No Recession Next Year?

 Financial FAQs

Fortune Magazine has come up with the most interesting reasons for a looming recession in a recent edition.

“Here are six reasons why a recession remains Bloomberg Economics’ base case. They range from the wiring of the human brain and the mechanics of monetary policy, to strikes, higher oil prices and a looming credit squeeze — not to mention the end of Taylor Swift’s concert tour.”

I’m not sure just what the wiring of the human brain has to do with recessions, other than  Nobelist Robert Shiller’s research on human behavior; that most financial decisions are based on hearsay, rumors, and plain old irrational exuberance.

The housing bubble was caused by such behavior. Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession.

Fortune Magazine should add blockbuster movies like Barbie and Oppenheimer, if they want to attribute our current economic health to happy consumers enjoying leisure activities; but their current temperament could change with bad news.

Oil prices are falling, the strikes have been settled with employees winning bigtime with better benefits, and the current credit squeeze hasn’t hurt current record employment and consumer spending to date per below graph (gray bars are recessions).

FREDunemployment

Federal Reserve Governors have also been sounding more dovish on interest rate policy of late.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said at his last press conference of this year. The Fed is “likely at or near the peak rate for this cycle.”

That leaves what Bloomberg believes is the major determinant of a possible recession; the “looming credit squeeze” due to the continuation of higher inflation and interest rates. So, we don’t yet know the full effect of the sudden hike in interest rates engineered by the Fed since March 2022, some 18 months ago that has made borrowing more expensive.

But consumers seem to act rationally when it affects their pocketbooks, especially from too high prices and interest rates. Their record spending on leisure activities could change if the Fed doesn’t begin to lower interest rates in the spring, as I said.

The so-called Fed Funds rate has been at its high point of 5.25 to 5.50 percent from August 2023, just five months, whereas Greenspan’s Fed held rates at their maximum for eight months, from August 2006 to June 2007. The Great Recession was determined to have begun in December 2007.

So there isn’t much room left to avoid a recession, is there? Watch the actual behavior of interest rates to know what consumers will do next!

Harlan Green © 2023

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

Wasn't the Fed

 Popular Economics Weekly

What more does Chairman Powell and the Federal Reserve Governors need to know to announce the inflation battle has been won? Its preferred inflation indicator has shown zero monthly increases for two months.

The rate of U.S. inflation based on the Federal Reserve’s preferred PCE index actually fell in November for the first time since 2020 and indicated that price pressures continue to subside. The PCE index dipped - 0.1 percent last month, the government said Friday. Inflation was unchanged in October.

FREDpce

This is what is called a ‘soft landing’, I said last week when the unemployment rate dropped back to 3.7 percent. More jobs are being created in November’s unemployment report, though some 50,000 of the 199,000 new nonfarm payroll jobs are strikers returning to work in Hollywood productions and auto factories.

So the Fed’s actions in raising interest rates to multi-decade highs wasn’t the proximate cause of declining inflation, in what looks like an overaction to the effects of the COVID pandemic.

High inflation wasn’t the fault of rising wages, either, when job openings are still at record highs so that everyone who wants a job can find one.

Workers are getting terrific raises now that the strikes have been settled, yet inflation keeps declining. No, broken supply chains were the major culprit. It’s taken almost three years to ramp up enough production to bring down prices.

We are now seeing the results as shoppers have shown in the latest retail sales figures that they are finding more bargains during this record holiday shopping season.

Even industrial production is ramping up; so much so that Q4 projections of growth are rising again.

Orders for durable goods for products that last more than three years (cars, appliances, etc.) rose 5.4 percent in November, the U.S. government said Friday. This is the largest gain since July 2020. It is the second gain in the past three months. Transportation orders had the largest increase, rising 15.3 percent in November. This was in part because orders for motor vehicles and parts jumped 2.8 percent after the end of the UAW strike. Orders for commercial aircraft also soared but tend to fluctuate wildly month-to-month.

The Atlanta Fed raised its estimate of fourth quarter GDP growth as high as 3.0 percent and it could go higher with today’s robust durable orders release by the Commerce Department.

The U.S. Federal Reserve Board suggested that interest rates would be cut by 75 basis points in 2024 after it last FOMC meeting of 2023 in December. Can we now be in what is called a Goldilocks economy?

That is when the Fed’s interest rate isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. Maybe we’ve reached that point.

Once again, consumers will decide on the direction of economic growth. And holiday travel shows they haven’t slowed down much.

Auto club AAA forecasts that 115 million people in the U.S. will go 50 miles or more from home between Saturday and New Year’s Day. That’s up 2% over last year. The busiest days on the road will be Saturday and next Thursday, Dec. 28, according to transportation data provider INRIX.

And MarketWatch reports the Transportation Security Administration screened more than 2.6 million passengers on Thursday, which had been projected to be one of the busiest travel days, along with Friday and New Year’s Day. That’s short of the record 2.9 million that agents screened on the Sunday after Thanksgiving, since travel tends to be more spread over Christmas and New Year’s.

The chorus is growing on the need to begin dropping interest rates. That’s all we need to sustain this recovery.

Harlan Green © 2023

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

Consumers Happier This Season

 Financial FAQs

Consumer confidence in December as measured by the Conference Board’s Consumer Confidence Index is rising again; it jumped 10 points to 110.7 from 101. Why should that be, with all the doom and gloom and geopolitical uncertainty bombarding us daily?

I think it’s because consumers are seeing falling prices and lower inflation, especially gasoline prices with average gas prices approaching $3 per gallon for the first time in years. And consumers continue to shop both online and in stores because they are finding more bargains, with retail sales surging.

“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, Chief Economist at The Conference Board.

And the unemployment rate has fallen back to 3.7 percent with more workers than ever joining the workforce. Why shouldn’t consumers’ temperaments improve?

Conference Board

“While December’s renewed optimism was seen across all ages and household income levels, the gains were largest among householders aged 35-54 and households with income levels of $125,000 and above.

This is also understandable as they comprise the largest percentage of the adult-age workforce with average hourly waging rising 4.0 percent—at least 1 percent above a falling inflation rate.

More good news is a recovery in the housing market. Single-family construction is soaring. Why? These adult-age consumers believe it’s time to own a home.

Overall housing starts increased 14.8 percent in November to a seasonally adjusted annual rate of 1.56 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“The single-family starts figure is remarkably strong, and we would not be surprised to see this figure revised lower or fall back slightly in the next month, given the nearly 20 % rise in November,” said NAHB Chief Economist Robert Dietz. “NAHB is forecasting an approximate 4 % gain for single-family starts in 2024, as mortgage rates settle lower, economic growth slows and inflation moves lower.”

