Debt Ceiling Deal Preserves New Deal

 Financial FAQs

FREDusdebt

President Biden said it best concerning the agreement to raise the national debt ceiling for two years, when asked at the G-7 summit if it could cause a recession.

“I know it won’t…Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.”

What did he mean?

Federal spending had already been reduced by $1.7 trillion last year with expiration of much of the COVID-19 spending programs. The above FRED graph shows it also reduced the federal debt-to-GDP ratio from 135 percent in Q1 2020 to 119 percent in Q1 2023, a cut of 16 percent.

One of its selling points was that the new debt ceiling and 2023-24 fiscal year budget agreement would continue reducing the deficit as well as growing the economy.

The agreement will continue government programs such as the Inflation Reduction Act and Infrastructure Investment and Jobs Act that are part of the New New Deal, a bevy of government programs generated to recover from the COVID pandemic and modernize the US economy, just as happened in the 1930s with Roosevelt’s New Deal.

The New York Times estimated the agreement should cut some $136 billion in government spending over the next two years by limiting the growth of discretionary spending on such as Food Stamps and early childhood education, part of the Republican wish list.

The G-7 summit President Biden just attended also signaled greater agreement of western nations in supporting a worldwide economic recovery that will aid the US economy as well.

The coordination of G-7 countries in military spending as well as the mitigation of global warming could generate a new industrial age in the words of recent Barron’s columnist and former Senior Treasury official Christopher Smart I cited in a recent column that could “launch a golden age of industrial policy.”

He estimates that the Biden administration will mobilize a stunning $3.5 trillion in public and private money over the next decade that could spur a ‘Roaring 2020s’ (my term) over the rest of this decade.

There are those that continue to believe in a looming recession, but that can only happen if the Fed continues to raise interest rates while enforcing its 2 percent inflation target. The Conference Board’s consumer confidence survey showed higher pessimism among consumers, though it hasn’t stopped their spending in leisure and entertainment activities.

“Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Their assessment of current employment conditions saw the most significant deterioration, with the proportion of consumers reporting jobs are ‘plentiful’ falling 4 ppts from 47.5 percent in April to 43.5 percent in May. Consumers also became more downbeat about future business conditions, weighing on the expectations index.”

Let us hope the Fed sees some light at the end of its struggle to tame inflation. More data is confirming that the inflation rate will continue to subside, regardless of the Fed’s actions.

It really looks like America will have partners to aid it in this economic recovery. There should be enough available resources to grow a new, New Deal.

Harlan Green © 2023

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

US Economy Improves

 Popular Economics Weekly

FREDpceindex

After a sputtering start, it looks like the U.S. economy is picking up steam. First Quarter GDP growth was revised upward from 1.1 to 1.3 percent in the BEA’s second estimate yesterday.

And the Personal Consumption Expenditure Index (PCE) out today (Friday), the Fed’s favorite inflation indicator, confirmed consumer spending is the main engine of growth. The PCE is the best measure of consumer behavior, and rather than pulling back because of higher inflation and interest rates, spending has kept up with inflation.

Compound this with predictions of up to 2.9 percent GDP growth in Q2, and we could be off to a ‘roaring’ 2023 year and decade I’ve been touting lately.

The result won’t make our Federal Reserve Governors happy who have been hinting at the possibility of a rate pause in June, since the PCE inflation index ticked up from 4.2 to 4.4 percent YoY.

PCE data showed consumer spending sprang back to life in April, rising 0.8%, the largest gain in three months, “surpassing expectations for a 0.5% increase as Americans bought more cars and spent more on services,” said a MarketWatch commentator. Why not, when consumers are fully employed and feeling more secure about their prospects?

Within services, the largest contributors to the PCE increase were spending for financial services and insurance, health care, and “other” services (notably professional and other services). Within goods, spending for motor vehicles and parts (led by new motor vehicles) and “other” nondurable goods (notably pharmaceutical products) were the largest contributors to the increase.

