Here's To A Happier New Year!

 Popular Economics Weekly

AtlantaGDPNow

Will US economic growth fall off a cliff in January? Maybe not. The Atlanta Federal Reserves’ GDPNow estimate has just raised their estimate of fourth quarter GDP growth to 3.7 percent and it was right on predicting higher Q3 growth.

Yet the pundit chorus is growing for at least two quarters of negative growth in 2023 due to the Fed’s hawkish stance on inflation.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.7 percent on December 23, up from 2.7 percent on December 20,” said the GDPNow report.

After recent releases from the US Census Bureau, the US Bureau of Economic Analysis, and the National Association of Realtors, the nowcasts of fourth-quarter real personal consumption expenditures growth and fourth-quarter real gross private domestic investment growth increased from 3.4 percent and -0.2 percent, respectively, to 3.6 percent and 3.8 percent, respectively.

One reliable indicator, the Conference Board’s Index of leading Indicators (LEI), is predicting a recession next year.

Ataman Ozyildirim, Senior Director, Economics, at The Conference Board said: “Despite the current resilience of the labor market—as revealed by the US CEI in November—and consumer confidence improving in December, the US LEI suggests the Federal Reserve’s monetary tightening cycle is curtailing aspects of economic activity, especially housing. As a result, we project a US recession is likely to start around the beginning of 2023 and last through mid-year.”

But the jury is still out among economists on what may happen next year. Harvard economist Jeffery Frankel, a leading growth expert, believes it’s not so inevitable in a Project Syndicate column.

“Clearly, the reports that the United States was in recession during the first half of the year were premature, especially given how tight the US labor market is. And, despite the confidence with which many again proclaim the inevitability of a downturn, the chances of one in the coming year are well below 100%.”

In fact, there are too many ‘known unknowns’ to paraphrase Bush Defense Secretary Donald Rumsfeld.

Let’s take the unemployment situation for starters. The unemployment rate is still at post-World War II lows, and 4.9 million jobs were created in 12 months, the fastest jobs recovery since the 1990 “Desert Storm” recession (black line in graph).

Calculated Risk

Why are we still at fill employment? There were record levels of government spending, to not only to aid the pandemic recovery but modernize our infrastructure, upgrade our healthcare system and the environment. This is New Deal level spending such as brought us out of the Great Depression.

The $1 trillion infrastructure bill is the largest in history. And it was needed since we had just survived the Great Recession that almost repeated the Great Depression as well as a pandemic that killed more than one million Americans.

Government came to the rescue then, as it is doing now.

The increase in real GDP for the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending, per the BEA.

It will do so again, and we have record corporate profits—still the highest as a percentage of GDP ever.

“Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. “

Consumers, at least, haven’t got the message that a recession is immanent. With so much government support, maybe they see a New Deal in the New Year.

Harlan Green © 2022

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

US Economy Still Surging

 Popular Economics Weekly

BEA.gov

Surprise, surprise. Third quarter GDP growth was revised upward in the government’s third estimate. How can we be thinking of a recession next year? Oh yes, because it increases the likelihood that the Federal Reserve will continue to raise interest rates.

But US economic growth is surging now. What was originally the BEA’s initial estimate of growth was revised from 2.6 percent to 2.9 percent, and now in its third and final estimate is 3.2 percent, largely because consumers are continuing to spend into the holidays.

That should have been an easy call for economists, at least, who are supposed to understand what ingredients make up growth.

“The "third" estimate of GDP released today is based on more complete source data than were available for the "second" estimate issued last month,” said the BEA’s press release.  “In the second estimate, the increase in real GDP was 2.9 percent. The updated estimates primarily reflected upward revisions to consumer spending and nonresidential fixed investment that were partly offset by a downward revision to private inventory investment.”

The increase in real GDP for the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending, per the BEA.

The main engine of the economy, consumer spending, increased at a very good 2.3 percent annual rate in the third quarter. Previously the increase was reported at 1.7 percent.

There are other factors showing strong growth as well. Corporate profits were not as weak in the third quarter as initially reported. Adjusted pretax earnings were flat instead of down 1.1 percent, which means corporate profits are holding at the highest level as a percentage of GDP since 1950.

And initial jobless claims have sunk back to post-pandemic lows, signaling corporations are not yet downsizing their payrolls. The number of Americans who applied for unemployment benefits in the week before Christmas rose slightly to 216,000, but new filings remained low and show the labor market is still strong.

