Inflation Target Reached?

 Financial FAQs

Inflation is probably as close to the Federal Reserve’s inflation target of 2 percent as possible this year, according to its favorite inflation index, the Personal Consumption Expenditure Price Index (PCE) that is the best overall measure of consumer price trends.

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In fact, all of the inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the cost of things to produce.

It’s mostly in the service sector, where the rising cost of recreation, entertainment, health care and the like has been the biggest source of recent inflation. The manufacturing sector has been stalled, however, because of the high interest rates.

Service prices rose 0.4% last month, the government said Friday. The biggest increases took place in housing, health care, recreation, dining and hotels. Over the past year the cost of services has risen 4%, far too high for the Federal Reserve's comfort. Before the pandemic service inflation averaged 2.2% a year.

Why? The culprit in the Fed’s eyes is too high wages and salaries that must come down to tame inflation “sustainably”, in their words. Yet without slightly higher incomes consumers wouldn’t be able to ‘sustain’ the higher economic growth that will pay for the current wars the US is supporting, modernization of US economy, and mitigation of global warming.

Of course, there are those inflation hawks (mostly Republicans) who say we cannot afford such largesse. There’s too much debt that will overwhelm the debt markets, collapse the Dollar’s value and similar forebodings.

But they forget that such spending also boosts labor productivity and economic growth! That is why GDP growth has surged, rising 4.9% and 3.6% over the last two quarters of 2023, respectively.

FREDlaborproductivity

And labor productivity has been surging. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported, as output increased 3.5 percent and hours worked increased just 0.3 percent.

Productivity was shrinking, just -2.4 percent at its most recent low point in Q2 2022, meaning the number of hours worked was rising faster than output. But it increased to +2.6 percent in Q4 2023, a swing of more than 4 percent in 6 quarters.

It’s not clear if such a surge has to do with workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.

But we do know that the $trillions in President Biden’s New, New Deal are being spent on developing new technologies, such as the CHIPs Act that is financing new factories in several states.

We had even more debt as a percentage of GDP during WWII. We couldn’t have won World War Two without it. And we also know the new technologies it financed created the American middle class and gave us the boom years after World War Two.

Harlan Green © 2024

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

Q1 GDP Better Than Estimate

 The Mortgage Corner

The initial estimate of first quarter 2024 Gross Domestic Product (GDP) growth was lower than expected, causing financial markets to panic, even though economic growth is better than the initial estimate is reporting.

The lower GDP estimate happened because Americans bought more imports than sold exports overseas. So consumers are still spending, which is the mainstay of growth, and even continued to invest in factories and infrastructure.

First quarter GDP growth was 1.6 percent, below expectations, after 3.4% growth in Q4 and 4.6% growth in Q3 2023.

Why the decline in Q1? Imports were higher that subtract from GDP and product inventories were down, as nobody was restocking their shelves yet, which is common while wholesalers and retailers wait to see the demand for their products in the New Year. But consumer spending held up (+2.5%).

That’s because the job market is still hot, with jobless claims in the latest week down to 207,000 from the more average 215-220,000. But the markets are seeing danger signs that the Fed may be less likely to lower interest rates.

Why? The product shortage is raising inflation as consumers must pay more because of the depleted inventories.

BEA.gov

“The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment, said the US Bureau of Economic Administration (BEA). Imports, which are a subtraction in the calculation of GDP, increased.”

The U.S. trade deficit in goods widened 1.7% to $91.8 billion in March, according to the Commerce Department’s advanced estimate released Thursday. That’s the largest deficit since last April.

Wholesale inventories fell 0.4% in March after a 0.4% gain in the prior month. Nonauto retail inventories fell 0.1% after a 0.3% rise in February.

Inflation has stalled, as there is now a supply shortage because inventories are not being replenished. But that will be cured soon enough as producers gear up production once again.

The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter, said the BEA. The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.

In fact, there’s a drop in exports because of the strong US Dollar in relation to other currencies, which makes exports more expensive. And that’s due to the sky-high interest rates the Fed is not yet reducing.

