Why the Inflation Confusion?

Financial FAQs

BEA.gov

Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the second quarter of 2023, according to the "second" estimate just released by the Bureau of Economic Analysis (BEA). In the first quarter, real GDP increased 2.0 percent.

This is great news because it showed our economy was still expanding in Q2, April-June.

Also, the price index for gross domestic purchases increased 1.7 percent in the second quarter, a downward revision of 0.2 percentage point from the previous estimate.

This was more good news. It showed that inflation was still declining.

Then why is the Fed still sounding hawkish in maintaining inflation hasn’t been tamed? I know this can be boring information for most readers. But it might help us to understand why the financial markets are so skittish about inflation, and what the Fed may do next concerning the everyday interest rates that govern debt rates for credit cards and car loans.

Because there is a lot of confusion over which inflation rate the Fed should use to acknowledge they have reached their 2 percent target rate.

We will never really know the underlying inflation rate, because it is a magical number decided upon years ago during Fed Chair Bernanke’s reign that developed countries central bankers could agree on, not because it had some intrinsic value. And sure enough, as the Fed began to raise interest rates to bring said inflation down to 2 percent, a recession has invariably followed.

The Fed seems to like the PCE price index, which measures just what consumers spend (rather than GDP, which measures what everyone spends, including governments). Personal Consumption Expenditures (PCE) increased 2.5 percent, a downward revision of 0.1 percentage point in the BEA’s same press release. Excluding food and energy prices, the PCE price index increased 3.7 percent, a downward revision of 0.1 percentage point, but still too high for the Fed.

FREDcpi

But the Consumer Price Index (CPI) that also measures consumer spending is the index used to set social security premiums and most rental leases! And it is currently increasing at 3.3 percent.

I maintain that is the reason there is so much confusion over inflation. The Fed is probably correct to concentrate on the behavior of consumers. Food and energy prices directly affect the consumer, where inflation does the most harm to household finances. But it also casts doubt on the Fed’s ability to control inflation!

The bottom line as I said last week is not enough is being produced to satisfy consumer demand, or the military’s demand for more weapons, or Americans’ need to shelter from the effects of ever greater Global warming.

So, the Fed’s policies shouldn’t even be part of this equation in such a time. Inflation will continue to subside on its own as more is produced to satisfy said demands. The above CPI chart shows the decades post-1990 when supply and demand were in balance—until the COVID pandemic upset that balance, which is being gradually restored.

Harlan Green © 2023

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No More Rate Hikes?

 Financial FAQs

Calculated Risk

The latest Job Openings and Labor Turnover Survey (JOLTS) report by the BLS shows there are still a lot of job openings, but that should continue to decline from the post-pandemic high of 12 million job vacancies in 2022.

Could that mean no more rate hikes by the Fed this year? Pundits and economists are mixed on that possibility in part because Fed Chair Powell gave mixed signals about Fed intentions at his annual Jackson Hole speech—from saying the job market is too tight to the possibility of no recession and a soft-landing scenario maybe next year.

“The number of job openings edged down to 8.8 million on the last business day of July, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 5.8 million and 5.5 million, respectively. Within separations, quits (3.5 million) decreased, while layoffs and discharges (1.6 million) changed little.”

The key fact was that the number of job openings (black line in graph) has been declining sharply, and the number of hires is declining more slowly (blue line). There were just 187,000 nonfarm payroll jobs added in July’s unemployment report. But retailers are gearing up for the holidays.

Over the month, job openings decreased in professional and business services (-198,000); health care and social assistance (-130,000); state and local government, which had increased the most in last month’s unemployment report. Whereas job openings increased in information (+101,000) and in transportation, warehousing, and utilities (+75,000), jobs in demand over the holidays.

The August unemployment report comes out this Friday, and there’s no real consensus by economists on what it might be.

Other news was a big drop in one consumer confidence report by the Conference Board that said consumers are losing confidence because energy and food prices are rising again, just when they thought inflation was being tamed.

Although bad news for consumers, it’s music to the ears of Powell, since it could mean less consumer spending, which in turn could depress the inflation rate without further Fed actions.