Why? Consumers are more optimistic about their future, as I reported recently, and it’s the holidays!

“Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. “

Disposable personal income increased as well, by $242.4 billion, or 5.4 percent, in the third quarter, an upward revision of $6.6 billion from the previous estimate. Real disposable personal income increased 1.0 percent, an upward revision of 0.1 percentage point.

GDPNow

And lastly, the Atlanta Fed’s GPNow estimate of fourth quarter growth has been steadily revised downward, mostly because the housing market is already in recession, particularly due to lower new home sales and housing construction.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 2.7 percent on December 20, down from 2.8 percent on December 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of fourth quarter real residential investment growth decreased from -21.2 percent to -21.5 percent.”

The engines of growth are still in place, but stocks are plunging again. The good news is seen as bad news by financial markets because the Fed isn’t looking at the real economy.

Harlan Green © 2022

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

Housing Market Swoons

 The Mortgage Corner

Confidence among U.S. single-family home builders fell for a record 12th straight month in December as even a scramble to offer incentives for prospective buyers failed to boost traffic and lift sales in today's high-inflation, high-interest rate environment.

 The housing market is in a “sales swoon”. Sales are poor but not as bad as past recession levels (gray bars in the Reuters graph).

Yet among actual consumers, “Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

This tells us what is happening in our economy is totally at odds with current Federal Reserve policy. The public sees good times ahead, in part because inflation has been declining.

The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs, said Franco. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus.

There were some indications the decline in builder confidence is nearing a bottom, as the gauge of sales expectations over the next six months rose four points to 35.

"The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment," said Robert Dietz, NAHB's chief economist. "Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations."

Reuters

Existing-home sales also declined for the tenth month in a row in November, according to the National Association of Realtors^®. All four major U.S. regions recorded month-over-month and year-over-year declines.

This is with sky-high interest rates just in the past six months.

“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” said NAR Chief Economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”

The demand for housing continues to outpace supply, Yun said. Half of the country may experience small price gains, while the other half may see slight price declines, Sales through October of this year are just shy of 4.4 million, and Yun estimates the 2022 total will reach 5.13 million units when November and December data are reported, down by more than 16% from 2021's 6.12 million.

Economists and pundits are sounding the alarm concerning a Federal Reserve-induced recession if it won’t start looking at the future instead of the past, since future inflation expectations, a key indicator, have been declining rapidly, “to the lowest level since September 2021”, per the Conference Board survey.

NYFederalReserve

Even Nobel Laureate Paul Krugman remarked on this recently.

“What many economists probably have in mind, however, is something else," he said in a recent blog post. "They’re worried about inflation getting “entrenched” in the economy. Textbook models of inflation say that once businesses and workers have come to expect persistent inflation, that inflation becomes self-perpetuating, because people set prices and wages based on the belief that everyone else will be raising prices and wages in the future. And once inflation has become entrenched, the story goes, getting it down again requires a nasty economic slump.”

People do expect elevated inflation over the next year, probably because they’re extrapolating from elevated gas prices earlier this year, said Krugman. But medium-term inflation expectations are quite low. There’s just no sign of inflation getting entrenched.

So Fed Governors beware. Look to the future if you want a picture of the real economy.

Harlan Green © 2022

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

Don't Blame the Workers

Popular Economics Weekly

FREDavghourlywages

What are we to make of Senator Elizabeth Warren’s reaction to Fed Chair Powell’s recent remarks on inflation?

“He’s pushing hard to get more people fired because he thinks that is one way to help bring down inflation,” Sen. Elizabeth Warren (D-Mass.) told HuffPost on Wednesday. “But it’s sure painful for the families who lose their jobs.”

But that is not the only way to bring down inflation, because a tight labor market is not even the major cause of current inflation.

Powell had said in his press conference after last Wednesday’s FOMC meeting, “Really there’s an imbalance in the labor market between supply and demand so that part of it, which is the biggest part, is likely to take a substantial period to get down.”

The Fed Governors didn’t like the November unemployment report that 263,000 nonfarm payroll jobs were created, and average hourly wages are still rising 5.1 percent annually. Jobs were created in every job category except retail/trade and transportation/warehousing.

In other words, the Fed Governors have been saying they won’t know if inflation has been conquered without higher unemployment, which means the unemployment rate rising to 5 or 6 percent from its current 3.7 percent.

Why? Because they believe rising wages are a major cause of inflation since wages and salaries make up two-thirds of product costs. But that doesn’t mean they make up two-thirds of the current inflationary surge.