But despite soaring mortgage rates, pending home sales rose 3.4% in March from the previous month that reflect transactions where the contract has been signed for the sale of an existing home, but the sale has not yet closed. It’s another sign that consumers are still spending.

“March’s Pending Home Sales Index – at 78.2 – marks the best performance in a year, but it still remains in a fairly narrow range over the last 12 months without a measurable breakout,” said NAR Chief Economist Lawrence Yun. “Meaningful gains will only occur with declining mortgage rates and rising inventory.”

The temporary inflation boost what is worrying the markets, but Treasury Secretary Yellen was reassuring markets today that it is temporary.

Thursday morning’s GDP report showed the Fed’s preferred measure of inflation, core PCE, rising to 3.7% in the first quarter of 2024, up sharply from 2% in the prior period that is mainly due to lagging rental rates based on annual rental contracts that aren’t yet reacting to growing supply of rental housing.

“When we look at the market for new rentals or for rents on single-family houses, what we see is those rents have stabilized, in some cases fallen,” Yellen said. “Ultimately that is what, over time, will govern increases” in the inflation statistics.

So it’s really a temporary supply shortage of everything this time of year that has boosted inflation, and the markets will soon realize this.

Harlan Green © 2024

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

America's Ongoing Civil War

 Popular Economics Weekly

Alex Garland’s just released movie, Civil War, about a modern American civil war to unseat a Trump-like authoritarian president in the name of restoring democracy, is portraying an armed uprising that won’t happen today. The possibility of such a military rebellion ended 159 years ago when General Lee surrendered the Confederate Army at the Appomattox Court House in 1865.

Garland misses the point that Americans are fighting a different kind of civil war today as ugly and brutal in many ways but has morphed into an ongoing political and economic competition waged between red and blue states. There are still many casualties, however.

I had been writing about an ongoing civil war since 2013 when a contributing writer for Huffington Post. It caught the attention of Al-Jazeera-America, who interviewed me at the time for an article on the ideological war between Democrats and Republicans during the Obama Presidency.

I said then “…It (the Civil War) was about such men attempting to preserve slavery and state rights. Today, it is about not giving more rights to minorities and the poor.”

The ruling elites of the red states are mostly Republicans wanting to preserve their wealth with lower taxes and less federal government intervention. They want little or nothing to do with expanding such government programs as Obamacare. And the ultra-conservative Tea Party was formed to lead their movement.

A NYTimes 2010 poll had found18 percent of Americans who identify themselves as Tea Party supporters tend to be Republican, white, male, married and older than 45.

It was easy to see why the Tea Party was powerful at the time. Obama’s election in 2008 had reawakened the racism of the old south that was part of an economic apartheid system between the Haves and Have-nots remaining after the abolishment of slavery.

"You're here because now is the single best time we have to defund Obamacare," declared Senator Cruz, one of the Tea Party leaders in 2013. "This is a fight we can win." It didn’t happen, of course, because of a Republican Senator from Arizona after more than 30 attempts by Republicans to defund it.

But it has been conservatives’ battle cry ever since that has caused a tremendous economic toll on the red states, whose poverty levels remain much higher than in the coastal blue states; a distant echo of the carnage that ended 159 years ago.

Why is there another movie about an actual civil war? Maybe it’s because a former president and his supporters keep threatening to wage a new civil war, which might have happened if said former president had succeeded in stopping the Electoral College vote on January 6, 2021.

A better take on today’s uncivil, civil war are films about protests happening today, like an antiwar movie by docu-drama filmmaker Peter Watkins. It was a 1971 movie made during the Vietnam War I happened to be involved in called Punishment Park.

Peter Watkins, an English film director already acclaimed for The War Game, a movie about the devastating effect of a nuclear bomb attack on London, used a dry lake in California as the movie setting for a concentration camp to house those arrested for protesting the Vietnam War, because regular prisons were already overflowing with anti-war protestors.

The movie posited that President Nixon had decreed a State of Emergency under a little-known internal security act from the 1950s to tamp down opposition to the Vietnam War.