What is making Fed officials nervous is the Atlanta Federal Reserve’s advance estimate of third quarter economic growth jumping to 5.9 percent because of higher third-quarter real gross private domestic investment growth, thought to be an almost unbelievable growth rate just weeks ago.

I said last week that GDP growth is soaring because private capital spending has also picked up, proving that governments must kick start many of those projects that don’t promise enough profits to bring in private investment, i.e., long term projects like roads, bridges that pay for future growth.

But said spending doesn’t have to be inflationary, as inflation hawks maintain. It inflates the budget, but doesn’t have to boost inflation if it’s paid for; i.e., if tax revenues keep up with spending, which is after all a reinvestment in our productivity, just as private industry does with its capital spending.

This is the truth that Wall Street and the inflation hawks don’t like to hear, either. It’s the chicken and the egg problem. Inflation occurs because not enough of something is produced when demand is high for such things. Policies that slow growth are counterproductive, because they seek to dampen demand rather than spend to produce more.

Harlan Green © 2023

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Why Such High Interest Rates?

 The Mortgage Corner

I said last month the National Association of Realtor’s chief economist Lawrence Yun’s exclamation “the housing recession is over,” was because the NAR’s Pending Home Sales (i.e., homes under contract but not closed) rose for the first time in four months.

"The recovery has not taken place, but the housing recession is over," Yun had said at the time.

Calcuated Risk

Yun might not be so optimistic with this month’s existing-home sales, which are down to a six-month low. And we know why. It’s not only a very small number of homes for sale, but the sudden rise in mortgage rates. We can’t blame Yun for his recent enthusiasm since longer-term fixed rates rose suddenly when the financial markets began to take seriously the possibility of accelerating economic growth rather than a recession this year.

Total existing-home sales^[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – waned 2.2% from June to a seasonally adjusted annual rate of 4.07 million in July. Year-over-year, sales slumped 16.6% (down from 4.88 million in July 2022), said the NAR.

“Two factors are driving current sales activity – inventory availability and mortgage rates,” said Yun. “Unfortunately, both have been unfavorable to buyers.”

The rest of the US economy has been recovering with the second quarter 2023 GDP advance estimate growing 2.4 percent, and the Atlanta Fed is now predicting the possibility that third quarter GDP growth could be as high as 5.8 percent.

Most economists are discounting such a possibility, but the possibility of higher growth has put the fear of higher interest rates in their calculations, and the real estate market is particularly affected by interest rate trends.

There is, however, very little inflation to fear, hence I believe bond traders are overreacting. The best inflation indexes show the retail inflation rate a little above 3 percent, down sharply from last year’s high.

Bond traders are causing the 10-year benchmark Treasury bond yield to rise that fixed mortgage rates use as an index. It is also considered to be a hedge against the possibility of higher inflation, and has risen almost 1 percent in the past few months to 4.3 percent, from its low of 0.54 percent in March 2020.

This was the reason for the sudden jump in existing-home sales to almost 7 million units annualized in 2020 (see above Calculated Risk graph). The 30-year conforming fixed rate mortgage fell as low as 3.5 percent, causing the sudden surge in housing sales.

When will the housing sales decline reverse course? Not very soon, according to Calculated Risk’s Bill McBride. “It now seems likely that in a few months existing home sales will fall below the previous cycle low of 4.00 million in January 2023,”

 

FREDnewhomes

Some good news is that sales of new single‐family houses in July 2023 were at a seasonally adjusted annual rate of 714,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development as home builders race to add to the depleted housing stock. This is a huge increase--4.4 percent above the revised June rate of 684,000 and is 31.5 percent above the July 2022 estimate of 543,000.

It is difficult to see other than a continuing housing bottom now. The cure to the housing shortage is the realization by the Fed and bond traders that inflation has been conquered. There’s no reason for inflation to be higher than the current 3 percent, and maybe trend down to the Fed’s 2 percent target in the not-too-distant future.

Harlan Green © 2023

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Higher Economic Growth Ahead--Part II

 Financial FAQs

AtlantaGDPNow

US economic growth could be accelerating—with manufacturing as well as consumers. It was consumers that provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth, but the manufacturing and construction industries may be taking over in the next phase of this economic recovery.