The Fed has made workers’ wages the culprit of high inflation since the wage-price spiral of the 1970s, when an overly accommodative Federal Reserve kept the credit spigot open to combat soaring oil prices. Unions had bargaining power then and it resulted in wages keeping up with inflation.

So top business leaders formed the Business Roundtable and began spending Big Bucks on lobbying and campaign contributions to weaken labor unions and introduce legislation that cut taxes, resulting in ‘trickle-down’ economic policies that lowered taxes for the wealthiest while asserting that some of their wealth would trickle down to workers.

It was the beginning of an economic counter-revolution, instituted to counter the influence of Keynesian, New Deal, economics that had prevailed since the Great Depression.

But we know that not much trickled down, in part because newly enacted laws not only restricted unions’ bargaining power but cut social programs as well.

We also know that prices have been rising even faster than production costs since the pandemic in various studies, including one such I reported by Nobel Laureate  Joe Stiglitz that showed corporate profit margins are the highest since 1950, and as a percentage of Gross Domestic Product.

This is while the current 5.1 percent average hourly wage rise of employees doesn’t even match the current annual inflation rate of 7.1 percent. Wages after inflation have been falling 1.9 percent annually since the pandemic, so they now make up a smaller portion of costs.

Wages and household incomes haven’t kept up with inflation since the 1970s. So Big Business did its job of suppressing the incomes of salaried workers during all those years of trickle-down economics.

It was also the beginning of record budget deficits, since Big Business justified the tax cuts by invoking President Reagan’s famous assertion that “deficits don’t matter”.

But deficits matter now because of record spending needed to vanquish COVID and assist the Ukraine in its war with Russia. So this is the wrong time to be penalizing workers and shrinking the American economy into a probable recession.

Harlan Green © 2022

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

 

What Is Real Inflation Rate?

 The Mortgage Corner

MarketWatch

Nobel Prize-winner Joe Stiglitz has weighed in once more against Chairman Powell’s Federal Reserve further boost of short-term interest rates; because said rates have almost returned to the 2 percent target range—if we consider what has occurred since the Fed began raising their rates.

And raising rates any higher harms wage-earners in the bottom income range, as well as homeowners and homebuyers watching soaring mortgage rates.

In March 2022, when the Fed first raised rates, inflation was accelerating. From January to March, the CPI had risen at an 11.3% annual rate. But then the Fed raised interest rates at six straight meetings, going from near zero to near 4% (see MarketWatch graph above) and now inflation is decelerating. From September to November, inflation rose at a 3.7% annual rate.

Professor Stiglitz highlights a new Roosevelt Institute report he co-authored that shows any benefits from the extra interest-rate-driven reduction in inflation will be minimal, compared to what would have happened anyway.

So, if the ‘real’ inflation rate has fallen so fast due to Fed actions, what is keeping prices high? Excessive corporate profits, in a nutshell, due to their pricing power; particularly in the petroleum sector that is dominated by just five major U.S. oil companies.

The Roosevelt report dispenses with the argument that today’s inflation is due to excessive pandemic spending, he said, and that bringing it back down requires a long period of high unemployment. Demand-driven inflation occurs when aggregate demand exceeds potential aggregate supply. But that, for the most part, has not been happening, as consumers have spent much of their savings and wage gains haven’t kept up with inflation.

Instead, the pandemic gave rise to numerous sectoral supply constraints and demand shifts that became the primary drivers of price growth, said the report.

Reproducing and updating the analysis of Jan De Loecker, Jan Eeckhout, and Gabriel Unger’s The Rise of Market Power and the Macroeconomic Implications,” Stiglitz said, “we find that markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s. Further, firms in the US increased their markups and profits in 2021 at the fastest annual pace since 1955.”

Inflation has been easing, in other words, even though food prices remain elevated with Russia’s war in Ukraine, and auto prices caused by a shortage of computer chips. But auto prices have been falling as car inventories have been rising.

MarketWatch economist Rex Nutting maintains actual inflation has fallen even further. If rental rates, which make up 40 percent of the Consumer Price Index and lag other CPI data because rental rates are usually fixed one year in advance, are removed from the retail inflation report, CPI inflation will have risen just 1.3 percent annually.

“Using rents to measure homeowners’ costs might be an acceptable methodology in normal times, but not now,” says Nutting. “Based on the increase in rents, the CPI showed that shelter costs for homeowners rose at a 8% annual rate in November. No one believes that’s true. Most homeowners have a fixed-rate mortgage, so their principal and interest payments haven’t gone up at all.”