A kangaroo court made up of local citizens was set up to try those arrested. The convicted are then given the choice—a chance to escape across the desert without being recaptured for three days without food and water while being pursued by the National Guard, after which they would be released if they survived.

And Watkins added a European news crew in the mix to film the events within the film, highlighting the hostilities and brutality on both sides of the protests.

It bombed at the box office. But I heard it was more popular in Europe, where Peter Watkins was better known.

Why the continuing civil war between red and blue states? There are so many reasons. One can start with the innate tension between states’ rights and the federal government’s role in preserving universal rights that was baked into the constitution.

The constitutional debate then was between northern Federalists led by John Adams that wanted a strong central government, and southern states righters led by Thomas Jefferson, who by some miracle were able to agree on our constitution.

The only casualty at the time was the death of Treasury Secretary Alexander Hamilton from a duel with Vice President Aaron Burr.

In the name of lower taxes for the wealthiest and fewer government benefits for the less wealthy, red states have the same issues today, including the racial apartheid of blacks and minorities who receive much less of the economic pie in those states.

What happened on January 6 was a close call, of course, and maybe Garland was right to visualize a possible military outcome had the former president succeeded in stopping the Electoral College vote.

But the center held, as the saying goes, there has not been another civil war, because of our legal system, the third leg of government that provided the needed checks and balances.

Maybe the best description of what has preserved our democracy was President Lincoln’s reputed quote in the Lincoln Douglas debates of 1858: “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

It is the best description of why citizens of democratic countries have a voice. The upcoming presidential election will be a test of how many citizens can be fooled, and whether we remain a democracy.

Harlan Green © 2024

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

Elevated Rates Endangering Economy

 Financial FAQs

Early predictions show first quarter economic growth picking up, but a little-known indicator of future growth, the Conference Board’s Index of Leading Economic Indicators (LEI) in March highlighted the danger that high interest rates hold for future growth.

The LEI’s year-over-year growth remains negative, but is on an upward trend

ConferenceBoard

“Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

And the Atlanta Federal reserve boosted their GDPNow estimate of Q1 growth once again.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 2.9 percent on April 16, up from 2.8 percent on April 15, after the increase of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”

We know why elevated interest rates pose a danger to growth. They hurt the manufacturing and housing sectors, for starters, that rely on investment spending to build new equipment or new housing, which is directly affected by the cost of money—and there are 7 percent fixed-rate mortgages for homebuyers and owners wanting to refinance.

Manufacturing is just beginning to come out of the doldrums. The Institute for Supply Management’s latest purchasing managers index for US manufacturing, a monthly survey that gauges economic activity, rose more than expected in March to a reading of 50.3, the first time the index has registered expansion since September 2022.

And Existing-home sales slipped in March, according to the National Association of Realtors^®. Among the four major U.S. regions, sales slid in the Midwest, South and West, but rose in the Northeast for the first time since November 2023. Year-over-year, sales decreased in all regions.

“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” said NAR Chief Economist Lawrence Yun. “There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”

The Federal Reserve’s Beige Book, based on anecdotal evidence from the 12 districts collected over the past six weeks, was favorable in that it showed softening of activities that boost inflation.

“Economic activity increased slightly, on balance, since early January, with eight Districts reporting slight to modest growth in activity, three others reporting no change, and one District noting a slight softening. Several reports cited heightened price sensitivity by consumers and noted that households continued to trade down and to shift spending away from discretionary goods.”

So maybe the Fed’s credit restrictions are slowing consumer spending, but a far greater danger is that it penalizes producers that make the things businesses and consumers buy, making them more costly, thereby keeping prices higher.

The Conference Board’s LEI best illustrates the problem. The Fed’s efforts to lower inflation are stymied by its own inaction on bringing down interest rates, which are continuing to climb in some markets.

The LEI has stalled, fluctuating at a breakeven point between growth and recession. It decreased by 0.3 percent in March 2024 to 102.4 (2016=100), after increasing by 0.2 percent in February. Over the six-month period between September 2023 and March 2024, the LEI contracted by 2.2 percent—a smaller decrease than the 3.4 percent decline over the previous six months.