The Atlanta Federal Reserve’s advance estimate of third quarter economic growth just jumped to 5.8 percent, thought to be an almost unbelievable growth rate just weeks ago. This will confound pundits and economists alike as all those capital infrastructure projects shift into high gear.

GDP growth is soaring because private capital spending has also picked up, proving that governments must kick start many of those projects that don’t promise enough profits to bring in private investment, i.e., long term projects like roads, bridges that pay for future growth. This is the truth that Wall Street doesn’t want to hear, until it meets a worldwide catastrophe like the COVID pandemic.

This has been the case since the Great Depression but never in the scale that has been spurred by the post-pandemic recovery.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.8 percent on August 16, up from 5.0 percent on August 15. After this morning's housing starts report from the US Census Bureau and industrial production report from the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4 percent and 8.8 percent, respectively, to 4.8 percent and 11.4 percent,” said the Atlanta Fed.

The jump in housing starts was surprising in the face of higher mortgage rates as bond traders expect that more robust growth will push up longer term interest rates, like the benchmark 10-year Treasury yield now edging above 7 percent.

“With many homeowners choosing to stay in their existing home to preserve their low mortgage rate, demand for new home construction pushed up single-family starts in July even as builders continue to struggle with increased uncertainty stemming from rising rates,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB).”

And manufacturing companies have added 100,000 clean energy jobs in wind and solar energy, EV manufacturing and other clean energy sectors across the country since the Inflation Reduction Act became law,, according to a report by the nonprofit Climate Power.

As of January 31, 2023, there are over 90 new clean energy projects in small towns and bigger cities nationwide totaling $89.5 billion in new investments, said their study.

This is what it means to pay for the future—our future health as well as creating better-paying jobs.

Harlan Green © 2023

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Here's to a Return of Normal!

 Popular Economics Weekly

FREDretailsales

Is it possible after years of pandemic and post-pandemic vicissitudes, the US economy is returning to normal growth, and Americans can breathe easier about the future?

By that I mean consumers are shopping as they did before the pandemic, industries are producing enough to keep inflation in check, and supply-chains fully stocked, even if the Fed won’t begin to drop interest rates until next year.

I believe so, and July’s retail sales are confirming that consumers are healthy and behaving more normally now that the tax season is over.

It surprised some economists that advanced sales for retail and food services jumped 0.7 percent in July, and 3.2 percent over July 2022, as reported by the Census Bureau. But 3 to 6 percent annual sales’ growth has been the norm going back years, seasonally adjusted but not for inflation, per the FRED graph.

Dining out and travel were the biggest beneficiaries of consumers’ largesse. Sales rose a sharp 1.4 percent at bars and restaurants, a sign that they are happy. Internet sales have risen 10.3 percent over the past year, more than double the rate of inflation.

In fact, the so-called ‘new normal’ of post-pandemic activity is looking more and more like the old normal. Unemployment should stay low for the rest of this year, at least. There are still nine million open job vacancies and wages are now rising faster than overall inflation, which should keep economic growth above 2 percent, the average longer-term US growth rate.

Why is inflation slowing so quickly without rising employment? Many economists believed higher unemployment and job losses were needed to slow consumers spending sufficiently to bring down the inflation rate.

Economists such as Paul Krugman believe that might have occurred if inflation expectations had become imbedded—i.e., in the belief that inflation would continue higher for an extended period.

But economies have recovered much more quickly, thanks in large part to the $trillions spent on the pandemic recovery—the ‘new’ New Deal I’ve been talking about.

So, there wasn’t enough time for inflation to become ‘embedded’ (an economic term) in the minds and expectations of Americans. Other countries haven’t invested as much in their recoveries, so are experiencing higher inflation.

A report just out by the NY Fed confirms that inflation expectations are subsiding. The median inflation expectation fell to 3.5 percent in July from 3.8 percent the previous month, and is the lowest reading since April 2021, the report said.

Consumers also expect home-price growth to slow slightly, said the NY Fed. They also see the cost of gas, food, medical care, college, and rent fall in the year ahead. Expectations for food inflation are at the lowest level since September 2020 (5.2 percent).