If I were the Fed Governors, I wouldn’t wait for inflation to drop further to begin to lower interest rates, I said last week. The inflation rate has been falling steadily for more than a year and we could be in a deflationary spiral. Sound impossible? It might happen if the Fed doesn’t see the writing on the wall.

Nobel Laureate Paul Krugman has been scolding certain economists of late in a NYTimes Op-ed who don’t believe what is happening.

“From an economic point of view, 2023 will go down in the record books as one of the best years ever—a year in which inflation came down amazingly fast at no visible cost, defying the predictions of many economists that disinflation would require years of high unemployment.”

The cost of living measured by the Consumer Price Index rose just 0.1 percent in November thanks to lower oil prices. Without food and gas prices, so-called core consumer prices rose a somewhat sharper 0.3 percent last month and matched the Wall Street forecast. And the annual rate of inflation slowed to 3.1 percent in November from 3.2 percent in the prior month, matching the lowest level since early 2021.

Consumers are starting to believe what they are experiencing, in other words. Gas prices are at the top of the list, but how about dining out?

There was a 11 percent increase in dining out sales, and Christmas may equal Thanksgiving as the highest travel month ever. Don’t consumers carry the most weight on which direction this economy is heading?

Harlan Green © 2023

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

How Low Can Interest Rates Go?

 The Mortgage Corner

Stocks and bonds are rallying after Chairman Powell sounded dovish for the first time at his December press conference following their last FOMC meeting of the year.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said. The Fed is “likely at or near the peak rate for this cycle.”

Plunging interest rates are best illustrated by the 10-year benchmark fixed rate Treasury note yield that sets mortgage rates. It has plunged below 4 percent for the first time since the pandemic.

And the 30-year fixed-rate mortgage fell for the seventh week in a row, averaging 6.95 percent as of Dec. 14, according to data released by Freddie Mac on Thursday. A year ago, the 30-year fixed-rate mortgage was averaging at 6.31 percent.

It remained below 5 percent from the end of the Great Recession until May 2022 when the Fed began to raise interest rates. I predict it should drop below 5 percent sometime next year as inflation continues to decline and the Fed begins its rate dropping schedule.

FRED30yrfixed

We are already seeing the results—holiday sales are booming. Retail sales are surging now, up 4.1 percent annually both online and in stores. Dining out is up 11 percent annually.

“Advance estimates of U.S. retail and food services sales for November 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $705.7 billion, up 0.3 percent (±0.5 percent)* from the previous month, and up 4.1 percent (±0.7 percent) above November 2022.”

The housing market is on hold until mortgage rates fall more.

NAR Chief Economist Lawrence Yun forecasts that 4.71 million existing homes will be sold, the housing market is expected to grow, and Austin, Texas will be the top real estate market to watch in 2024 and beyond.

Yun predicts home sales will begin to rise next year – by 13.5 percent compared to 2023, and the median home price will reach $389,500 – an increase of 0.9 percent from this year.

Builder confidence in the market for newly built single-family homes is improving slightly. It rose three points to 37 in December, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today.

“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” said NAHB Chairman Alicia Huey. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”

AtlantaFed

The Fed’s abrupt change in course has also boosted Q4 economic growth prospects. The Atlanta Fed’s GDPNow growth estimate just leaped from 1.2 percent to 2.6 percent, due to “…fourth quarter real personal consumption expenditures growth, fourth-quarter real gross private domestic investment growth, and fourth-quarter real government spending growth.”

So I don’t believe it’s too early to predict a better New Year for investors and homeowners!

Harlan Green © 2023

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

Please Lower Interest Rates Sooner!

 Financial FAQs

If I were the Fed Governors, I wouldn’t wait for inflation to drop further to begin lowering interest rates. The inflation rate has been falling steadily for more than a year and we might be in the midst of a deflationary spiral. Sound impossible? It could be if the Fed doesn’t see the writing on the wall.

The cost of living measured by the Consumer Price Index rose just 0.1 percent in November thanks to lower oil prices. Without food and gas prices, so-called core consumer prices rose a somewhat sharper 0.3 percent last month and matched the Wall Street forecast. And the annual rate of inflation slowed to 3.1 percent in November from 3.2 percent in the prior month, matching the lowest level since early 2021.

The next stage could be outright deflation, which nobody wants because it has spelled recession in the past. Why? Because the steep decline in inflation over a short period means a looming oversupply of things at the same time as sky-high interest rates, and that was the cause of past recessions.

The first indication of oversupply is gas prices, which are falling fast. As of Monday, the average national price for regular unleaded gasoline stood at $3.153 a gallon, down from $3.242 a week ago, and down from $3.376 a month ago, according to AAA.

AAA.com

The main reason is a weaker cost for oil, which is struggling to stay above $70 per barrel.  The falling price comes just a week after OPEC+ announced voluntary production cuts of about 2 million barrels daily. 

“Historically, crude oil tends to drop nearly 30 percent from late September into early winter with gasoline prices trailing the play,” said Andrew Gross, AAA spokesperson. “More than half of all US fuel locations have gasoline below $3 per gallon. By the end of the year, the national average may dip that low as well.”

Inflation is falling fast with the 6-month CPI already down to 2.5 percent, yet unit wages are rising 4.0 percent annually in November’s unemployment report. So inflation today is being caused by higher rents and used cars, not oil prices as happened in the 1970s or rising wages.

We now know why inflation is falling. Nonfarm labor productivity is soaring, up 5.2 percent in the third quarter of 2023 as output increased 6.1 percent and hours worked increased 0.9 percent.

The increase in labor productivity is the highest rate since the third quarter of 2020, when productivity increased 5.7 percent. From the same quarter a year ago, nonfarm business sector labor productivity increased 2.4 percent.

The last time we approached bubble territory was an oversupply of housing in early 2000 that led to the housing bubble and Great Recession. Labor productivity was as high in Q1 2002 at 5.8 percent.

Under Fed Chairman Alan Greenspan, the Fed didn’t recognize the housing bubble until it was too late (In part due to lax supervision by the GW Bush administration Treasury and Greenspan’s Fed). In fact, he even encouraged homebuyers to take out adjustable-rate mortgages to prolong the housing market rally.

He then held the same 5.25 percent Fed Funds rate too long—10 months from August 2006 to June 2007—before the fed began to drop rates.

