It’s about time. Fed Chairman Powell has finally admitted in so many words that the U.S. economy has made a ‘soft landing’; economists’ term for inflation to have declined sufficiently that the Fed can begin to ease credit conditions by cutting their interest rates.
This will give a boost to the manufacturing sector that has been in recession, and many other sectors as well. It will most of all aid those consumers who had to borrow heavily just to maintain their lifestyle, and whose savings are exhausted. Most of all, it will avoid a recession that had probably begun in the housing and manufacturing industriesvisio.
Even more importantly, he said, we will do “everything we can to support a strong labor market.” That was a huge admission that rising wages and excessive consumer demand wasn’t the inflation culprit. It was the pandemic-induced shutdown that made everything more expensive.
What must have added urgency to his announcement was the Bureau of Labor Statistics downward revision of one year’s job formations by -818,000 nonfarm payroll jobs from March 2023 to March 2024. It turns out the labor market wasn’t as strong as originally thought.
It was mostly in the service sector, which had created the most jobs to date—professional and business services, where employment was revised down by 358,000 during the period. Leisure & hospitality had the second-largest downward revision of 150,000.
This is while the Federal Reserve’s preferred Personal Consumption Expenditure (PCE) inflation measure has remained at 2.5 percent ever since January 2024.
I have opined in past columns that inflation won’t go much lower, as long as we have decent economic growth. If prices do in fact turn negative, which is the meaning of deflation, then we will have a recession.
That is as good a definition of recession. One sees this clearly in the FRED graph above where PCE inflation dipped sharply at the 2020 recession (gray bar) and has fallen in every other recession since 1960.
There is little to fear from such an event at the moment, since predictions for third quarter economic growth are in the 2% range. Both the Atlanta Fed and New York Fed’s GDPNow estimates have dropped to 2%, because there is little investment in the housing market due the high cost of money. But that could change and boost third quarter growth with the Fed’s rate cuts.
The 30-year conventional fixed mortgage rate has dropped from 7.8% to 6.4% in less than one year. It didn’t impress the National Association of Home Builders, in part because there is still a 7.8-month buildup of new homes for sales.
There was a sudden bump in new-home sales in July, up 11 percent and 5.6 percent in a year because of the lower mortgage rates.
(But) “Despite the monthly bump in new home sales data, higher rates continue to sideline buyers as housing affordability challenges remain,” said Carl Harris, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Wichita, Kan. “The only sustainable way to ease high housing costs is to implement policies that allow builders to construct more attainable, affordable housing.”
The Fed’s decision is huge on many fronts. Stock and bond prices should be able to regain the highs reached before the Fed began to raise interest rates, for starters.
Lower interest rates should also help to cure the housing shortage.
Harlan Green © 2024
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