Why shouldn’t consumers feel better about their future, and act accordingly?

Harlan Green © 2023

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The Main Cause of Pandemic Inflation?

 Financial FAQs

FREDprofits/gdi

The St. Louis Fed (FRED) graph of corporate profits as a percentage of Gross Domestic Income (GDI), a good proxy for gross domestic output (GDP), explains much of what boosted inflation during the COVID pandemic. The product shortages and supply chain shortcomings caused the sudden scarcity of goods, but not the sky-high retail inflation that consumers in particular experienced.

Corporate profits accounted for the largest share of the price hikes experienced since the pandemic. Data from the U.S. Commerce Department shows that 2021 corporate profit margins were the largest they've been in 70 years, some 16.7 percent in 2021, the last year annual profit data was available.

That is why consumer CPI inflation surged in 2021 and is slowly returning to more normal levels. You name it—food service and energy companies took advantage of the sudden shortages in their efforts to maximize profits.

BLS.gov

The Consumer Price Index (CPI) rose just 0.2 percent in July, and the yearly rate of inflation rose to 3.2 percent from 3 percent in the prior month, the consumer price index showed. It was the first increase in 13 months.

The core rate without food and energy prices over the past year slowed to 4.7 percent from 4.8 percent and is the lowest rate in almost two years.

However, a large share of the remaining core inflation includes housing rents and used car prices that have remained stubbornly high. Since when is the Fed responsible for bringing down rents and car prices? These prices are controlled by intermediaries like realtors and auto dealers that want to maximize their own profit margins, not by the Fed.

There is also a surge in business productivity reports Brian Bethune, a Boston College economics professor. Business productivity jumped by 3.7 percent while unit-labor costs rose just 1.6 percent.

“At the same time, overall prices increased by 2.2% — well within the U.S. Federal Reserve’s target and the lowest inflation rate since the second quarter of 2020,” said Professor Bethune.

U.S. corporate profit margins have been excessive, said Bethune.

“In other words, there was “profitflation” — also known as “greedflation,” The ability of industry to raise prices aggressively, rather than defensively, is tied to increasing business consolidation and more mergers and acquisitions. Indeed, bank takeovers resurfaced in the first half of 2023 under severe liquidity stresses created by higher short-term interest rates; that story is not yet over.”

The inflation battle has been largely won, and corporate profit margins are declining as supply chains catch up to demand. Profits declined – 4.1 percent in Q1 2023, according to the Bureau of Economic Analysis (BEA).

Consumer spending is tapering as well that has been the main cause of said demand, so that personal consumption expenditures (PCE) were up 5.4 percent YoY in June, down from the post-pandemic high of 13.1 percent in 2021.

Consumers provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth.

The story is not over for the Fed’s battle with inflation, either. High interest rates that are crimping corporate profits as well as consumer spending will continue to bring down the inflation rate. But we don’t want outright deflation China is experiencing that is causing massive unemployment among its youth.

We cannot really afford another recession, such as happened in 2007-09, or might happen again if the Fed continues to boost interest rates.

Harlan Green © 2023

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Guest Opportunity for Podcasters

 Answering Kennedy’s Call

About Harlan Green

§ Harlan Russell Green is 2023 Winner of the Peace Corps Writers’ Publisher’s Award Jul 31, 2023

§ Harlan Russell Green (Turkey 1964–66) 2023 Publisher’s Award Building Community: Answering Kennedy’s Call, Harlan Green’s memoir of his years working to build successful communities…

§ Editor and Publisher of PopularEconomics.com, dedicated to “Enhancing the Popular Understanding of Economics”, a financial columnist who has been interviewed by international news outlets, and a documentary filmmaker and photographer. He is also the author of The Mystery of Money, Understanding the Modern Financial World, has a B.S. in Economics from UC Berkeley, and M.S. in Public Communications (COM ’82) from Boston University.

§ A lifelong advocate of livable communities, he was a Peace Corps Volunteer in a rural community development program in Turkish villages, joined the US Environmental Protection Agency at its inception to publicize its activities in the Western Region, and became a member of César Chávez’s United Farmworkers Union during its organizing struggles, before contributing to his own community planning effort that resulted in a new city.