But by then it was too late. The Great Recession began in December 2007. Housing values had already begun to plunge due to a one-million-unit oversupply and the mortgages tied to them became worthless because they could no longer be serviced due to soaring mortgage rates that followed the Fed’s rate hikes.

Can this happen again? There is a pronounced undersupply of housing today with builders racing to catch up, so there is little danger of a housing bubble. Instead of looking backwards to the 1970s when oil shortages led to the inflationary spiral, the Fed should be focusing on possible oversupply today and falling prices as the production of things continues to ramp up.

There could be an oversupply in the industrial sector, for instance—of computer chips in particular as new factories begin to produce, and ordinary commodities as labor productivity stays high with AI and supply-chains continue to improve.

And let’s not forget the four bank failures to date due to the Fed’s rate hikes. The Fed should not forget the failure of Lehman Brothers and many other financial institutions that was also part of the Great Recession.

Harlan Green © 2023

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

Higher Productivity Lowers Inflation

 Financial FAQs

Why has the Fed got it so wrong with inflation, even though the inflation rate has been falling steadily for more than a year?

Paul Krugman in a recent NYTimes Op-ed said the personal consumption expenditure deflator (PCE) excluding food and energy—the Fed’s preferred inflation indicator—has risen at an annual rate of only 2.5 percent over the past six months, down from 5.7 percent in March 2022. When food and energy prices are added it still rose just 2.5 percent.

Even U.S. unit labor costs were much weaker than initially thought in the third quarter amid surging labor productivity, which meant unit labor costs (i.e., wages) weren’t pushing inflation higher. So-called ‘sticky wages’ were the main reason the Fed kept saying inflation would remain high, hence their refusal to say when they would begin to drop interest rates.

The markets now believe it could begin as early as in May next year.

FREDproductivity

“Unit labor costs fell at a 1.2% annualized rate in the third quarter, the Labor Department's Bureau of Labor Statistics said, revised down from the previously reported 0.8% pace of decline. Unit labor costs rose at a 1.6% rate from a year ago, the smallest year-on-year increase since the second quarter of 2021.”

Slowing wage pressures were underscored by the ADP National Employment Report, which showed that private payrolls increased by just 103,000 jobs in November after rising 106,000 in October. ADP said almost all the new jobs were created in transportation, education, and health care.

There is another obscure economic statistic that can show a better next year. It’s the Labor Department’s JOLTS report that counts the number of job openings each month. The number of openings was sky-high after the COVID pandemic as evidenced by the black line in Calculated Risk’s graph because employers wanted to re-hire workers as the economy recovered so quickly.

Calculated Risk/BLS.gov

It has been steadily declining since then, as has the number of hires (blue line).

But the unemployment rate is still below 4 percent (currently 3.9%) and has been since December 2021. Americans are fully employed, and companies are wanting to hire more despite inflation and soaring interest rates.

“The number of job openings decreased to 8.7 million on the last business day of October, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 5.9 million and 5.6 million, respectively. Within separations, quits (3.6 million) and layoffs and discharges (1.6 million) changed little.”

The difference between hires (5.9 million) and separations (5.6 million) in the JOLTS report means approximately 300,000 new jobs were created in November, changing little in the employment picture.

That should tell us there will be a strong November unemployment report on Friday, though slower GDP growth is forecast for the fourth quarter. Americans are experiencing an incredible recovery, fastest in the developed world, including China.

Harlan Green © 2023

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

Peacemaking in E. Congo

 Answering Kennedy’s Call

What could be more important than supporting projects in the Democratic Republic of Congo? Santa Barbara Rotarians have been supporting projects such as the Congo Peace School in conjunction with an eastern Congo Rotary Club since 2010.

"There are few worse places, if any, to be a child," said Amani Matabaro, former President of the Bukavu Mwangaza Rotary Club of E. Congo.

While we love to share the amazing impact your giving makes in the lives of the children and adults we partner with in eastern Congo, we also know it is important to share the horrific context in which these children we serve are not only surviving but thriving.

As noted in the September 2023 press briefing from the UN’s children’s agency UNICEF on Congo (DRC) and specifically the eastern part of the country where we are located, “the war-torn country had the world's highest number of UN-verified violations against children in armed conflict.”

The violence "has reached unprecedented levels," said Grant Leaity, UNICEF's representative in the country. "There are few worse places, if any, to be a child."

“The east of the Democratic Republic of the Congo (DRC) is facing one of the world’s most complex and forgotten crises. Around 2.8 million children are bearing the brunt of violent conflict, being recruited by armed groups, losing their families and homes, and being exposed to ever-growing levels of sexual- and gender-based violence.” (ReliefWeb infographic here)

It’s a harrowing and difficult report to read, a content warning for sexual assault and violence against young children.

In this space where so many use violence to control innocent civilians, our Founding Director Amani Matabaro’s vision for active peace is revolutionary. Each week at the Congo Peace School, the students and staff focus on a principle of peace and nonviolence as taught by Martin Luther King, Jr.

This last week the focus was the development and interpretation of Principle Three of Kingian Nonviolence: Nonviolence Seeks to Defeat Injustice, or Evil, Not People.

Training the teachers, Amani helped them put the concept into vocabulary that is easier for the students to understand – to attack the forces of evil, not the persons doing evil, so the students and staff could focus on how to practice the principle in the context of eastern DRC.

Amani spoke to some of the Peace School students to ask how they understood the principle, and how they are putting it into practice in their own lives.

As it is not located in a mining area, The Congo Peace School is in a place of relative peace, but the students and staff and community are surrounded by the violence of militias and war, the threat of being recruited as a child soldier, and the extreme poverty that leads to malnutrition, child marriages, and gender-based violence.

From the UNICEF summary of remarks: “In the first three months of 2023, in North Kivu alone, more than 38,000 cases of sexual- and gender-based violence were reported. That’s a 37 per cent increase compared to the same time period in 2022. Said another way: in just one year, there have been 10,000 additional reports of sexual- and gender-based violence. Those are the ones reported. And in North Kivu alone.”

“As well as unprecedented levels of violence, the lives of children in eastern Congo are threatened by epidemics and malnutrition. Around 1.2 million children under five in the east are facing the risk of acute malnutrition.

UNICEF’s Leaity warned about the risk of "acceptance of something which is unacceptable."

"As the world looks away, we are failing the children of DRC," he said.

Harlan Green © 2020

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

What Happens Next?

 Popular Economics Weekly

What does the future foretell? Everyone wants to know what will happen next year now that the Fed is on hold and inflation continues to decline.