And lastly, orders for U.S. manufactured goods jumped 1.1 percent in April largely because of the military, but business investment also rose sharply in another  positive sign for the economy. Manufacturing output has been shrinking over the last six months.

In a good sign, business investment rose a sharp 1.4 percent. What are corporations seeing that induces them to invest more? They are also expecting economic growth to improve.

The latest results show that consumers are in a tug-of-war with the Fed, which has been outspoken in its efforts to slow consumer spending with boosts to credit card and installment loan interest rates.

Yet Americans remained worried about the future of the economy, especially against the backdrop of another fight in Washington over the debt ceiling.

The University of Michigan sentiment survey final reading in May rebounded slightly to 59.2 from earlier in the month but was still lower than April’s 63.5 final reading.

“Consumer sentiment slid 7% amid worries about the path of the economy, erasing nearly half of the gains achieved after the all-time historic low from last June. This decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged,” said survey Director Joanne Hsu.

But they can’t be too worried as the post-pandemic surge in prosperity has been cancelling out the bad news.

Harlan Green © 2023

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

This Recovery Could Spawn Another 'Roaring Twenties'

 Financial FAQs

AtlantaFed.org

I wonder if our recovery from the COVID-19 pandemic could repeat the ‘Roaring Twenties’ jazz era of F Scott Fitzgerald. Why not? There are some surprising similarities.

The Roaring Twenties were named for the era that followed the Spanish Flu pandemic of 1920. It was a truly unique history. World War One was over and women had just won the right to vote with passage of the 19^th Amendment.

The COVID-19 pandemic wreaked as much havoc as World War One, with many more casualties. It resembled the Spanish flu epidemic in many ways—mask-wearing, business shutdowns, and more the 650,000 Americans dying then vs. the one million estimate of American deaths from COVID-19 and its variants.

And there was a very strong recovery as from today’s pandemic.

“By the dawn of the 1920s, the second Industrial Revolution had transformed the United States into a global economic power and drawn millions of Americans to cities,” said Britannica.

There is a growing chorus that suggests Americans could have a similar result from the COVID pandemic because of $ trillions poured into the U.S. economy as recovery aid as well as future economic growth.

Christopher Smart, a former Senior Treasury official writing in last week’s Barron’s Magazine, estimates that the Biden administration will mobilize a stunning $3.5 trillion in public and private money over the next decade that I believe could spur a ‘Roaring 2020s’ (my term) over the rest of this decade.

He reports that communiqués coming out of the just finished G-7 economic summit in Japan “confirm a rare moment in which leaders gather with both mandate and money to launch a golden age of industrial policy.”

Could it spur a third Industrial Revolution? No, but it will certainly give a boost to the current Information Age that is spawning its own Digital Revolution with $ billions being poured into chip manufacturing and modernizing the U.S. infrastructure.

This is already happening, even in the face of debt ceiling negotiations that could crimp the next fiscal year budget.

For instance, the Atlanta Federal Reserve just announced it had upped its estimate of second quarter GDP growth to 2.9 percent q/q, while other prognosticators have been more cautious, such as Goldman Sachs (2.0 percent q/q) and B of A (1.2 percent q/q)

GDP grew 1.1 percent in Q1 down from 2.6 percent in Q4 2022, according to the US Bureau of Economic Analysis (BEA)., but some indicators are showing stronger growth ahead, rather than a recession.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 2.9 percent on May 17, up from 2.6 percent on May 16. After this morning's housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth increased from -6.3 percent to 0.6 percent.:”

The real estate sector has traditionally been a leading indicator of growth, and it is feeding an extreme housing shortage.

For instance, "Sales in the second half of the year should be notably better than the first half as job gains continue and more favorable mortgage rates are expected," said NAR chief economist Lawrence Yun. "Sales of new homes are already matching 2019 pre-COVID activity and are expected to increase in 2023, largely due to plentiful inventory in this segment of the market."