Harlan Green © 2023

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

Higher GDP Growth Ahead?

 Financial FAQs

AtlantaGDPNow

The US economy continues to expand in all sectors—with consumers as well as in manufacturing. But it was consumers that provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth, I said recently.

And now the Atlanta Federal Reserve’s advance estimate of third quarter economic growth just jumped to 4.1 percent. How is that possible with Fed Chair Powell hinting at further rate hikes in his latest remarks?

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 4.1 percent on August 8, up from 3.9 percent on August 1. After recent releases from the US Census Bureau, the Institute for Supply Management, the US Bureau of Economic Analysis, and the US Bureau of Labor Statistics, an increase in the nowcast of third-quarter real gross private domestic investment growth from 5.2 percent to 8.1 percent was slightly offset by decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real government spending growth from 3.5 percent and 2.9 percent, respectively, to 3.2 percent and 2.7 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth increased from 0.08 percentage points to 0.11 percentage points.”

This is largely about the huge increase in private sector investing that is being stimulated by yes, as I have been saying, our recent federal legislation that is creating a new industrial policy much like the Great Depression’s New Deal.

And why not? The COVID-19 pandemic did as much damage as the Great Depression when economies worldwide shut down. It took a New Deal then to bring us out of the Great Depression which lasted from 1933-38, and it is taking years to recover from the pandemic shutdown when 8 million jobs were lost, for starters.

Businesses ratcheted up fixed investment at a nearly 5 percent annual pace in Q2. That’s the biggest increase in six quarters. Investment rose at double-digit rates, in percentage terms, for both equipment and structures.

Part of the increase in domestic fixed investment likely stems from the Inflation Reduction Act that gives subsidies and tax credits to businesses that invest in green energy and technology such as chip making.

All of this news should confirm once and for all that no recession is imminent this year. Even if growth in Q3 and Q4 slowed, the overall year’s growth would still be positive., I also said recently.

The inflation rate is cooperating. The PCE price index increased just 2.6 percent, compared with an increase of 4.1 percent in Q1. Excluding food and energy prices, the PCE price index increased 3.8 percent, compared with an increase of 4.9 percent.

There is also a burst in labor productivity, as workers are working even harder while their wages keep rising.

Brian Bethune, a Boston College economics professor in a MarketWatch Op-ed wrote that the U.S. economy has demonstrated “amazing flexibility and resiliency since the pandemic recovery cycle began three years ago.’

Business productivity jumped by 3.7 percent while unit-labor costs rose just 1.6 percent.

“At the same time, overall prices increased by 2.2% — well within the U.S. Federal Reserve’s target and the lowest inflation rate since the second quarter of 2020,” said Professor Bethune.

Economists are also coming around to the view that targeted government spending is necessary for future economic growth. Dani Rodrik in an interesting Project Syndicate opinion piece summarized the research that is refuting so-called ‘free marketers’ views that any domestic industrial policy other than for the military harms economic growth and innovation.

“The results of this research are much more favorable to industrial policy, tending to find that such policies – or historical accidents that mimic their effects – have often led to large, seemingly beneficial long-term effects in the structure of economic activity.”

So why does the Fed want to continue to raise rates? Our biggest economic competitor, China, is now experiencing slowing growth and actual deflation for the first time in two years.

Harlan Green © 2023

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Jobs Still Plentiful!

 Popular Economics Weekly

MarketWatch.com

The Fed Governors should be happy with Friday’s unemployment report—nothing has really changed over the past several months, including record low unemployment, inflation continuing to decline, and average hourly wages holding at 4.4 percent.

“Both the unemployment rate, at 3.5 percent, and the number of unemployed persons, at 5.8 million, changed little in July. The unemployment rate has ranged from 3.4 percent to 3.7 percent since March 2022,” said the BLS press release.

We are in August and still no sign of a recession. Gross Domestic Product is estimated to grow even higher this quarter—as high as 3.9 percent from 2.4 percent in the second quarter, according to the latest Atlanta Federal Reserve GDPNow estimate. And companies are struggling to find more workers.