I believe the construction industry is telling us the economy will continue to expand next year, despite the Fed’s intransigence on dropping interest rates. Plunging bond yields are signaling inflation will continue to decline, so why wouldn’t the Fed follow?

Construction spending rose in October for the 10th month in a row, largely because of work on commercial buildings and government-funded public projects.

FREDconstruction

Spending on construction increased 0.6 percent in October to just over a $2 billion annual rate, up 11 percent annually, the Commerce Department reported Friday, and per the FRED graph on construction spending.

Much of it comes from the ‘new’ New Deal bipartisan Bidenomics bills that are modernizing the American economy as well as fighting climate change.

And inflation as measured by the Fed’s preferred PCE price index, or personal consumption expenditures price index, was unchanged in November. It was held down in part by a decline in oil prices. The increase in inflation over the past year decelerated to 3.0 percent from 3.4 percent in the prior month and 6.4 percent one year ago. That’s the lowest level since February 2021.

And construction spending could even accelerate as interest rates drop further. Bonds in particular have rallied, as the 10-year Treasury note yield declined more than 0.5 percent in November igniting a huge bond rally after briefly touching 5 percent.

What is being constructed? Everything from roads (public) to commercial properties (private). Private construction spending was almost $1.5 billion of the total.

In October, the estimated seasonally adjusted annual rate of public construction spending was $447.8 billion, 0.2 percent (±2.0 percent) above the revised September estimate of $446.9 billion. Public construction is building for the future that only governments can do.

Educational construction was at a seasonally adjusted annual rate of $97.2 billion, 0.4 percent (±2.3 percent) above the revised September estimate of $96.7 billion.

Highway construction was at a seasonally adjusted annual rate of $132.0 billion, 0.3 percent (±4.8 percent) below the revised September estimate of $132.4 billion.

Since Biden took office, employers have created 14 million jobs, and the unemployment rate has been hovering around a 50-year-low for months, said the NYTimes Ross Serkin.

The president has also been talking up signature economic accomplishments like the Infrastructure Investment and Jobs Act, which he argues have helped rebuild rural America and invigorated the economy.

“Bidenomics is just another way of saying the American dream,” he said in a speech. It’s not a stretch. The economy grew last quarter at 5.2 percent, belying a global slowdown.

President Biden will convene the first meeting of his supply-chain resilience council, using the event to announce 30 actions to improve access to medicine and needed economic data and other programs tied to the production and shipment of goods.

“We’re determined to keep working to bring down prices for American consumers and ensure the resilience of our supply chains for the future,” said Lael Brainard, director of the White House National Economic Council and a co-chair of the new supply chain council.

Working to increase the supply of everything is the best way to bring down prices, and inflation.

Harlan Green © 2023

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

Consumers Happy, Less Inflation

Financial FAQs

There are two indicators that show consumers will continue to support economic growth this year, (and hence avoid a recession), while inflation is continuing to decline.

Firstly, Thanksgiving, the biggest shopping holiday, lured in more shoppers than ever. A record number of people showed up in stores or online to spend money over Thanksgiving, but their spending on holiday-related items ticked lower as they looked for more bargains, according to data from the National Retail Federation released Tuesday.

The industry group said that 200.4 million customers shopped between Thanksgiving Day and Cyber Monday. That’s above the record 196.7 million that turned out last year.

“The five-day period between Thanksgiving and Cyber Monday represents some of the busiest shopping days of the year and reflects the continued resilience of consumers and strength of the economy,” said NRF President and CEO Matthew Shay. “Shoppers exceeded our expectations with a robust turnout. Retailers large and small were prepared to deliver safe, convenient, and affordable shopping experiences with the products and services consumers needed, and at great prices.”

Consumer confidence also increased. The Conference Board Consumer Confidence Index® increased in November to 102.0 (1985=100), up from a downwardly revised 99.1 in October. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—ticked down slightly to 138.2 (1985=100), from 138.6. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—rose to 77.8 (1985=100) in November, up from its downwardly revised reading of 72.7 in October.

“Consumer confidence increased in November, following three consecutive months of decline,” said Dana Peterson, Chief Economist at The Conference Board. “This improvement reflected a recovery in the Expectations Index, while the Present Situation Index was largely unchanged.”

Higher confidence was concentrated primarily among householders aged 55 and up though confidence among householders aged 35-54 declined slightly.

Top this off with a revised estimate of third quarter Real GDP growth that rose to 5.2 percent from its initial estimate of 4.9 percent.

BEA.gov

But households spending rose 3.6 percent in the third quarter, down from an original 4 percent, which was a sign of slowing inflation. And Personal Consumption Expenditure (PCE) prices that are part of the GDP growth estimate rose just 2.8 percent, 2.3 percent with food and energy prices excluded.

Business profits, meanwhile, increased for the second quarter in a row. They rose 3.3 percent to mark the largest gain in five quarters, suggesting that higher labor costs are not weighing much on earnings. Government spending was also a strong contributor as spending rose at a 5.5% rate, versus 4.6% initially.

All of this news has stocks and bonds rallying—stocks because business profits have increased, and bonds because interest rates have declined precipitously.

The yield on the 10-year Benchmark Treasury note that sets mortgage rates retreated 4.7 basis points to 4.288% from 4.335% Tuesday afternoon. This will give a huge boost to the housing market in the coming months.

So why shouldn’t we be enjoying the holidays? Just maybe the Fed will stop worrying that it isn’t being taken seriously. Inflation is being tamed without causing a recession!

Harlan Green © 2023

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

Housing Starts Up, Recession Worries Over?

 Financial FAQs

The best indicator of a looming recession is to watch how consumers behave. And this will be a record year for travel on the ground and in the air. So, would consumers continue travelling if they saw financial trouble ahead? Of course not.

Gas Buddy, for one, says gas prices are down. For the ninth consecutive week, the nation’s average price of gasoline has declined, falling 6.2 cents from a week ago to $3.27 per gallon according to GasBuddy data compiled from more than 12 million individual price reports covering over 150,000 gas stations across the country.

And AAA is predicting a record number of cars on the road. the third highest since 2000. AAA projects 55.4 million travelers will head 50 miles or more from home over the Thanksgiving holiday travel period.

Housing construction and Pending Home sales numbers were also up in October. This may be an indication that the housing market slowdown may have bottomed, another sign of a resurgence.

That’s in part because mortgage rates have dropped suddenly to the low 7 percent range, 15-year fixed to mid-6 percent, and homebuyers will know this. The bond market has been rallying of late, in line with optimism that the Fed may be done with its rate hikes and even begin to ease rates early next year.