The best way to lower the price of things is to make more things, which  means in part lowering the cost of money to make them.

Harlan Green © 2024

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

Retail Sales Boost Q1 Growth

 Financial FAQs

Consumers haven’t slowed shopping, even during tax season. They keep boosting economic growth which is edging above 2 percent annualized predictions again.

FREDretailsales

Retail trade sales were up 0.8 percent (±0.5 percent) from February 2024, and up 3.6 percent (±0.5 percent) above last year, said the US Census Bureau. Nonstore retailers were up 11.3 percent (±1.6 percent) from last year, while food services and drinking places were up 6.5 percent (±2.1 percent) from March 2023.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 rose 2.8 percent on April 15, up from 2.4 percent on April 10, “…after increases in nowcasts of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”

This is at the high end of Blue-Chip economists’ estimates; no wonder with such robust consumer spending, but this confuses the inflation picture.

It is an economic fact that indicates the US economy is doing very well, and that Main Streeters should believe it, contrary to the polls, I said last week. But will economic facts win out over the irrational pessimism showing up in consumer polls? The facts win out in retail sales.

The problem with the irrational pessimism measured by polls is that it seems to be largely based on the inflation picture. The fluctuating inflation indexes are higher at the moment because of housing rents that are adjusted once per year.

FREDHICP

But another inflation index, core CPI inflation without food, energy, tobacco or alcohol, the Harmonized Index of Consumer Prices (HICP) used by Europeans as a more accurate indicator of longer term inflation, indicates the inflation rate has been at or below 2 percent since June 2023, like the Producer Price Index.

Then why does the Fed keep saying they are unsure inflation has been tamed when rents are outside of their control? Because of “unknown knowns,” to paraphrase former Bush Defense Secretary Donald Rumsfeld when he was attempting to justify the invasion of Iraq?

He said in attempting to justify the unknown fact that Saddam Hussein had weapons of mass destruction that: “There are known knowns, things we know that we know; and there are known unknowns, things that we know we don't know. But there are also unknown unknowns, things we do not know we don't know.”

How is that a justification for anything? The same uncertainty can be said of unknown future economic events, so keeping interest rates at their maximum 5.25 percent and the Wall Street Prime Rate at 8.5 percent to suppress consumer borrowing when not knowing what are the future shocks that could again disrupt supply change, like the Covid pandemic and Ukraine war, are “things we do not know we don’t know.”

But with fixed 30-year mortgage rates again above 7 percent, we know it is hurting the housing market at a time when more housing is desperately needed.

Atlanta Fed President Rafael Bostick has been sounding the alarm on the housing shortage yet has been one of the Fed Governors reluctant to support lowering the Fed’s interest rates.

Bostic said in a recent conference, “Nationally, a household that earns the median income—roughly $75,000 a year—must spend 41 percent of that just to own the median-priced home, which would cost about $359,000. That percentage far exceeds the standard threshold for affordability, which is 30 percent.”

This is not an ‘unknown known’, since we know that lower interest rates would boost housing construction and hence supply, thereby bringing down rents and housing prices. Privately‐owned housing starts in March were14.7 percent below the revised February estimate . Single‐family housing starts in March were 12.4 percent below the revised February estimate.

Can we blame consumers for doubting the sincerity of the Fed Governors about inflation when they contradict themselves?

Harlan Green © 2024

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

Inflation Still Declining

 Popular Economics Weekly

The inflation rate for wholesale goods and services (PPI) is still declining, which will hearten the inflation doves after yesterday’s Consumer Price Index (CPI) seems to be stuck in a 3 percent range. So, the Fed has a dilemma, which one to choose and use to forecast future inflation?

The Producer Price Index for final demand rose 0.2 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. The index for final demand increased 2.1 percent for the 12 months ended in March, the largest advance since rising 2.3 percent for the 12 months ended April 2023.

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What? You mean wholesale inflation is already down to 2 percent? This annual cost of raw materials and services has been at or below 2 percent for a year and hit zero percent in June 2023 as the supply chains recovered.

