Thursday, September 8, 2022

When Bad News is Good News

Financial FAQs


Doomsayers, such as historian Niall Ferguson, may be doing the Federal Reserve’s job by predicting a recession in the coming year. Their dire warnings are causing plunging stock prices for starters. And oil prices are plummeting as well, with WTI oil down to $83 per barrel at this writing.

Dr. Ferguson warned last Friday that the world is sleepwalking into an era of political and economic upheaval similar to the 1970s — only worse.

“The ingredients of the 1970s are already in place,” Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University, told CNBC’s Steve Sedgwick.

“The monetary- and fiscal-policy mistakes of last year, which set this inflation off, are very alike to the ’60s,” he said, likening recent price hikes to the high inflation of the 1970s.

The U.S. economy is doing well, in spite of the doomsayers, as illustrated by the FRED graph above showing employment in the service-sector holding up that employs most American workers (gray bar is last recession).

The ISM’s service-sector index that measures business conditions at companies such as restaurants and hotels rose to 56.9 percent in August from 56.7 percent in the prior month, the Institute for Supply Management said Tuesday. It is the highest level since April.

“In August, the Services PMI® registered 56.9 percent, 0.2 percentage point higher than July’s reading of 56.7 percent,” said Anthony Nieves, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee. “The Business Activity Index registered 60.9 percent; an increase of 1 percentage point compared to the reading of 59.9 percent in July. The New Orders Index figure of 61.8 percent is 1.9 percentage points higher than the July reading of 59.9 percent.”

Yet inflation is already moderating with average gas prices below $4 per gallon and both the Consumer Price Index and Producer Price Indexes down from their highs.

Such fears generated by the doomsayers—with little to go on except past history rather than present conditions—are doing as much to bring down inflation as the Fed’s hawkish comments that they will continue to push up rates until inflation is tamed.

This is also indicated by the various surveys that measure consumers’ future inflation expectations, such as put out by the University of Michigan’s sentiment survey. Future expectations of CPI inflation have averaged 3 percent since 2012 when the survey was first conducted.

“The median expected year-ahead inflation rate was 4.8%, down from 5.2% last month and its lowest reading in 8 months,” said the UMich survey’s Director and Chief Economist Joanne Hsu. “Uncertainty over expectations rose considerably, particularly among lower-educated consumers. Long run expectations came in at 2.9%, remaining within the 2.9-3.1% range seen in the past year (actually since 2012 per its chart).

So, all the bad news about a possible recession may be good news for economic growth, and consumers, if it keeps the Fed from putting too much pedal to the interest rate metal, as the saying goes. The Fed may not have to keep boosting short-term rates if they see consumers and producers pulling back as demand cools.

The remarks from recognized pundits are enough to recall the draconian measures taken by former Fed Chairman Paul Volcker’s Fed that raised its overnight rate to 20 percent to combat the 1970’s era inflation, causing two subsequent recessions in the 1980s.

Fed Chair Powell’s Fed doesn’t have to fight inflation on his own. There’s help on the way from those pessimists who won’t see what is staring them in the face—an economy still recovering from the worst pandemic in 100 years.

Maybe it will keep the Fed from raising interest rates much further?

Harlan Green © 2022

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