense the County would incur to do the studies necessary to classify Goleta Old Town as a redevelopment district. The County would chip in its 50 percent in the form of time and labor, and whatever was needed for the feasibility study that would determine if Goleta Old Town fulfilled the state requirements for its redevelopment.

The study would include a report on degraded infrastructure, such as inadequate surface transportation, and the number of bars and other “nonproductive” businesses in Old Town. The point was to determine the extent of blight, or physical deterioration, of the Old Town community, and a cost estimate for fixing those problems.

There was plenty of blight. Goleta’s Old Town had become run down in the 1980s as competing malls were built elsewhere to accommodate the new auto-dependent subdivisions built to hold the growing population. Bars had proliferated as businesses left Old Town. A fire partially destroyed a ten-unit apartment building. A Santa Barbara News-Press reporter covering the fire reported that residents thought the popping noise from breaking Windows sounded like gunfire from gang warfare.

We raised the $50,000, the County Planning Department hired a consultant to write the feasibility study, and it was approved within a year. That gave us the means to begin planning for a new town center, and maybe a city.

Harlan Green © 2022

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

 

 

Jobs Picture Reduces Recession Worries

 Popular Economics Weekly

Calculated Risk

Weekly initial unemployment claims are holding at the lowest level since 1970, which is a sign of an extremely tight labor market.

In the week ending June 18, the advance figure for seasonally adjusted initial claims was 229,000, a decrease of 2,000 from the previous week's revised level, said the DOL.

It dipped below 200,000 claims once before in 1999 just before the COVID-19 pandemic, per Calculated Risk’s graph.

How is this a sign of an impending recession? Companies are holding on to their workers for dear life, with one of the lowest unemployment rates in history at 3.8 percent. The unemployment rate was only lower in 1950, dipping to 2.5 percent during the record recovery from World War II, per the FRED graph below.

FREDunemploymentrate

In fact, the latest JOLTS report showed there were still 11.4 million job vacancies over the past two months. Most headlines touted that the 11.4 million job openings in May as a “severe” drop from 11.9 million vacancies in April, But that wasn’t a sign of weakness. 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, as I said in an earlier post.

This is while consumers’ personal consumption expenditures have risen 6 percent in a year. Consumer spending that makes up some two-thirds of economic activity has skyrocketed since the pandemic; after just 2 percent average annual growth rates since the Great Recession.

The question pending is whether rising interest rates will slow consumers spending sufficiently to reduce inflation, averting reoccurrence of a 1970’s-style stagflation?

The Fed's June Open Market Committee press release was optimistic about the prospects for continued growth.

“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. (But) Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

We must now wait to see what the Fed’s push to raise interest rates will do to future growth.

Harlan Green © 2022

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

Home Sales Returning to Normal Levels

 Financial FAQs

FREDcalculatedrisk

The home sales frenzy that has prevailed since COVID and rock bottom interest rates is finally subsiding.

Existing-home sales retreated for the fourth consecutive month in May, according to the National Association of Realtors®. Month-over-month sales declined in three out of four major U.S. regions, while year-over-year sales slipped in all four regions.

This is slowing rising prices, though the national median price just topped $400,00 for single-family homes, up 15 percent in a year. But it also means annual sales are returning to the range that prevailed since the Great Recession in 2007, as can be seen in Calculated Risk’s above graph.

Calculated Risk’s Bill McBride predicts that housing supplies will increase this year because a record number of homes will be completed due to a record number of housing units under construction—some 1.7 million residential units.

“Supply constraints have lengthened the time from start to completion. We can see the impact of supply constraints by looking at the gap between single family starts and completions. It usually only takes about 6 months between starting a single-family home and completion, but it has taken longer during the pandemic,” said McBride.

Total existing-home sales,1 https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.4 percent from April to a seasonally adjusted annual rate of 5.41 million in May. Year-over-year, sales receded 8.6 percent (5.92 million in May 2021).

"Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance," said NAR Chief Economist Lawrence Yun. "Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions."