Much of the coming industrial growth touted by the G-7 is already baked into the cake of future spending because the Ukraine war and Chinese belligerence has caused a large increase in military spending, with many countries expending more money and resources on mitigating global warming as well.

In fact, the Ukraine war is also causing a faster switch to alternative energy sources and away from fossil fuels. Who knows what may happen next, but with the West now united in purpose, a younger, energetic generation of Americans wanting to be seen and heard, the future has never looked better.

Harlan Green © 2023

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

Existing-Home Sales in Sharp Decline

 The Mortgage Corner

I said last week that higher new home sales and rising homebuilders’ optimism foretell a strong summer sales season if builders and existing-home inventories don’t run out of housing stock.

The problem is not enough existing homes are for sale, hence the below-normal inventory of total homes for sale, which has spurred new-home construction. We know there is a tremendous housing shortage.

Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums, and co-ops – slid 3.4% from March to a seasonally adjusted annual rate of 4.28 million in April. Year-over-year, sales slumped 23.2% (down from 5.57 million in April 2022).

Calculated Risk

That’s a decline of more than one million existing homes sales in just one year.

Calculated Risk’s Bill McBride reported last week that private residential construction spending was down 10.0 percent annually. Non-residential spending is up 21.3 percent year-over-year (i.e., apartments) and public construction spending is up 15.0 percent year-over-year, which is keeping the real estate industry barely alive.

The Calculated Risk graph tell us why. As interest rates rose home sales declined. The sharp rise in interest mirrors the sharp decline in sales over the same time period—beginning January 2022 when everyone knew the Fed was in earnest about suppressing inflation.

There are 1.675 million units under construction, reports McBride, just 35 thousand below the all-time record of 1.710 million set in October 2022.

Of these, there are currently 977 thousand multi-family units under construction.  This is the highest level since September 1973, and close to the record of 994 thousand in 1973 (being built for the baby-boom generation).

For multi-family, construction delays are a significant factor because of supply shortages, such as of electrical equipment. The completion of these units should help to lower rents, which puts downward pressure on inflation. Rents comprise a large part of the retail inflation numbers.

"Home sales are bouncing back and forth but remain above recent cyclical lows," said NAR Chief Economist Lawrence Yun. "The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand."

Total housing inventory² registered at the end of April was 1.04 million units, up 7.2 percent from March and 1.0 percent from one year ago (1.03 million), says the NAR. Unsold inventory sits at a 2.9-month supply at the current sales pace, up from 2.6 months in March and 2.2 months in April 2022, still much too low to satisfy the surging demand for more housing.

Econbrowser

The Econbrowser blog puts out an interesting graph that shows what is keeping economic growth from collapsing into recession territory. It’s the rising NFP (nonfarm payroll) number coupled with a surge in industrial production (pink line). Other sectors that the National Bureau of Economic Research (NBER) business cycle dating committee scrutinizes to call a recession—personal income, consumption, and Mfg. & trade sales—have stalled.

This gives a better picture of how much damage to economic growth and housing industry has been caused by the Fed’s battle with inflation; and what signs to look for in coming months of further declines that might trigger a recession call.

Harlan Green © 2023

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

Retail Sales Still Healthy

 Financial FAQs

Calculated Risk/Census Bureau

Why do consumers keep spending when so much news warns of an impending recession? Well, because we’re not even close to a recession yet. NYTimes columnist and Nobel laureate Paul Krugman has been puzzling over it as well.

“America hasn’t yet brought inflation back to prepandemic levels, and we may yet have a hard landing. But so far, at least, we’ve had a stunningly successful recovery from the Covid shock.”

Retail sales are up 3.1 percent YoY, though slowing from its prior highs since the pandemic as shown in the above graph.

