What are we to make of a predicted jump in fourth quarter GDP growth? The Atlanta Fed’s GDPNow prediction of Q4 growth was just increased to 3.5 percent and had been creeping upward as more positive economic data came in. This is a huge increase and could mean much stronger growth in early 2023 as well.
It should mitigate recession fears, even with just released data of declining retail sales and industrial production for December. And it is intensifying debate on whether the Federal Reserve has done enough to restrict credit with interest rate hikes and reduced security holdings discussed in my last blog piece.
Sales at U.S. retailers sank -1.1 percent in December, largely because of falling gasoline prices and fewer purchases of new cars. U.S. industrial production fell -0.7 percent in December, reported the Federal Reserve. It is the biggest monthly decline since September 2021.
This was mostly due to a accelerating decline in inflation that isn’t adjusted for in the retail data, rather than an actual decline in sales. U.S. wholesale prices sank 0.5 percent in December due to cheaper food and gasoline prices, according to the government’s Produce Price Index. It was the biggest decline since April 2020, when the U.S. economy shut down to try to contain the coronavirus outbreak.
These are sure signs of slowing growth that Fed Governors should heed but are yet reluctant to do so.
The more dovish Fed Governor Richmond Fed President Tom Barkin said in a recent speech that the Fed has raised interest rates to a level where “our foot [is] unequivocally on the brake” so “it makes sense to steer more deliberately as we work to bring inflation down.”
Whereas the Federal Reserve should not “stall” on raising its benchmark rates until they are above 5 percent, said a more hawkish St. Louis Fed President James Bullard on Wednesday.
“I like the front-loading story,” Bullard said in an interview with the Wall Street Journal that was streamed live. The Fed should move as rapidly as it can to get its policy rate over 5 percent and then it can react to the data, he said.
The conflicting signals from Fed Governors aren’t good for the financial markets, which is why only bonds are rallying at the moment, since mortgage rates have declined sharply, boosting mortgage applications and perhaps the housing market.
The Atlanta Fed ‘s GDPNow report was more optimistic for several reasons.
“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.5 percent on January 19, unchanged from January 18 after rounding. After this morning’s housing starts report from the US Census Bureau, the nowcast of fourth-quarter real residential investment growth increased from -24.6 percent to -24.0 percent."
We shouldn’t take such predictions too literally, but the Atlanta Fed was close to right in predicting Q3 growth at 3.2 percent. And we still have full employment, despite the Fed’s threat to quash job growth with even higher interest rates.
Whatever the basis for the Fed Governor’s fears of inflation—whether it be that so-called inflation expectations are too high, or product costs (such as worker’s wages) rise too fast, as I’ve said earlier, the result of their credit-tightening measures is already causing a growth slowdown.
So, what to make of the fourth quarter jump in GDP growth predictions? Consumers are already spending less in part because of price discounting by retailers as consumers become more cautious because of the higher borrowing costs.
The prices of everything are beginning to decline as well, while 770,000 new workers entered the workforce in November per the unemployment report. Everyone that wants to work can work, an optimistic sign of a better future.
But the Federal Reserve Governors haven’t shown signs that they believe what they are seeing, and is now confirmed by the bond market—inflation has been steadily declining.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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