Total housing inventory registered at the end of May was 1,160,000 units, an increase of 12.6% from April and a 4.1% decline from the previous year (1.21 million). Unsold inventory sits at a 2.6-month supply at the current sales pace, up from 2.2 months in April and 2.5 months in May 2021.

The problem is that first-time buyers have an even more difficult time in purchasing a residence, hence the surge in apartment construction.

First-time buyers were responsible for 27 percent of sales in May, down from 28 percent in April and down from 31 percent in May 2021. NAR's 2021 Profile of Home Buyers and Sellers – released in late 2021 – reported that the annual share of first-time buyers was 34 percent.

In fact, first-timers have made up to 40 percent of purchases when interest rates were lower, so will either now have to wait for either changes in zoning laws that allow a greater housing density near transportation hubs, something that communities should encourage that want to attract more working folk to their towns, or the next time interest rates come down.

Harlan Green © 2022

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

What is a Livable City?

 Answering Kennedy’s Call

Chapter Twelve

 I and several others living in Santa Barbara and the Goleta Valley were interested in a more ecologically friendly and less auto-dependent community. Drs. Susanne Lennard, architect, and her husband, child psychologist Henry Lennard, were two disciples of “livable cities”. They influenced our thinking.

The Lennards founded the Making Livable Cities organization in 1986. It began holding Livable Cities conferences, hosting mayors and urban planners from throughout the world.

In one of those conferences that I attended, the Dean of Urban Planning from Venice, Italy, extolled the virtues of pedestrian-friendly Venice and Venice’s many public spaces that created its close-knit community. He even offered his listeners a personal tour of Venice, should we decide to visit him one day!

Mayors and planners from as far away as India, South America, and Singapore attended and presented papers—all wanting to show off their cities’ people-friendly plans that had evolved over centuries of traditional living.

Central to their ideas was that communities had to be safe from crime, with sustainable economic growth that did little environmental damage. This was achieved by creating town centers built around squares, or plazas that became central community meeting places.

The Greeks and Romans had their public forums and amphitheaters that served their communities. Traditional European cities have open squares or plazas surrounded by shops and apartments from which families can watch their children while doing their own work.

The safety of children must be paramount. Its website, MakingCitiesLivable.org, states:

To be sustainable, a neighborhood, town or city must SUSTAIN ITS CHILDREN [their emphasis]. It must provide a physical environment that ensures children’s health, develops their faculties, and fosters their love for community, and for nature. In this way, children grow up to become agents of sustainability.

It is a messianic statement, but saving cities from themselves is a messianic endeavor. These conferences were tremendously exciting for those interested in building sustainable communities that combined good jobs with a human-scale environment. Dr.

Henry Lennard had developed the concept of child-centered communities where children are able to roam and explore their neighborhoods on their own. They could get to school on streets safe for children without being ferried around by a soccer mom, or anyone in a car that prevented them from exploring their surroundings, creating a sense of autonomy and personal responsibility so important for success in later life.

Many Goleta residents were idealistic former UC Santa Barbara students opposed to anything that hinted at urban; that might disturb the largest Monarch Butterfly Preserve in the west coast, for example. Their vision had to be included in a community plan. Similarly, Goleta and the South Coast in general was becoming another Silicon Valley with major tech startups like Mentor and Citrix corporations located there.

Goleta had also been a major aerospace center in the 1970s and 1980s with Raytheon, General Motor’s Delco and other defense contractors. UC Santa Barbara’s technical expertise was nearby, as was Vandenberg Air Force Base where spy and weather satellites were launched into north-south polar trajectories.

How could we accommodate all this diversity in a well- functioning city?

Harlan Green © 2022

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

Higher Inflation Doesn't Mean Stagflation

 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 that 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 low 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, which means that wages, some two-thirds of product costs, won't be part of the inflation equation this time.

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. 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 rate don’t eventually subside.Why wouldn't they?

Harlan Green © 2022

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

May's Strong Job Report

 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, “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

An Uncertain Jobs Market

 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, including rising interest rates and soaring inflation.

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