“Advance estimates of U.S. retail and food services sales for April 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $686.1 billion, up 0.4 percent (±0.5 percent) from the previous month, and up 1.6 percent (±0.7 percent) above April 2022. Total sales for the February 2023 through April 2023 period were up 3.1 percent (±0.4 percent) from the same period a year ago.”

Consumers won’t let up their spending ways anytime soon with summer approaching, schools are out, and leisure activities still the favorite thing to do.

For instance, so-called nonstore retailers (Internet) were up 8.0 percent (±1.2 percent) from last year, while food services and drinking places were up 9.4 percent (±2.5 percent) from April 2022, a sign that consumers haven’t yet spent those excess savings accumulated during the pandemic.

I am also puzzled by the disconnect between perceptions and reality. Americans know employment is at a record high, even with the baby boomer retirement, and wage increases are keeping up with rising prices.

It could be the debt-ceiling debate and constant bickering between political parties are unnerving the average citizen. Or the Federal Reserve interest rate increases while hammering on the dangers of inflation.

And I believe we are still suffering a hangover from the COVID-19 pandemic that shut down the world economy, a multi-year shock to our collective psyche that will take years to recover from.

The hyper-partisanship and distrust of institutions, including the Federal Reserve, can’t be helping, either.

The uncertainty of a better future is also affecting public opinion—caused by a hot Russian war, a Chinese cold war, a broken border, supply disruptions; you name it.

This contrasts with economic reality. Industrial production increased a very large 1.0 percent in April with motor vehicle production surging 9.3 percent after declining 1.9 percent in March. And the Atlanta Federal Reserve's GDPNow model predicts 2.6 percent GDP growth in the second quarter after Q1 growth of 1.1 percent.

Manufacturing production has been in a 6-month slump, so maybe it is climbing out of its own recession? (There’s that word again.) So what should we make of the bumpy economy we are riding?

Above all, I believe there’s a general anxiety weighing on Americans over their future. Too much change is uncomfortable, but still bearable. What will happen in generations to come?

Harlan Green © 2022

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

Wholesale Inflation is Tamed

 Financial FAQs

BLS.gov

April’s Producer Price Index for final demand confirmed the wholesale cost of goods and services has already returned to a 2 percent range, which should enable Fed officials to say the battle against COVID-induced inflation is almost won. But will they?

“The Producer Price Index for final demand advanced 0.2 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported yesterday. On an unadjusted basis, the index for final demand moved up 2.3 percent for the 12 months ended in April.”

April’s Consumer Price Index slowing as well, showing retail prices dropping to a 4.9 percent inflation rate yesterday. It means other factors are keeping retail inflation higher than the wholesale cost of materials.

The so-called PPI should be a more accurate measure of inflation, since it reflects the downward trending costs of stuff that goes into retail goods and services.

Supply chains are being replenished, in other words. Retail inflation has remained higher because corporations today are making record profits by padding their profit margins. They took advantage of the sudden supply shortage during the COVID pandemic.

But as supplies are replenished—particularly by the Asian countries including China that produce most consumer goods—wholesale prices have fallen sharply, forcing corporations to lower their profit margins to a more normal level.

Average hourly wages of employees are also rising faster than normal (4.4 percent), and now the Fed considers higher wages to be the main inflation danger. So, it has prolonged their tightening cycle because it wants corporations to cool the red hot labor market.

Some 80 percent of wholesale costs was in the service sector that caters primarily to consumers that love their leisure activities such as travel and dining out. Over one-third of the April advance in the index for final demand services can be traced to a 4.1-percent rise in prices for portfolio management. The indexes for food and alcohol wholesaling, outpatient care (partial), loan services (partial), hospital inpatient care, and guestroom rental also moved higher.

We can now see clearly why consumers are fearing a recession. The University of Michigan sentiment survey plunged because of such fears.

“Consumer sentiment tumbled 9% amid renewed concerns about the trajectory of the economy, erasing over half of the gains achieved after the all-time historic low from last June,” said survey director Joanne Hsu. “While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff.”