So, we don’t need more rate hikes to vanquish the headline inflation rate broadcast to the public that masks its underlying cause, and which isn’t allowing the Fed Governors to ease up on their credit tightening, thus harming future economic growth.

Look to those companies taking advantage of the inflation surge (and suffering it is causing) to fatten their own profit margins.

Harlan Green © 2022

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

Corporate Profits the Inflation Culprit?

 Financial FAQs

BusinessInsider

Another just published economic indicator predicts inflation could be moderating faster than predicted by most analysts.

The New York Fed’s consumer expectation survey just out reported median one-, three-, and five-year-ahead inflation expectations decreased to 5.2 percent, 3.0 percent, and 2.3 percent, respectively, according to the November Survey of Consumer Expectations. Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at the short-term and medium-term horizons and is way done over the longer 5-year term.

This should hearten inflation doves, including Treasury Secretary Janet Yellen, who said in a 60 Minutes CBS TV interview that “I believe by the end of next year, you will see much lower inflation, if there’s not an unanticipated shock.”

It looks increasingly like the economy is doing the Federal Reserve’s work in bringing down inflation, as I said recently with gas prices now below pre-pandemic levels, and shipping and raw material costs declining.

But there is still a major roadblock to be considered—record corporate profits, the highest in history as a percentage of Gross Domestic Product (see above graph). And it tells us why producers can raise prices faster than the inflation rate. It reached its high point of 14.8 percent of GDP in July 2021.

More than half of the companies surveyed by the small business services reviews website Digital.com reported raising prices beyond what was required to offset rising input costs, said Business Insider.

“What’s interesting about our findings is that more than half of respondents say that while they used inflation as a reason for price increases, they expect higher profits as a result,” says Digital.com’s small business expert, Dennis Consorte.

Food prices are now the biggest worry for inflation watchers. The government will release October figures for food and other costs in its Consumer Price Index report Tuesday.

Food prices rose 10.9 percent year-over-year in October’s CPI report. Food at home — grocery store or supermarket purchases — increased by 12.4 percent, ticking down from 13 percent in September, and rose 0.4 percent on the month, the smallest monthly increase in the category since last December.

But several categories rose far more than the overall rate of inflation. Egg prices rose 43 percent year-over-year in October, butter increased by 26.7 percent, and flour and prepared flour mixes were up 24.6 percent. Lettuce prices rose 17.7 percent year-over-year, while bread and milk prices rose by 14.8 percent and 14 percent, respectively.

Let us see if tomorrow’s CPI inflation report continues to indicate inflation declining.

What to do about corporate profits? That’s a long story, a very long story. The Business Insider graph shows it started its record climb in 2009 when recovering from the Great Recession.

Harlan Green © 2022

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

Consumer Sentiments Rising As Inflation Declines

 The Mortgage Corner

UnivMichigan

Consumers are feeling more optimistic, and it’s probably because they are seeing price rises beginning to moderate and prices decline in some areas.

The University of Michigan reported in its preliminary sentiment survey for December that consumer sentiment rose 4 percent above November, recovering most of the losses from November but remaining low from a historical perspective.

“Gains in the sentiment index were seen across multiple demographic groups, with particularly large increases for higher-income families and those with larger stock holdings, supported by recent rises in financial markets…Throughout the survey, concerns over high prices—which remain high relative to just prior to this current inflationary episode—have eased modestly.”

Why in are consumers feeling better? One reason may be gas prices are falling. The national average retail price for a gallon of gas is now $3.33, down $1.69 from June, according to White House data, and now lower than pre-Ukraine war levels.

And a key index of wholesale inflation, the Producer Price Index (PPI), also softened. It rose 0.3 percent in November. The core producer price index, which excludes volatile food, energy and trade prices, also rose 0.3percent in November, up from a 0.2 percent gain in the prior month, but slowed to 7.4 percent gain over the past 12 months from 8.1 percent in the prior month.

Even more importantly for economic growth, the index is down from the peak of 11.7 percent in March when bottlenecks restricted the supply of raw materials that comprise the wholesale price index.

Its reading on future inflation expectations is also looked at by the Fed in an attempt to predict future consumer spending.

Year-ahead inflation expectations improved considerably but remained relatively high, falling from 4.9 percent to 4.6 percent in December, the lowest reading in 15 he months but still well above 2 years ago.

“Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification. At 3.0 percent, long run inflation expectations has stayed within the narrow (albeit elevated) 2.9-3.1 percent range for 16 of the last 17 months.”