The National Association of Realtors Pending Home Sales Index (PHSI)* – a forward-looking indicator of home sales based on contract signings – rose 1.1 percent to 72.6 in September. Pending transactions had declined 11% in a year.

The NAR forecasts that the 30-year fixed mortgage rate will average 6.9 percent for 2023 and decrease to an average of 6.3 percent in 2024, as markets unwind from the Fed’s rate hikes.

I can see blue skies ahead for housing as interest rates continue to decline. More existing homes for sale are needed, which are at historic lows because of the interest rate disparities from the COVID pandemic (see red line in below Calculated Risk graph).

Calculated Risk

Overall housing starts (new construction) increased 1.9 percent in October as well to a seasonally adjusted annual rate of 1.37 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The October reading of 1.37 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 0.2 percent to a 970,000 seasonally adjusted annual rate.

However, single-family starts are down 10.6 percent year-to-date. The multifamily sector, where demand is greatest and includes apartment buildings and condos, increased 6.3 percent to an annualized 402,000 pace.

“The construction data in October continue to reflect that despite multidecade lows for housing affordability, the market continues to lack attainable inventory that only the home building industry can provide,” said NAHB Chief Economist Robert Dietz. “And with the 10-year Treasury rate now back in the 4.5% range, we are forecasting gains for single-family home building in the months ahead and an outright gain for construction in 2024.”

What are consumers thinking at the moment? Many have been discouraged from even looking for homes because of such high interest rates.

Overall, lower-income consumers and younger consumers exhibited the strongest declines in sentiment, said Joanne Hsu, Director of the University of Michigan sentiment survey. In contrast, sentiment of the top tercile of property owners improved 10 percent, reflecting the recent strengthening in equity markets.

It’s a reflection of the 37 percent increase in wealth of mostly homeowners from 2019 to 2022, according to a new survey from the Federal Reserve. The average family's net worth jumped 37 percent between 2019 and 2022. That's the largest three-year increase since the Fed began conducting the survey more than three decades ago.

The bottom line is with so much pent up demand brought on by the Fed’s inflation fight, consumers still want to spend, especially with interest rates on the decline.

Harlan Green © 2023

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

Where's the Inflation--Part II?

 Popular Economics Weekly

We can also look at the behavior of wholesale prices to see if inflation has been conquered. The Producer Price Index has been at or below the Fed’s target 2 percent since May 2023. It’s the cost of raw materials that go into finished products, so it should have told Fed officials that retail inflation will soon follow that is now rising at 3.2 percent.

What is holding up retail CPI prices? Market scarcities that have enabled producers to temporarily boost their profit margins. But the PPI tells us that scarcities are quickly disappearing; in autos and gas, for instance, where prices had the largest drop in the PPI.

FREDppifinaldemand

“The Producer Price Index for final demand fell 0.5 percent in October, seasonally adjusted, after advancing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. The October decline is the largest decrease in final demand prices since a 1.2-percent drop in April 2020.”

What more proof does the Fed need to begin thinking about dropping interest rates? Corporations are reporting record profits in the third quarter due to those pandemic-induced scarcities and 98 percent reporting in the third quarter say they are increasing their dividends, a sure sign of increased profits.

The PPI is slightly higher without volatile foods, energy, and trade services, advancing +0.1 percent in October, the fifth consecutive rise. For the 12 months ended in October, prices for final demand less foods, energy, and trade services moved up 2.9 percent.

This may be the ‘head fake’ that Chairman Powell was talking about at a recent conference. What if food and energy scarcities surface again with all the geopolitical uncertainty?

If it wasn’t for the huge 4.9 percent Q3 GDP growth, economists will begin to worry that falling inflation shows a drop in the demand for goods and services, which does signal a slowdown.

Slowing retain sales can be the first sign of any slowdown in activity. Are shoppers already shopped out for the holidays? Retail sales have declined, falling 0.1 percent in October for the first time in seven months, but the decline is unlikely to last as Americans enter the holiday-shopping season, especially if prices are no longer rising.

There was better news with housing. The 30-year fixed-rate mortgage dropped a quarter of a percent to 7.50%, the largest one-week decrease since last November, according to Freddie Mac, the guarantor of mortgages.

It should kick start more housing sales, according to Lawrence Yun, the NAR’s chief economist. Yun forecasts that interest rates will drop to between 6-7% by the spring buying season and anticipates that more sellers will enter the market.

“Builders are back on their feet, up 5% in newly constructed home sales year to date,” said Yun. “Builders can simply create inventory. In a housing shortage environment, builders are really benefiting.”

What happens next year may depend on the housing market, which traditionally takes up approximately 7 percent of GDP activity, but is also a leading indicator of market direction.

The overall decline in interest rates we are already seeing will give a boost to almost every sector of economic activity going into next year.

Harlan Green © 2023

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

Where's the Inflation?

Financial FAQs

What if there’s too little inflation? That’s actually the definition of a recession. It seems unlikely at the moment and inflation is still a major upset for consumers. But it could happen if the Fed doesn’t ease up on its hawkish position that inflation has yet to be tamed.

It hasn’t happened yet, but if inflation should drop below the 2 percent Fed target, it has generally meant recession. The CPI plunged to -1.96 percent annually in July 2009 at the end of the Great Recession and dropped to +0.22 percent in May 2020 (gray bar in graph) at the end of the short-lived COVID recession.

Economists are becoming alarmed that the Fed has boosted interest rates too high and too fast. The Fed has raised short-term rates a record 11 times since early 2022, from effectively 0 percent to around 5.25 percent.

Another Nobel Laureate, Joseph Stiglitz, is now added to the list of major economists giving warning. In a study co-authored by Ira Regmi, he believes the Fed is in danger of precipitating another recession if it holds its interest rates too high for too long.

“The pandemic-induced inflation was exacerbated further by Russia’s invasion of Ukraine, which caused a spike in energy and food prices,” said Stiglitz. “But, again, it was clear that prices could not continue to rise at such a rate, and many of us predicted that there would be disinflation — or even deflation (a decline in prices) in the case of oil.”

 

FREDcpi

And that is happening. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, after increasing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. It dropped to 3.2 percent from 3.7 percent in August. It was as high as 8.9 percent in June 2022.

In fact, the consensus of 34 economists surveyed by the Philadelphia Fed and released Monday is that there may not be any soft landing of the economy at all, but economic growth continuing into next year.