The Fed must pause any further rate hikes while congress works out some kind of debt ceiling compromise. Any compromise will slow economic growth further, which should bring down retail prices as well.

Harlan Green © 2022

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

Inflation is Now Tamed?

Popular Economics Weekly

FREDcpi

Has Chairman Jerome Powell’s Federal Reserve been suffering from a giant inferiority complex, from the fear that its actions are not being taken seriously enough and so it tends to overreact to crises?

That seems to be the case today. As the Federal Reserve of St. Louis (FRED) graph that dates from 1950 and WWII makes plain, the inflation rate had been on a steady downward trend since its 1980 peak of 14 plus percent and five subsequent recessions (gray bars in graph) since then.

Each Fed nudge of higher rates when inflation spiked since then caused those subsequent mild recessions, until the COVID-19 recession that lasted just two months. Instead of plunging after the COVID-induced recession as had the others, inflation soared because the whole world’s economies were shut down while still growing at full throttle. Yet with the aid of governments’ largesse demand returned to pre-COVID levels, but supply-chains had dried up.

Hence the sudden rise in inflation, which is subsiding as supply-chains have begun to play catch up. So it’s easy to see from the graph how unique has been this pandemic-fueled inflation surge that panicked the Fed to raise interest rates so quickly, and is only know easing off the credit brakes with several bank failures.

Wall Street markets rallied this Wednesday with heartening news. Retail inflation dropped to 4.9 percent, the lowest in two years. The Consumer Price Index inflation rate was last at 4.9 percent in May 2021.

“The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in April on a seasonally adjusted basis, after increasing 0.1 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.9 percent before seasonal adjustment.”

It is still high and consumers’ main concern while weathering the pandemic with its shortages of everything. But FRED’s graph shows clearly it was caused by the pandemic and two-month recession of April 2020, but will continue to abate as we recover from the longer-term effect of COVID-19.

It has now become the concern of the housing industry as well, with a very extreme housing shortage. The NAR’s chief economist Lawrence Yun explained in a recent interview that the Fed’s aggressive rate hikes have hurt regional banks and the housing market. He noted that inflation has already started to calm, but rents on apartments and single-family homes remain elevated that comprise 40 percent of the CPI inflation index.

“Inflation will not reignite – inflation will come down closer to 3% by the year’s end,” Yun stated. “Inflation has calmed down while rents are still accelerating.”

Yun said apartment construction has reached a 40- to 50-year high.

“Rent growth will decrease because apartment construction – entry units coming on the market – is already in the pipeline,” Yun added. “We are already moving in the right direction towards consumer price inflation.”

The inflation rate reached its 9 percent high in June of 2020, when markets began to begin to replenish what was lost with the supply-chain disruptions to food supplies, available housing, and resources in general.

Why does the Fed still think its actions aren’t being taken seriously enough? Wall Street is taking it seriously, which is why financial markets have lost so much value over this year as the Fed continued to raise short-term rates.

With financial markets back in line, the Fed is now picking on the rest of the economy—consumers that make up two-thirds of all economic activity. Consumers don’t seem to be taking the Fed seriously, because they haven’t substantially cut back their spending way, so must be punished by targeting their wage increases as too excessive.

Maybe if the Fed took itself more seriously, believed that its actions have real consequences for all Americans, it might instead pat itself on the back and say it was a job well done.

Harlan Green © 2023

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

Where's the Recession?

 Popular Economics Weekly

FREDunemployment

Surprise, surprise. Americans remain fully employed, in spite of the Fed’s efforts to slow economic growth. The ‘official’ unemployment rate dropped to 3.4 percent in April. The last time it was this low was in 1968.

It is raising hopes we may avoid a recession.

“Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4 percent, the U.S. Bureau of Labor Statistics reported today Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance.”