So, where’s the inflation the Fed is worried about? It’s because of rising wages and the higher profits of producers (corporations) and distributors that took advantage of the supply shortages during the Covid pandemic are added into the Consumer Price Index.

So-called equivalent rents are also incorporated into the CPI. And that is a lagging indicator that is based on last year’s rents, which aggravates Realtors, because one reason for the housing shortage (and higher rents) is fewer new homes are being built, largely because of higher construction costs from the very high interest rates engineered by the Federal Reserve!

The NAR’s chief economist Lawrence Yun has been loudly complaining about this anomaly:

"March inflation figures were very bad, which also means bad news for interest rates. Consumer prices reaccelerated to 3.5%,” said Yun. “This is higher than the 2% target inflation, which raises eyebrows regarding the Federal Reserve's delay in cutting interest rates. The bond market immediately responded with high yields to compensate for the loss in purchasing power.”

“One strange data point is rent, Yun said, “which the official data shows at 5.8%. The unofficial data from the apartment industry indicates falling rent due to over-construction. If rent data calms, then overall inflation will automatically be lower. It is, therefore, possible to get to the 2% inflation target by year's end, even with bumps and delays."

Said rising wages are also one reason our economy is doing so well. Consumers continuing to shop is a sign of continuing prosperity, is it not?

So why do so many Fed Governors remain hawkish and want to continue the inflation fight, instead of dropping interest rates? It could push economic growth down into no growth territory, as economists and some Fed Governors are warning.

New York Fed President John Williams said Thursday that monetary policy "is in a good place," helping to restore supply and demand balance to the economy.

"There's no clear need to adjust monetary policy in the very near term," Williams told reporters after a speech in New York.

The Fed therefore has a dilemma, as I said—when to drop their interest rates without losing their credibility in fighting inflation?

Willem Buitner and Ebrahim Rehbari, two English economists, say first improve their forecasting methodology, in a Project Syndicate article:

“There is a vibrant debate about whether firms abnormally raised their profit margins in recent years. A recent Fed study finds that nonfinancial corporate profits rose to 19% over gross value-added in the second quarter of 2021, up from 13% in the fourth quarter of 2019. But once prices have risen and profit margins are high, they are less – not more – likely to rise further than before the large price adjustments. Normalizing energy prices, supply chains, and profit margins all contributed to the faster-than-expected decline in inflation in the second half of 2023.”

They then cite Fed Chair Jerome Powell, paraphrasing Winston Churchill, recently called forecasters “a humble lot – with much to be humble about.”

It may be the opposite lesson from the Great Recession when CPI retail prices plunged to a negative 2 percent in July 2009, in part because the Fed held their 5.25% maximum rate too long.

Inflation remained in the 2 percent target range for the next 10 years, but also did GDP growth, as budget debates and a government shutdown plagued the Obama administration, which meant badly needed infrastructure, technology and climate change legislation wasn’t passed until the Biden administration.

So, the Fed should pay more attention to PPI wholesale inflation that indicates the Fed is close to its inflation target, since even slightly higher inflation is helpful when higher growth is necessary to modernize the US economy.

Harlan Green © 2024

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

Return of the Bully Mentality

 The Mortgage Corner

The NYTimes Bret Stephens lamented the “bullying mentality” at the heart of the pro-Hamas movement in a recent Op-ed that lamented their attempts to shut down pro-Israeli speakers. Hamas is a movement that wants to completely eliminate the state of Israel.

Such protests have even permeated UC Berkeley, my alma mater. It’s shades of the 1960s and 70s anti-Vietnam protests, but instead of peace loving and ultra-liberal protestors, many of the protests seem to be supporting violence and Hamas terrorists.

Such a mentality, or bullying behavior to use its more common term, is once again affecting the budget battles we still have today, especially concerning aid to Israel and Ukraine, with some Republicans attempting to even block debate on a bill, after the Biden administration was able to pass many bipartisan bills that supported the post-pandemic recovery.

