Job growth is slowing, but is it enough to call off the inflation hawks, including Federal Reserve Governors, from wanting more rate hikes?
The U.S. Economy is still fully employed for those wanting to work; with a historically low 3.5 percent unemployment report, 263,000 nonfarm payroll jobs, and wages rising at 5 percent in September’s unemployment report.
It was the smallest jobs gain in 17 months, and we are back to pre-pandemic levels of employment, but prices are falling very slowly because of the Ukraine War and a shortage of goods and services. The supply-chain shortages really mean there is still a worldwide shortage of supplies, though there are now plenty of trucks, ships, and planes to deliver them.
Almost all business sectors continued hiring, and people continued to travel and dine out in large numbers, as hotel, restaurants and other companies in the hospitality business created 83,000 new jobs, reflecting strong demand for services such as travel and recreation.
Hiring also rose sharply in health care and professional businesses. Manufacturers also added 22,000 jobs and construction firms hired 19,000 people.
All this activity is keeping prices from falling fast enough to please the hawks, but do we even have much choice in the matter? Noted market strategist Jim Paulsen of the Leuthold Group has done research on the history of such inflationary spikes, and they all seem to behave the same, regardless of monetary policies.
His graph shows that inflation spikes have fallen as fast as they rose. Paulsen maintains this is therefore an excellent buying opportunity for investors because it’s now possible to predict approximately when the inflation surge ends and interest rates decline, which tend to follow such inflation surges.
CPI inflation in particular has generally taken 12 months to return to more normal levels, so since this inflation spike peaked in March-April, 2022 we should see inflation returning to a normal range by next March-April 2023.
He lists the reasons inflation is already subsiding:
· Energy prices are down sharply. West Texas Intermediate crude prices CL.1, 3.36% are down 30% from June. A gallon of gasoline has fallen 23% since peaking in the same month. Energy is central to the economy, so its price has a big impact on the prices of almost everything. Plus, there is a psychological angle.
· Commodity prices are falling fast. The S&P Goldman Sachs Commodity Price index is down over 20% from its early June peak. Copper, steel and aluminum prices have fallen 31% to 48% since March. These are basic building blocks in the economy that go unfollowed. But the price declines are feeding through to headline inflation.
· Rents are now dropping. A big concern is that services inflation is hot. That’s driven to a large degree by rents, which are rolling over. Follow updates from CoStar Group CSGP, -1.89%, a great source of data on real estate trends and analytics. “We’re seeing a complete reversal of market conditions in just 12 months, going from demand significantly outstripping available units to new deliveries outpacing lackluster demand,” says Jay Lybik, CoStar’s director of multifamily analytics.
· Retailers are slashing prices to clear excess inventory. Target TGT, -1.96% grabbed headlines in early June when it reported it will have to cut prices to clear inventories. Nike NKE, -2.27% followed suit last week. Those two are not alone in over-ordering merchandise, expecting the pandemic-induced consumer preference for goods over services to continue. This inventory clearing will show up in headline inflation numbers soon.
· Supply chains are improving. Recent Fed surveys show that inventories are rising and delivery times are falling. Freight rates are down by one-third from recent highs. Monday’s Institute for Supply Management manufacturing business survey confirmed that order backlogs fell by 2.1 percentage points compared to August. Inventories also rose, indicating an easing of supply chain congestion.
And consumer surveys already show consumers becoming more confident about the future with inflation expectations already below 3 percent over the next five years.
This should be enough to convince inflation hawks to ease up on their inflation fears, and the Fed to pause and see what the holidays bring. Consumers and businesses seem to be tolerating the moderate Fed rate hikes to date. There’s no hurry to reverse course, either, unless prices begin to fall precipitously, causing fears of outright deflation, which would signal a recession. Why not show patience, Chairman Powell, as consumers seem to be doing and enjoy the holidays!
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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