What is going on? It peaked at 14 percent in April 2020 then plunged incredibly quickly after what was just a two month recession. This had never happened since World War Two.

Could it be the COVID-19 pandemic, the first worldwide pandemic in 100 years that has killed more then seven million citizens of the world?

Of course it was the pandemic, which has upset everyone’s prognostications, especially the Fed’s economists, because so much has changed in 100 years. But there are some similarities. The Spanish flu lasted from 1920-22, and then the Roaring Twenties kicked in that was the greatest economic expansion in history at the time.

And then came the Great Depression and a New Deal when Roosevelt’s government became the solution rather than the problem.

The same is happening today. Both Democrats and Republicans raised $trillions to pay for the COVID-19 recovery, putting actual checks in consumers’ pockets so that they still have some $1 trillion in savings, which has kept them spending, and employers hiring ever more employees.

Everyone seems to be working that wants to work. The BLS said among major worker groups, the unemployment rates for adult men (3.3 percent), adult women (3.1 percent), teenagers (9.2 percent), Whites (3.1 percent), Blacks (4.7 percent), Asians (2.8 percent), and Hispanics (4.4 percent) were at record lows.

Education and Health added 77,000 jobs, followed by Professional/Business and Leisure and Hospitality; all in the service sector. Governments added 23,000 jobs, which highlighted just how government spending has boosted growth.

The one factor that worries Fed governors most is that average hourly wages rose slightly to 4.4 percent, though it has fallen sharply from its high last year.

Stocks are rallying because it has reduced fears of an imminent recession. In fact, how is that possible now?

Consumer spending is the main engine of U.S. growth and grew 3.7 percent last month, I wrote last week. It was the biggest increase in almost two years. Businesses are now aggravating the inflation problem by not meeting consumers’ needs, reducing investments and production at a time when consumers are still consuming, thus keeping prices from declining more quickly.

What is the Fed to do that just raised their rate another 0.25 percent? Former Fed Chair Greenspan made the mistake of continuing to raise the Fed Funds rate 16 consecutive times over two years, this causing the housing bubble to bust and the Great Recession in 2008-09.

How can Chairman Powell avoid making the same mistake?

Harlan Green © 2023

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

More Housing Sorely Needed

 The Mortgage Corner

I said last week that higher new home sales and rising homebuilders’ optimism foretells a strong summer sales season if builders and existing-home inventories don’t run out of housing stock.

The construction industry is responding. Spending in March 2023 rose 0.3 percent above the revised February estimate of $1,829.6 billion, according to the Census Bureau. The March figure is 3.8 percent above the March 2022 estimate of $1,768.2 billion.

This is even with the Fed’s latest 0.25 percent hike that means higher construction costs.

Why? We know there is a tremendous housing shortage. There are 63,000 homeless in Los Angeles alone, more than 150,000 nationally, and rental rates aren’t coming down because of low vacancy rates. People have to live somewhere: for too many it’s on the streets.

Calculated Risk

Calculated Risk’s Bill McBride reports private residential construction spending is down 10.0 percent. Non-residential spending is up 21.3 percent year-over-year. Public spending is up 15.0 percent year-over-year.

That is because of the $ trillions being fed into the economy with the Infrastructure and Inflation Reduction Acts. It’s what governments—both state and federal—are supposed to do doing recessions and other uncertain times (such as wars, pandemics, global warming, etc.).

So, it’s a very good sign for our economic future and the reason I believe what some economists are calling a ‘rolling recession’ will be short-lived.

But that’s not helping the homeless. States like California are addressing the problem, but a national survey reports that NIMBY zoning laws and local governments’ recalcitrance to rezone for denser housing is the main reason residential construction isn’t meeting this demand.

Surveys have shown time and again the reluctance of communities to build more affordable housing, since residents believe it harms their own housing values. The answer must be the better design of neighborhoods that improve accessibility to jobs as well as affordable housing.