I’ve highlighted the longer term expectations because it is this statistic that is supplying ammunition for the inflation doves who say the Fed should now pause in their rate hikes to see if their actions to date will induce consumers to spend less, thus pushing down inflation even further.

We are already seeing its effect on the housing industry. I reported recently that the National Association of Realtors® (NAR) reported median house prices were up just 6.6 percent year-over-year (YoY) in October. This is down from the peak growth rate of 25.2 percent YoY in May 2021.

And, Case-Shiller reported that the National Index was up 13.0 percent YoY in August, down from a YoY peak of 20.8% percent in March 2022.

Calculated Risk

Any moderation in inflation is good news for housing, of course. Calculated Risk’s Bill McBride just highlighted a report from the National Association of Realtors (see above graph) that for-sale housing inventories are up 53 percent in one year.

This is perhaps the best reason to believe that as inflation continues to decline, it will revive the housing market as well as bolster consumer confidence.

Harlan Green © 2021

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

Government Is Solution (Not the Problem)

 Financial FAQs

BEA.gov

It looks increasingly like the economy is doing the Federal Reserve’s work in bringing down inflation, says the most recent economic data. And our government is doing its part.

Much of recently enacted U.S. government programs will modernize the U.S. economy, increasing its efficiency (e.g., better roads and bridges, Internet, health care, less pollution), which will continue to bring down inflation.

As Nobel Prize-winner Joe Stiglitz said recently in a MarketWatch article, “Thanks to President Joe Biden’s recovery bill (the American Rescue Plan), the United States had the strongest recovery of any of the world’s advanced economies, reducing childhood poverty by almost half in the space of a year.

“Biden also oversaw the passage of the first major infrastructure bill in decades; America’s first major legislative response to climate change, the Inflation Reduction Act; and a major industrial-policy bill, the CHIPS and Science Act, which explicitly recognizes the government’s key role in shaping the economy. And these landmark bills all passed despite a historically unwieldy Congress,” said Professor Stiglitz.

This Friday’s upcoming Producer Price Index for raw materials should also telegraph another drop in inflation before the Fed Governors convene their last meeting of the year, as raw material prices for almost everything (copper, steel, fossil fuels) are in decline.

A worldwide drop in fossil fuel consumption is causing our gas prices to fall below the $3.50 per gallon price that prevailed before the Ukraine war. This should be good news for continued domestic growth, even if declining prices are a sign of slow growth elsewhere.

Even today’s reports of higher factory activity, and the ISM’s index of service-sector growth show the U.S. economy expanding, not contracting.

The ISM’s non-manufacturing survey, a barometer of U.S. business conditions at service-sector companies such as banks and restaurants rose to 56.5 percent in November, which is a strong showing that shows the economy still expanding. Numbers over 50 percent are a sign the economy is growing, and figures above 55 percent are viewed as exceptional.

“In November, the Services PMI^® registered 56.5 percent, 2.1 percentage points higher than October’s reading of 54.4 percent. The Business Activity Index registered 64.7 percent, a substantial increase of 9 percentage points compared to the reading of 55.7 percent in October. The New Orders Index figure of 56 percent is 0.5 percentage point lower than the October reading of 56.5 percent,” said Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management^® (ISM^®) Services Business Survey Committee.

Economists have pointed out the service sector that includes leisure activities (dining out, travel) is playing catching up as we recover from the pandemic, while consumer spending holds steady over the holidays.

And orders for U.S. manufactured goods rose 1 percent in October, the U.S Census Bureau said Monday. This was the twelfth increase in the past thirteen months. Durable-goods orders rose a revised 1.1 percent in October compared with the initial estimate of a 1 percent gain (things lasting more than 3 years, autos, appliances). Orders for nondurable goods were up 1 percent in the month.

Fed Chair Powell recently said the Fed Governors are leaning to a more moderate increase of just 0.50 percent at their December FOMC meeting, rather than the last four 0.75 percent interest rate increases.

Let us hope they continue to lean in that direction. Consumers may help as they have historically slowed spending in January to save up for taxes and future spending sprees.

Harlan Green © 2022

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

Too Many New Jobs??

 Popular Economics Weekly

FREDavghourlywages

The Fed Governors won’t like this morning’s unemployment report. The U.S. Census Bureau just reported that 263,000 nonfarm payroll jobs were created in November and average hourly wages are still rising 5.1 percent annually.