The Survey of Professional Forecasters is the oldest quarterly survey of macroeconomic forecasts in the U.S., having started in 1968.

“The outlook for the U.S. economy looks somewhat better now than it did three months ago,” the survey found, according to a MarketWatch article.

On an annual-average over annual average basis, the forecasters expect real GDP to increase at a 2.4 percent rate this year and slow only marginally to a 1.7 percent rate in 2024.

So the din is growing for the Fed to begin to cut rates early next year, though we wouldn’t know it from Fed Chair Powell’s remarks that the falling inflation numbers might be a ‘head fake’.

Why would Powell want to spoil the party celebrating continued growth? He must still have the 1970’s wage-price inflationary spiral in mind. It was a time of the Arab oil embargo and long lines at American gas stations, with unions attempting to keep up with the wildly fluctuating energy prices.

But Siglitz and Regmi addressed that as well in their study.

“We conclude that with nominal wages already tempered, this does not seem likely. Moreover, declining real wages are typically not a sign of a tight labor market. Weak unions, globalization, and changes in the structure of the economy provide part of the explanation for why wage-price dynamics today may be markedly different from 50 years ago.”

Stocks and bonds are rallying because of today’s good news on inflation, especially REITs (Real Estate Investment Trusts). This is a sign that the real estate market and housing in particular may be on the mend as well.

It also says there is growing optimism among investors that the Fed is done and will not want to obstruct future growth

Harlan Green © 2023

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

Why Not a Return to the 'Roaring Twenties'?

 The Mortgage Corner

“The Roaring Twenties was a decade of economic growth and widespread prosperity, driven by recovery from wartime devastation and deferred spending, a boom in construction, and the rapid growth of consumer goods such as automobiles and electricity in North America and Europe and a few other developed countries such as Australia.”

Does this sound familiar to history buffs? It’s Wikipedia’s take on the ‘Roaring 1920s’, the era of widespread prosperity and women’s rights as the US recovered from World War One and the Spanish Flu pandemic, in which some 650,000 Americans died.

I know I may be way out on a limb but there could be a repeat in this decade, which I’ve been calling the ‘Roaring Twenty-Twenties.’

There are similarities today. We are still recovering from the COVID pandemic that killed one million Americans, for starters. And consumers are spending like there’s no tomorrow.

The Trump and Biden administrations have passed spending bills of more than $6 trillion to aid the recovery and modernize the American economy, which will boost growth and household incomes for the rest of this decade.

And while we’re not fighting a world war, spending has picked up because of the Middle East and Ukrainian conflicts, just as it did fighting world wars.

Such unprecedented spending is producing results. Third quarter US economic growth has soared to 4.9 percent after just 2 percent real growth in the first two quarters of 2023.

Predictions of Q4 growth are all over the map, in part because few believe that consumers can keep shopping at the current rate. Maybe not, but does that mean massive layoffs and an abrupt halt to the huge construction boom in infrastructure, the environment and expansion of the social safety net going forward?

No, because the Biden administration has focused on infrastructure, clean energy and semiconductor manufacturing, sectors that produce more high paying jobs, Lael Brainard, director of the National Economic Council, said at a White House press briefing.

“Despite repeated forecasts that recession is just around the corner, the U.S. recovery is solid, and inflation is down. Unemployment has fluctuated in a narrow band below 4 percent for 17 months in a row—the longest stretch in 50 years (my emphasis),” said Brainard.

And since Biden took office in 2021 it has already spurred nearly $500 billion in private-sector commitments, she stated.

Critics, mostly conservatives that want smaller government say, however, that it is the major reason inflation isn’t coming down faster. But Brainard counters that annual core CPI inflation has now fallen and is projected to decline further as rents decelerate.

The closely watched category of core non-housing services CPI that Fed Chair Powell has said is most important has run at annualized rate of 3.3 percent over the last six months, close to the 3.2 percent average from the three decades before the pandemic and excluding the financial crisis.

FREDpceinflation

The more general Personal Consumption Expenditure (PCE) inflation indicator, another favored Fed price index, is running at 3.4 percent annually per above FRED graph .

The latest economic data confirm the good news. Labor productivity in Q3 jumped to 4.9 percent, the highest in three years, according to the Bureau of Labor Statistics, in part because of more investment in new technologies such as AI, which means an increased supply of things. Production output in the third quarter rose 5.9 percent, hours worked rose just 1.1 percent.

This is while unit-labor costs, a key measure of wage growth, fell 0.8 percent in the third quarter, the first decline since the fourth quarter of last year, which is another sign of falling inflation since labor costs make up two-thirds of production costs.

So why all the public pessimism that seems to prevail? Economics is a very opaque window to look through in understanding the American economy. The public looks at the cost of everything, and the Fed has posted interest rates at a record pace to slow inflation.

That’s why most Americans are focused on the past and present rather than the future, but this decade has just begun. The Roaring 20’s was a wild ride then, and it will be a wild ride again to a prosperous future.

Harlan Green © 2023

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

Where's the Recession - Part II?

 Popular Economics Weekly

We will have to wait longer for a recession. October’s Jobs report showed even the unsettled labor strikes didn’t make much of a dent in the labor market. The usual suspects—leisure activities, healthcare, and a booming construction industry gave the most boost to hiring, but new government jobs were one third of the total 150,00 nonfarm payroll jobs created.

The loss of 33,000 in manufacturing was largely due to the UAW strikes, said the BLS.

MarketWatch.com

The financial markets are loving the slowdown in hiring. Even the past two months were adjusted lower in the report. The change in total nonfarm payroll employment for August was revised down by 62,000, from +227,000 to +165,000, and the change for September was revised down by 39,000, from +336,000 to +297,000.

The Fed likes the report because since their recent lows in April the unemployment rate is rising. The unemployment rate is up by 0.5 percentage point and there are 849,000 more unemployed persons.

Yet calls for an imminent recession are still in the air. Why still?? Firstly, it takes months, sometimes more than one year to call a recession, because a downturn must be long enough that there is a prolonged decline in demand from consumers as well as employers.

Most of the pessimists are taking the Fed’s word that they will keep rates high enough until they reach the 2 percent inflation target. What if that takes another year? Then all bets are off on when a recession might happen.

And this month’s jobs report can’t be taken too seriously on what might happen next because of the ongoing labor strikes, including SAG-AFTRA’s 130,000 members.

And NPR reports, “Altogether, there have been 312 strikes involving roughly 453,000 workers so far in 2023, compared with 180 strikes involving 43,700 workers over the same period two years ago, according to data by Johnnie Kallas, a PhD candidate at Cornell University’s School of Industrial and Labor Relations, and the project director of the ILR Labor Action Tracker.”