It mirrors bullying behavior I wrote about in a 2014 contributor column for Huffington Post during earlier budget battles, in which I quoted Paul Krugman:

"But nobody expects to see a lot of prominent Republicans declaring that rejecting Medicaid expansion is wrong, that caring for Americans in need is more important than scoring political points against the Obama administration. As I said, there's an extraordinary ugliness of spirit abroad in today's America, which health reform has brought out into the open."

The "ugliness" he speaks of is really a bully mentality. Bullies prey on those weaker than them, and so the most conservative Republicans have tried every trick in the book to oppose any programs that smack of aiding those most in need.

“Not all Republicans are bullies, and not all Democrats enlightened progressives,” I said then. “But the bully mentality of House Speaker John Boehner's "no compromise" tactics, or Senator Mitch McConnell's filibustering of even the most innocuous Obama administration appointments have been the reason recovery from the Great Recession hasn't been stronger.”

And it continues with the attempts to bully House Speaker Mike Johnson into not advancing a desperately needed aid package that MAGA Republicans oppose by threatening to unseat the House Speaker.

Who are the bullies? Republican House members from conservative Red states, in the main that oppose almost any form of government aid—even for border protection that passed with bipartisan support in the Senate.

They belong to the states most dependent on government support. Smart Asset conducted a research on the states most dependent on the Federal government, and found they were Republican governments, with Red states making up 8 out of top 10 dependent states.

GeorgetownPPR

The result of such bullying behavior is easy to see from this Georgetown public Policy Review graph. Beginning 20 years ago median household annual incomes between red and blue states began to diverge—rising per annum to $60,000 in 2018 in Republican-led states vs. some $72,000 in Democratic-led states.

The divergence between Red and Blue states began in 2000 when the Bush administration passed massive tax cuts that took away the 4 years of budget surpluses created by the Clinton administration and cut back many social programs; at the same time it began the wars on terror.

The Center on Budget and Policy Priorities (CBPP), a non-partisan think tank, said at the time, “Despite promises from proponents of the tax cuts, evidence suggests that they did not improve economic growth or pay for themselves, but instead ballooned deficits and debt and contributed to a rise in income inequality.”

It also led to the largest federal budget deficit; in fact, the first one $trillion federal deficit in US history. And “the Bush tax cuts (including those that policymakers made permanent) would add $5.6 trillion to deficits from 2001 to 2018,” said the CBPP.

It began an alarming trend, the “no compromise” behavior that the Biden administrations has attempted to alleviate with such as its New New, Deal Infrastructure and Inflation Reduction Acts that are bringing back good jobs to those Red states.

Such bullying behavior has intentionally impoverished many, and this might be the best of times to study and counteract its effects with a bipartisan spirit that younger generations are keen to support in many polls.

A recent PEW Research poll, for instance, tells us why Gen Z’ers in particular support compromise over no compromise: “…members of Gen Z are more likely than older generations to look to government to solve problems, rather than businesses and individuals. Fully seven-in-ten Gen Zers say the government should do more to solve problems, while 29% say government is doing too many things better left to businesses and individuals.”

Can today’s younger generations overcome such a bullying mentality that has also permeated university campuses and fulfill the promise of a greater bipartisanship they say their prefer?

Harlan Green © 2024

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

March Payrolls Soaring

 Popular Economics Weekly

I said last week I don’t believe Wall Street investors are irrationally exuberant at present, contrary to those that say we are now in a stock market bubble with the record level S&P and DOW indexes.

That’s because March nonfarm payrolls increased 303,000, far above the 200,000 average poll of economists, and the unemployment rate fell slightly from 3.9 percent to 3.8 percent. This may finally put a dent in those pessimists polled that would deny the US economy is continuing its surprising surge.

FREDnonfarmpayrolls

Why? Government employment increased by 71,000, higher than the average monthly gain of 54,000 over the prior 12 months. It was mostly in local government (+49,000) and federal government (+9,000). Construction added 39,000 jobs in March, about double the average monthly gain of 19,000 over the prior 12 months.