Why the sudden growth spurt? Even Nobel laureate economist Paul Krugman is calling it a Goldilocks economy.

“Economic policy in 2021 was actually pretty good. In fact, given the dislocations associated with a continuing pandemic, we ran what was in effect a Goldilocks economy, one that was neither too cold nor too hot.”

The sustained low unemployment rate is truly historic. Unemployment has declined to 3.5 percent only two other times—in 1955 during the post-WWII boom and 1969, the year of the first moon landing.

Education & healthcare led the report with 100,000 jobs added, but I like the construction jobs numbers best. This is because they show the effects of the recently enacted Infrastructure and Jobs Act and Inflation Reduction Act that are pouring $$trillions into real projects that are creating high-paying jobs. The problem—finding the workers.

Construction employment continued to trend up in July (+19,000), in line with the average monthly gain of 17,000 in the prior 12 months. Over the month, job growth occurred in residential specialty trade contractors (+13,000) and in nonresidential building construction (+11,000), per the BLS press release.

So why the recession worries at this stage of the recovery? It seems to be because of the much talked about inverted Treasury yield curve when short term rates (such as the 2-year Treasury) yield a rate much higher than the 10-year benchmark Treasury for an extended period of time.

It means credit is tighter, because lenders such as banks tend to lead at rates close to the 10-year benchmark Treasury yield, which is currently around 4 percent, but borrow at the usually lower 2-year rate that is now higher at around 4.8 percent.

When their cost to borrow is higher than what they can earn on their loans, lenders simply have less money to lend, hence tighter credit conditions.

FREDdeficit/gdp

That is happening because of the Fed’s credit tightening moves (that have driven up short-term rates). But the federal government is providing many more $$ to spur the economic renewal. Its current quarterly funding request is for $1 trillion to fund all those government projects that will pay for the future health of our economy.

Then why the credit downgrade by Fitch Ratings that has markets worried? Because debt rating agencies obsess about unmanageable debt. Yet, as the above FRED graph dating from 1930 shows, the actual annual deficit as a percentage of Gross Domestic Product is more important than the actual debt-to-GDP that has grown to 120 percent, because it shows the US can easily pay for said debt. Its ratio today is 5.8 percent and declining.

Dips below the zero-deficit straight line are deficits in the graph. The deficit has come down sharply from the negative -14.9 percent in 2020 because of the pandemic due to our strong economic growth since the pandemic.

Harlan Green © 2023

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Q3 Economic Growth to Double?

 Popular Economics Weekly

AtlantaFedGDPNow

We could have even higher third quarter economic growth, believe it or not, from the second quarter 2.4 percent (advance) growth estimate by the US Bureau of Economic Analysis.

The Atlanta Federal Reserve’s GDPNow model estimates a jump to 3.9 percent growth in Q3 (September to December 2023), a huge leap from its second quarter estimate that actually matched the BEA’s Q2 estimate. So, we should take it seriously, given all the good news about public spending on new infrastructure.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 3.9 percent on August 1, up from 3.5 percent on July 28. After this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, the nowcasts of third-quarter real personal consumption expenditures growth and real gross private domestic investment growth increased from 3.1 percent and 4.7 percent, respectively, to 3.5 percent and 5.2 percent.”

Construction is surging because of the US Infrastructure Act and Inflation Reduction Act $trillions being spent to modernize the US economy.

As if to emphasize the increased optimism, orders at U.S. factories rose 2.3 percent in June, largely because of more contracts for Boeing planes. Bookings for durable goods climbed 4.6 percent that are mostly consumer goods meant to last at least several years. The overall manufacturing sector is still weak and future orders have been contracting for almost one year.

How can the Atlanta Fed be so optimistic about future growth when Fitch Ratings just downgraded US Sovereign Debt to AA+ from AAA?

Much of it may have something to do with the various programs congress enacted, now being called Bidenomics, because though bipartisan it happened under President Biden’s watch.

Major economists like Nobel Laureate Paul Krugman are jumping on the Bidenomics growth bandwagon.