A recent Stanford University study of California’s homeless problem highlighted its complexity. Twenty-five percent of the homeless have either drug addiction or mental health problems that could be mitigated with better treatment centers.

Single-family zoning and local opposition to housing, often embodied by the “not in my backyard,” or NIMBY, sentiment makes neighborhoods more expensive. Each additional growth control policy a community added was associated with a 3-5 percent increase in home prices (Taylor 2015; Rothell 2019), said the study. 

The construction industry is also playing catch-up, as new construction almost ceased during and after the Great Recession. The aftermath of the busted housing bubble produced an excess of one million homes, which large corporations and hedge funds snapped up at rock bottom prices, which took many homes off the housing market.

The Biden administration has chipped in more than $250 million to subsidize more affordable housing, but $ billions more will be needed to encourage more such developments.

The Great Recession caused almost as much economic damage as the Great Depression. Great Depression programs in the 1930s subsidized homeownership during record unemployment of that time.

More government support will be needed to support such efforts once again.

Harlan Green © 2023

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

The Fed Fighting Wrong Battle

 Financial FAQs

CalculatedRisk

First Republic Bank’s takeover by the FDIC highlighted just how vulnerable our banking system is to higher interest rates. It had more than 80 percent uninsured deposits, just like the other failed banks vulnerable to higher interest rates that reduced the value of their assets.

So even though higher interest rates have been causing most harm to the banking system, causing panicky depositors to withdraw their funds, the Fed Governors don’t seem ready to quit raising interest rates. We will know more tomorrow at the end of their two-day FOMC meeting.

The Fed is focusing instead on the job market, believing rising wages are the main inflation culprit, and higher interest rates will slow employers’ demand for more workers.

That is already happening, as the Labor Department’s Job Opening and Labor Turnover Survey (JOLTS) March report showed a softening labor market.

The JOLTS report said layoffs jumped by 248,000 to 1.8 million, the highest level since December 2020. The increase was led by the construction industry, which shed 112,000 positions. The decline likely reflected the job losses in the housing market, which has been hammered by higher mortgage rates.

Accommodation and food services lost 63,000 jobs, while the health care and social assistance category reported 42,000 layoffs. Employment in the leisure and hospitality sector remains below its pre-pandemic levels.

And wage increases are also lessening as economic growth has slowed to 1.1 percent in the first quarter 2023 from 2.6 percent growth in last quarter of 2022.

Yet the real inflation culprit is lack of adequate goods and services that has been unable to meet such a soaring demand for more supplies, exacerbated by higher borrowing costs. Factory orders, for instance, have already weakened. U.S. manufactured goods rose just 0.9 percent in March, the Commerce Department said Tuesday. The increase followed two months of decline.

The Fed isn’t helping matters by wanting to raise interest rates enough to boost unemployment from the current 3.5 percent to 4 to 5 percent. Fewer working employees also reduces said supply.

Which brings us to other reasons supply chains aren’t producing more—higher energy prices and higher tariffs that raise import costs, and a rising tide of economic nationalism that encourages more to be ‘Made in USA’ and less foreign trade that also disrupts supply-chains.

Nobel Prize-winner Joseph Stiglitz has been most vocal on the harm continuing rate increases are causing in a recent Project-Syndicate article.

“The Fed, like other independent central banks, jealously guards its credibility. The risk of losing it has been cited as the reason for the Fed’s interest-rate hikes of the past year, which went far beyond normalizing the ultra-low rates that characterized the post-2008 era. But by failing to recognize the risks posed by its rapid rate increases, and how more than a decade of near-zero interest rates had exacerbated these risks, the Fed undermined its own credibility – precisely the outcome it sought to avoid.”

I said last week Treasury Secretary Janet Yellen in a recent Fareed Zakariah interview on CNN 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.

It is now obvious that higher interest rates are harming the banking system. Leading economists are also worrying. Will Chairman Powell and the Fed Governors listen?

Harlan Green © 2022

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