Treasury Secretary Janet Yellen said in a recent Fareed Zakariah interview on CNN that she thought an economic soft landing was possible, despite warnings that the recent bank failures could cause banks to tighten in their lending criteria, contributing to a slowing economy.
That is already happening. Retail sales in March posted the third decline in four months, largely because of lower auto and gasoline sales. Rising interest rates make car loans more expensive, for starters.
Retail sales aren’t inflation adjusted, so it means an even larger drop if inflation is factored in. Restaurants and bar sales also declined, a sign that consumers are spending less on leisure activities.
In fact, the decline in retail sales was widespread. Receipts at auto dealers dropped 1.6 percent. Furniture store sales fell 1.2 percent, while receipts at electronics and appliance stores tumbled 2.1 percent. Sales at building material and garden equipment supplies dealers plummeted 2.1 percent.
It is a sign that consumers are beginning to seriously cut back on spending, which affects other sectors. The Fed showed manufacturing production dropped 0.5 percent in March after increasing 0.6 percent in February. Durable goods lasting more than three years have been down the past two months.
"While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run," said survey director Joanna Hsu.
Inflation is beginning to seriously worry consumers, in other words. One-year inflation expectations increased 4.6 percent in the year ahead, up from 3.6 percent in the prior month, said the Univ. Michigan survey. But in the longer run, expectations were unchanged. Americans think inflation will average 2.9 percent annually in the next five years.
So, when will the Fed pause in its rate hikes? Inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.
In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March, as reported last week. Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.
Is Janet Yellen right, will consumers avoid a crash landing?
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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