“It’s hard to overstate how good the U.S. economic news has been lately. It was so good that it didn’t just raise hopes for the future; it led to widespread rethinking of the past. Basically, Bidenomics, widely reviled and ridiculed a year ago, looks a lot better in retrospect. It’s starting to look as if the administration got it mostly right, after all.”

Second quarter consumer spending (i.e., personal consumption expenditures) has held up, though down from its first quarter spike. And real gross private investment is increasing 5 percent annually, thanks to those $trillions government is spending to stimulate private investments that is modernizing almost every area of our economy, from roads and bridges, water treatment facilities, airports, energy grids, to rural Internet hookups.

And a higher percentage of Americans are working than before the pandemic, so why shouldn’t the US economy look even better in Q3?

Harlan Green © 2023

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Still Many Job Openings!

 Financial FAQs

Calculated Risk Blog

It’s hard to reconcile the recent downgrade of US Treasury debt by Fitch Ratings, one of the three major debt rating agencies, to AA+ from AAA, with the US economy still at full employment.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” it said. “Several economic shocks” as well as tax cuts and new spending initiatives “have contributed to successive debt increases over the last decade,” reported MarketWatch on the downgrade.

The Bureau of Labor Statistics Job Opening and Labor Turnover Survey (JOLTS) reported an average of 5.9 million hires per month (blue line in graph), and total separations of 5.6 million, while the number of job openings has declined to 9.8 million range (black line).

That’s still a lot of job openings, mostly in government and services. Openings increased in health care and social assistance (+136,000) and in state and local government, excluding education (+62,000). Job openings decreased in transportation, warehousing, and utilities (-78,000), state and local government education (-29,000), and federal government (-21,000), said the Bureau of Labor Statistics press release.

Fitch maintained that “tighter” credit, weakening investment in business, and a “slowdown” in consumption “will push the U.S. economy into a mild recession” in the fourth quarter of this year and the first three months of next year, reported MarketWatch.

This is although most economists now see little danger of any recession at all; maybe just a ‘soft landing’ that slows economic growth once the Fed ends its interest rate hikes.

That doesn’t mean it hasn’t been a wild ride since the pandemic-induced disruptions.

The Calculated Risk graph tells the best tale of the pandemic—what our economy has endured from the effects of COVID-19. There were 13.406 million job layoffs and discharges in March 2020 (red bar spike in graph) during the nationwide shutdown when city streets emptied from the mandatory lock downs and home stays and wild animals roamed the streets.

It resulted in the shortest recession ever—just two months, April-May 2020—then economic growth suddenly reversed, and businesses hired 8 million workers (blue line) in the next couple of months.

The JOLTS report also tells us the difference between hires and total separations has averaged some 300,000 nonfarm payroll jobs, which approximates the average monthly job creations this year.

This is what Bidenomics is all about, the various aid programs and bills enacted by congress to modernize the US economy and reduce global warming. It has created something like six million jobs since President Biden took office, and maybe 3,600,000 more jobs this year.

It also tells us why the US economy continues to expand in all sectors—with consumers as well as in manufacturing. Consumers provided most of the 2.4 percent increase in Gross Domestic Product (GDP) in the ‘advance’ (first of three) estimates of second quarter economic growth.

This should confirm that no recession is imminent this year. Even if growth in Q3 and Q4 slowed, the overall year’s growth would still be positive.

Goldman Sachs chief economist, Jan Hatzius is one of the major economists who trimmed the probability of a recession in the next 12 months to 20 percent from 25 percent — well below the 54 percent median among forecasters who participated in the last Wall Street Journey survey.

“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” said Hatzius.

And as I reported earlier, Federal Reserve Chair Powell said the Fed Governors now believe we can avoid a recession at Wednesday’s post-FOMC meeting, after announcing raising the benchmark interest rate to a range of 5.25 percent to 5.5 percent, the highest level in 22 years, in order to combat “elevated” inflation.

Consumers also like the continued growth, according to the Conference Board’s July Confidence Index that jumped from 110.1 to 117.

“Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” said Dana Peterson, Chief Economist at The Conference Board. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”

We should wait for Friday’s latest official unemployment report for the most recent unemployment picture, but it looks like Fitch Ratings is an outlier on the soundness of the US economy.

Harlan Green © 2023

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