To make matters worse for the Governors, jobs were created in every job category except retail/trade and transportation/warehousing.

“The unemployment rate was unchanged at 3.7 percent in November and has been in a narrow range of 3.5 percent to 3.7 percent since March. The number of unemployed persons was essentially unchanged at 6.0 million in November,” said the Census Bureau.

What is going on, as I said recently? Short-term interest rates (e.g., that control credit card and auto loan rates) have risen from essentially zero during the pandemic to 4 percent, and the Fed Governors keep threatening to boost them further until consumers cry uncle with their spending and companies stop hiring so many workers!

Top this sign of economic health with third quarter GDP growth just revised higher, and economists now predicting even higher fourth quarter growth—as high as 4.3 percent with the Atlanta Fed’s latest GPNow estimate?

The unemployment rate of 3.7 percent was unchanged and stayed close to a more than a half-century low (really the 1950s). Hourly pay rose 0.6% last month to an average of $32.82. That’s the biggest advance in 13 months, but isn’t that also a result of many states raising their minimum wages to $15 or more from the national 7.25 percent rate that has prevailed since the 1990s (not the red states, unfortunately)?

Hourly pay rose as high as 8 percent in April 2020 when corporations suddenly ramped up production, as portrayed in the enclosed FRED graph, and it started last year’s record growth spurt of 5.7 percent, not seen since the 1960’s high times.

Average wages had been rising no more than 2-3 percent since the Great Recession (large gray bar in graph), and wages make up some two-thirds of production costs, historically. So the Fed is targeting workers’ wages as the main culprit as it has always done. And corporations must stop hiring so many workers, even though the demand for their goods and services is still soaring.

Some (progressive) economists, however, maintain that the main inflation culprit isn’t the workers in wanting higher wages when household incomes are catching up to inflation for the first time since the 1970s. Rather, it’s excessive profiteering of companies, particularly the energy companies riding the wave of higher demand with scarcer resources; but also the supply shortages due to the COVID-19 pandemic that is still limiting supplies and hampering supply chains.

And, we now have a European war causing even more shortages of food and energy supplies.

So, what is the Fed to do with its threats to businesses and consumers that if they don’t stop their spending spree the Fed will cause a recession by raising interest rates too high?

Harlan Green © 2022

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

Inflation Decine Accelerating

 Financial FAQs

Another inflation indicator, the Personal Consumption Expenditure Index (PCE) is declining as well, which is a broader measure of inflation preferred by the Federal Reserve than the Consumer Price Index (CPI). This is probably why Fed Chair Powell sounded more dovish about inflation prospects in Wednesday’s press conference.

The yearly rate of inflation slowed to 6 percent in October from 6.2 percent in the prior month and a 40-year high of 7 percent last summer, as portrayed in the FRED graph below. The PCE index is the best measure of inflation, especially the core gauge that strips out volatile food and energy costs.

“From the same month one year ago, the PCE price index for October increased 6.0 percent (table 11),” said the BEA. Prices for goods increased 7.2 percent and prices for services increased 5.4 percent. Food prices increased 11.6 percent and energy prices increased 18.4 percent. Excluding food and energy, the PCE price index increased 5.0 percent from one year ago.”

 

FREDpce

The core rate of inflation in the past 12 months slipped to 5 percent from 5.2 percent. It’s also down from a 40-year high of 5.4 percent last February. Consumer’s items were still expensive, however.

Federal Reserve Chairman Jerome Powell’s press conference was noteworthy because he signaled that smaller rate increases (than the last 4 0.75 increases) were in the offing because there were signs that the demand for goods and services was softening.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said, in a speech to the Brookings Institution.

So much depends on what consumers do over the coming months. They continue to push up prices by keeping up with inflation. Consumer spending had fallen somewhat, though the latest figures coming into the holidays were still robust.

Americans spent more in November on gasoline, per the BEA, largely reflecting an increase in prices at the pump. They also spent more on new cars, dining out and hotel stays.

But gasoline prices, a key ingredient of consumer prices, are about to take another plunge. Average national gasoline prices have already fallen to pre-Ukraine war prices of $3.50 per gallon, a boon to consumers over the holidays.

Why? China’s economy is stagnating as its Communist Party insists on locking down its cities, rather than inoculating most of its citizens, a lesson in hubris for a government that chooses coercion over the protection of its citizens.

The lesson ought to be that our Federal Reserve should listen to the citizens as well, who rather than government and the pundits, know what is best for them.

Harlan Green © 2022

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