This is largely because of President Biden’s New New Deal legislation such as the Infrastructure and Inflation Reduction Acts, but also expanding CHIPS production and a host of health care addons, all government largess that is boosting overall economic growth.

Health care added 72,000 jobs, as Biden has expanded healthcare coverages, while Obamacare enrollment is up 21 million this year.

Will this finally begin to change the irrational pessimism of Main Street, in the main ordinary working adults in the PEW study I’ve been highlighting?

In a poll by PEW Research, “About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

There’s still the inflation worry, which combined with the 8.5 percent Prime Rate that sets credit card and installment loan interest rates, is making consumers nervous.

So the key to trends are short and long term inflation expectations measured in the various surveys. And consumers don’t see inflation improving in the near term, which I maintain is in part due to the too-high Prime Rate.

I highlighted a recent National Bureau of Economic (NBER) working paper that concluded one reason consumers remain unconvinced that economic conditions have improved is because if borrowing costs were included in the inflation data, the inflation rate would be much higher.

The Federal Reserve Bank of New York’s Center for Microeconomic Data released the February 2024 Survey of Consumer Expectations, for instance, which shows that inflation expectations remained unchanged at the short-term horizon, while increasing at the medium- and longer-term horizons.

The Conference Board is similarly less sanguine about inflation: “Consumers remained concerned with elevated price levels, which predominated write-in responses, said Dana Peterson, its Chief Economist. “March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about gas prices have been trending downward.

Most Americans are exhausted and still recovering from the pandemic. And they rely on their immediate experience; much of it due to the post-COVID gyrations of the economy.

PEW in the recent poll said, however, expectations for future economic conditions are more positive than they were last spring: Today, roughly a quarter say that they expect economic conditions will be better a year from now (26%) – up from 17% in April 2023.

There is hope, in other words, the pessimists will eventually realize a surging stock market means higher corporate profits, so stocks aren’t yet overvalued. Companies wouldn’t be hiring this many workers if profits weren’t growing, so their jobs are safe.

Harlan Green © 2024

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

Q1 Growth Even Better

 The Mortgage Corner

The post-pandemic recovery is looking better this year, as higher estimates for 2024 economic growth come in.

The job market is still hot, which is why consumers keep shopping until they drop, to use a common expression for their stalwart behavior in the face of sky-high interest rates.

But there are danger signs if the Fed doesn’t begin to drop their short-term rates sooner rather than later, with just three 0.25 percent rate cuts predicted this year. This will not do much to alleviate a looming credit crunch, and effects on borrowers of the current 8.5 percent Wall Street Prime Rate.

But first the good news. The Atlanta Fed’s GDPNow estimate of first quarter GDP growth is updated regularly, and it’s improved again after some fluctuations.

AtlantaFederalReserve

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 2.8 percent on April 1, up from 2.3 percent on March 29. The uptick was mainly due to gains in nowcasts of first-quarter real personal consumption expenditures (PCE) growth and first-quarter real gross private domestic growth.”

The so-called Blue Chip Consensus estimate of GDP growth shaded gray in the graph that ranges from 1 to 2.5 percent has also been trending upward.

And the final reading of Q4 2023 U.S. Gross Domestic Product growth adjusted for inflation (real GDP) was raised slightly to a 3.4% annual pace, reflecting strong consumer spending.

FRED/CalcuatedRisk

Why the happier numbers? The US economy keeps creating more jobs, hence the large number of job vacancies in the JOLTS report. This is a gauge of the demand for labor. It changed little from January at 8.8 million job openings employers say they want to fill on the last business day of February, the U.S. Bureau of Labor Statistics reported today.

The Calculated Risk graph of the JOLTS report shows job openings (black line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column). There were 5.8 million hires and 5.6 million separations, so the 200,000 difference approximates the net number of new jobs filled.

This will help us to estimate this Friday’s unemployment rate published by the Bureau of Labor Statistics. Since JOLTS was little changed, the unemployment report should be about the same as last Month’s 225,000 nonfarm payroll jobs increase, though the unemployment rate rose to 3.9 percent.

The University of Michigan sentiment survey also showed consumers see better days ahead.

“Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long run expectations 46% above November 2023 readings. For all but one index component, readings this month were higher than all values between mid-2021 and the end of 2023.”

Now the bad news. The question is, will the Fed heed the warning of a rising unemployment rate? Fed Governors still seem convinced that the key to reaching their 2 percent inflation target rate is to cool the hot labor market. That means waiting for the unemployment rate to rise even higher than 3.9 percent, and the loss of maybe millions of jobs.

Economists are beginning to stress the urgency of future Fed rate cuts. I mentioned last week that Claudia Sahm a former Federal Reserve economist noted for creating a formula for predicting upcoming recessions, is one such calling for the Fed to cut rates sooner.

“But recessions are like snowballs, Sahm said: They start very small but can grow big enough to trigger avalanches, which can then sweep down on the economy — wiping away jobs, economic growth and income for millions of people.”

The 8.5 percent Prime Rate will eventually begin to toll on consumers pocketbooks, since most consumers rely on some form of credit. The question is not if, but when the recession bell will toll if Fed officials react too slowly to the warnings.

Harlan Green © 2024

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

Economic Facts Tell the Truth

 Financial FAQs

Here’s another reason we have avoided a recession. Regardless of the looming tax bills due in April that traditionally causes consumers to save more and spend less, consumers are spending more and saving less, per the BEA’s Personal Consumption Expenditure release.

It’s another economic fact that indicates the US economy is doing very well, and that Main Streeters should believe, contrary to what many seem to say per the polls. But will economic facts win out over the irrational pessimism showing up in consumer polls?

In a poll by PEW Research I wrote about last week, “About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

BEA.gov

Consumers are spending more than they earn because they feel better about their own situation, in spite of what they say about economic conditions. The government’s Personal Consumption Expenditures (PCE) data that the Fed watches closely in February showed consumers’ disposable income (after taxes) increasing 1.0 percent while spending had increased 4.0 percent. The personal savings rate therefore slipped from 4 percent to 3.8 percent.

Fourth quarter economic growth was just upgraded to 3.4 percent from 3.2 percent, and consumer spending, the main engine of the economy, was revised up to a 3.3% increase in the fourth quarter instead of 3% annually as well.

Why the pessimism by ordinary consumers? Because most economic data is basically unintelligible to Main Street consumers. Duncan Foley, an economics Professor at NYU’s New School maintains that the economics profession has become so complex that economists are “becoming priestly figures, with arcane knowledge and special powers” in his book, Adams Fallacy: A Guide to Economic Theory.

He asserts economics is as much philosophy as a social science, since it attempts to measure financial behavior with economic data and formulas, many of which are understandable only by economists.

More importantly “Thinking like an economist comes hard to many people…the economic way of thinking is just as value laden as any other way of thinking and can foster dangerous mistakes of judgement.”

What is hurting consumer finances the most? The Wall Street Prime Rate has risen to 8.5 percent because the Funds rate is 5.25 percent. Consumers must spend more than they save because borrowing costs have soared for those with credit card debt and installment loans.

FREDprimerate

How much longer can consumers spend as they have, as their personal savings continue to be depleted? A recent National Bureau of Economic (NBER) working paper concludes that one reason consumers remain unconvinced that economic conditions have improved, is because if borrowing costs were included in the inflation data, the inflation rate would be much higher.

“Consumers, unlike modern economists, consider the cost of money part of their cost of living. Interest rates have reached 20-year highs in the wake of the pandemic. With higher rates, mortgage payments, car payments, and other credit payments required to finance everyday purchases have risen as well.”

So that makes the Federal Reserve part of the problem since the Prime Rate is directly keyed to the Fed Funds rate, and why wouldn’t the price of things be controlled by the cost of said things??

That could be why we see so much irrational exuberance, to use former Fed Chair Greenspan’s term, in which decisions are made via hearsay and word of mouth rather than economic facts.

Consumers must deal with the cost of money when they look at their financial condition, which should mean their mood will improve when the Fed finally decides to cut interest rates.

Harlan Green © 2024

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