Putting most of the striking workers back to work could bring the unemployment rate back down, and the higher wages goose the inflation rate again.

So, who really knows where we will land next year?

Harlan Green © 2023

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

US Budget Deficit Not the Problem

 Financial FAQs

Harvard Economics Professor and former Treasury Secretary Larry Summers said Tuesday during an event staged by the Center for American Progress, a Democratic Party-aligned think tank, that the U.S. budget deficit, which came in at $1.7 trillion in 2023, “is probably a more serious problem than it ever has before.”

Really? We have the fastest growing economy in the developed world—up 4.9 percent annually in the third quarter. But the new Republican House Speaker wants to slash spending in the name of cutting the deficit, which is an attempt to cut back on President Biden’s New, New Deal programs that will modernize the American economy by “paying it forward” in the words of Senator Elizabeth Warren for future generations.

So, this is not the time to worry about the budget deficit, though it’s the highest since World War Two.

Professor Summers had been very good at convincing Presidents Clinton and Obama at reducing budget deficits. So much so that President Clinton had four consecutive years of budget surpluses from 1996-2000. That worked when the Soviet Union broke up ending the Cold War and the US was able to make huge cuts in military spending.

But it’s not good advice today as it wasn’t a good idea to limit FDR’s New Deal spending when our government had to re-arm to win World War II. There are two regional wars today, and we’ve had to spend $trillions just to win the COVID world war.

The massive debt accumulated during WWII was paid down quickly when the technological advances spurred by those wartime investments brought soaring economic growth and post-war prosperity.

FREDdebt/GDP

The same will happen today because the $trillions in debt that is modernizing the US economy, the educational system, and our social safety net is investing in future growth.

We are already seeing the results with soaring Q3 GDP growth and a historically low unemployment rate, but only if the debt is paid down with growth rather than slashing spending prematurely at the time it is most needed.

The current budget battle is over what to spend. Republicans want to raise the retirement age for Social Security and Medicare and cut benefits, as well as slash spending on money already approved to expand IRS operations, which is meant to collect long overdue taxes, thus improving the deficit.

It’s the Repubs backdoor way of cutting federal spending by reducing tax revenues, thus protecting their wealthy donors who have thrived with all manner of tax shelters.

Their initial proposal is to pay for Biden’s war funding by taking $14 billion away from the IRS budget, which budget analysts say will actually cost $40 billion because of lost tax revenues from the reduction of tax collections.

And what about aiding the democracies fighting two wars and winning the climate change battle, just as we needed to win WWII to survive as a democracy?

Our government must also worry about the Fed. The debate is still when the Fed will begin to lower their short-term rates in time to prevent a recession.

Harlan Green © 2023

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

Where's the Recession?

 Popular Economics Weekly

Is waiting for the next recession becoming a useless guessing game? Maybe even the event itself has less meaning these days when conditions can change so quickly.

We have declining existing home sales yet surging new-home sales in September. And the first ‘advance’ estimate of third quarter economic growth made a huge jump to 4.9 percent, up from 2.1 percent in Q2.

 

BEA.gov

Economists and pundits have been calling for a recession since the beginning of this year. Yet the Fed’s rate hikes haven’t dampened consumer spending, which grew 4 percent in Q3. It highlights the fact that American consumers power more than 60 percent of economic activity.

And inflation continued to decline, contrary to the Fed’s expectations, which is a growth booster. The personal consumption expenditures (PCE) price index increased 2.9 percent, compared with an increase of 2.5 percent in Q2, per the GDP report. Yet excluding more volatile food and energy prices, the PCE price index increased 2.4 percent, compared with an increase of 3.7 percent.

So where is the recession? It doesn’t have to be two consecutive quarters of negative GDP growth. The US economy began to expand again in the third quarter of 2022 after two quarters of negative growth per the above BEA graph.

The technical definition of a recession is when basic growth indicators such as nonfarm payrolls, retail sales, and industrial production have peaked and begin a prolonged decline.

That could still happen next year if long-term interest rates remain high. Yet who does that really affect? Companies like to plan ahead so corporations can cut back investing in future growth. but our federal government is spending $trillions on modernizing the economy as well as fighting both hot and cold wars.

And retail sales keep expanding. Seasonally adjusted sales came off ground zero (+0.4 percent) in June 2023 and expanded 3.0 percent in September.

Now is a good time for Fed Chairman Powell to announce that inflation has been conquered, as so many economists are doing. For instance, Nobel Laureate Paul Krugman said recently:

“Growth, both in gross domestic product and in jobs, has remained solid. But standard measures of underlying inflation are now under 3 percent and falling. Fancier statistical models maintained by the New York Fed tell the same story, and say that underlying inflation has fallen by half since its peak last year.”

The reason? The Fed’s anti-inflation policies are working. But there is a time lag for higher interest rates to fully affect consumers and investors. Household wealth as well as incomes continue to stay ahead of inflation.

The Federal Reserve recently announced that the average family's net worth jumped 37 percent between 2019 and 2022. That's the largest three-year increase since the Fed began conducting the survey more than three decades ago, according to its latest Survey of Consumer Finances.

It's not only due to consumers being fully employed but a massive increase in housing values during the pandemic when mortgage rates bottomed.

Both the Great Depression and Great Recession were catastrophic times but how often do such events happen? It doesn’t look like we have as much to fear given the current economic recovery.

Harlan Green © 2023

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

Too Little Growth a Danger

 Popular Economics Weekly

Rather than worry about too much inflation still in the pipeline, we should worry about too little economic growth going forward, if we take Chairman Powell at his word in his latest speech at a recent economic forum the Fed should keep their rates high enough that economic growth should be in the 2 percent range to achieve the Fed’s target inflation rate of 2 percent inflation.

But Realtors are loudly crying that holding interest rates at the current high level is destroying the housing market.

Remarking on the fact that existing-home sales are now at the lowest level since the Great Recession, NAR chief economist Lawrence Yun said ,

"As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales. The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains."

Chairmen Powell’s truism wasn’t always the case. A look at the below FRED graph dating from 1950, shows economic growth was ‘held’ in the 2 percent range only after 1980 and former Fed Chairman Paul Volcker’s era of setting sky high interest rates until the sky high inflation originating in the 1970s was tamed (gray bars are recessions).

