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