But to accomplish it, Volcker’s Federal Reserve believed a massive transfer of wealth from salaried workers to owners of capital (shareholders and corporate CEOs in the main) was necessary. Why? Volcker’s Federal Reserve believed that the economy couldn’t tolerate an inflation rate with average hourly wages rising much more than 2 percent per year.

FREDgdp

This was obviously an overreaction to the 1970s wage-price spiral. Yet prior to 1980 quarterly GDP growth averaged closer to 5 percent, and there was a much more equal distribution of income between employees and employers.

The Fed under Volcker’s successor, Alan Greenspan, had done such a good job of tamping down wage increases that too low inflation was the worry in 2009 after the busted housing bubble and Great Recession. It was the reason his successor, Ben Bernanke, instituted the Quantitative Easing (QE) policies that injected enough money into the system to bring the inflation rate back to its 2 percent target.

Existing-home sales faded in September, according to the National Association of REALTORS®. Among the four major U.S. regions, sales rose in the Northeast but receded in the Midwest, South and West. All four regions registered year-over-year sales declines.

A record number of multi-family units (apartments) are under construction, as there are now a record number of Americans needing some kind of housing, and more apartments might create more affordable rents.

But it won’t satisfy those still holding the American dream of owning their own home. "For the third straight month, home prices are up from a year ago, confirming the pressing need for more housing supply," Yun said.

Now is not a good time for the Fed to continue to restrict credit. We need higher economic growth more than ever with so much geopolitical uncertainty, and a poor housing market.

Harlan Green © 2023

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

Retail Sales Will Save Us

 Financial FAQs

The debate is raging on when the Fed will begin to lower their short-term rates in time to prevent a recession. A number of pundits and economists, such as Nobel Laureate Paul Krugman, have said the inflation battle has been won. And most Fed Governors are now saying they should not raise interest rates any higher.

The problem is the bond market doesn’t’ believe so, even believes the latest robust economic data show growth not slowing enough to pacify the Fed, hence 10-year and 30-year bond yields are soaring above 4 percent and fixed mortgage rates above 7 percent in the expectation that the Fed will cause a recession.

Well, retail sales might save us from a recesssion. Sales are surging, far above consensus estimates, recovering from negative sales growth in February and March 2023. Consumers are supposed to slow spending when the Fed raises the cost of borrowing, aren’t they? What is going on?

FREDretail

“Advance estimates of U.S. retail and food services sales for September 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.9 billion, up 0.7 percent (±0.5 percent) from the previous month, and up 3.8 percent (±0.7 percent) above September 2022,” said the Census Bureau’s press release.

I said last week economic growth is increasing because there has been a huge surge in job formation—336,000 new jobs in September alone with higher revisions in the past two months. And wages are now rising faster than inflation for the first time in years, so why wouldn’t consumers want to spend with the upcoming holidays?

And we have the Atlanta Fed in its latest forecast saying, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. The consensus for Q3 economic GDP growth is a bit lower, probably in the 3-4 percent range.

I maintain there’s also another reason, a rise in what is called multifactor productivity, which measures capital inputs (machines, new technologies) as well as labor productivity, and it is soaring per the below FRED graph. It rose to 3.6 percent in 2021 from zero in 2020. This will create a greater supply of things, which puts downward pressure on prices, as do more workers producing more.

FREDproductivity

Is it because of the increased use of AI, which is a capital input? That’s too soon to know, but Doctors are already reporting more accurate diagnoses using AI to quickly find bad genes to determine what should be done with a cancer tumor.

“Over the last decade, the supply chain landscape has witnessed a transformative evolution, largely propelled by technological advancements. Such innovations as AI, the Internet of Things (IoT), blockchain and sophisticated data analytics have automated and optimized various aspects of supply management,” said an Institute for Supply Management article on automation.

The real key to staying fully employed while taming inflationary surges is also to avoid too much geopolitical uncertainty (wars), and preparing better for future pandemics that disrupt said supply chains.

Harlan Green © 2023

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

Too Low Inflation a Danger

 Popular Economics Weekly

Rather than worry about too much inflation still in the pipeline, we should worry about too little inflation going forward. The Producer Price Index of wholesale goods and services in September was 2.2 percent. It hit the Fed’s 2 percent target rate sometime between April-May this year. It then plunged to a zero inflation rate in June 2023 before rising to the current 2.2 percent inflation rate.

FREDppi

Too low inflation was the worry in 2009 after the Great Recession and the reason former Fed Chair Ben Bernanke instituted the Quantitative Easing (QE) policies that injected enough money into the system to bring the inflation rate back to its 2 percent target.

Today’s 2.2 percent PPI tells us the cost of wholesale goods and services has reached the Fed’s target rate and is a reason the Fed may have gone too far in suppressing wholesale prices. It means the supply chains have recovered and could even be over producing, which would continue to depress prices.

Why be worried when prices have risen so much in just two years? Final Demand Producer prices peaked in March 2022 at 12 percent. Consumers want prices to come down, after all.

But it’s a very dangerous monetary policy to suppress demand with such high interest rates for a prolonged period as Fed officials are saying they want to do.

Companies and consumers can quickly change course should there be more unforeseen consequences, such as a wider Middle East war creating scarcities that push prices up again. The 3.3 percent rise in final demand energy prices was the major culprit of the September PPI report.

The retail Consumer Price Index for September was a bit higher because of rising shelter costs and gas prices. But the headline all items annual inflation rate remained at 3.7 percent as in August.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the all items monthly rise,” said the BLS.

So which index is more accurate?

The other Personal Consumption Expenditure Index (PCE) is rising at 3.5 percent over 12 months, right in the middle, and is probably the best picture of overall inflation. It shows the same bell curve and has also flattened of late.

“It’s the latest encouraging sign for Fed policymakers, who have been raising interest rates since March 2022 in a campaign to slow the economy and cool price increases,’ said NYTimes Jeanna Smialek. “While economic momentum has held up better than expected, a less ebullient housing market and a grinding return to normalcy in the car market have helped key prices — like automobile and rents — to fade.”

Unfortunately, the release of the Fed’s September FOMC minutes showed Fed officials aren’t yet getting the message that their credit policy may be too restrictive.

MarketWatch reporter Greg Robb summed it up: “The 12 voting Fed officials were unanimous in their decision to keep interest rates at a 22-year high, between 5.25% and 5.5 while penciling an additional rate hike before the end of the year to bring down inflation. “Almost all” of the 19 Fed officials supported holding rates steady, the minutes said.”

I am hoping circumstances will convince the Fed too low inflation can be a danger..

Harlan Green © 2023

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