The Atlanta Fed’s GDPnow graph perfectly illustrates how uncertain are predictions for second quarter economic growth in 2023. They go literally from negative growth to 2 percent plus!
Why? Because though manufacturing sector growth has been negative for seven months, the service sector of our economy has been supporting jobs and the US economy, which makes up most of economic activity these days.
The latest reading by the S&P Global “flash” U.S. service sector activity index fell to a 54.1 in June from 54.9 in the prior month, a two-month low. Economists surveyed by the Wall Street Journal had forecast a reading of 53.3.
The S&P Global “flash” U.S. manufacturing sector index, meanwhile, slid to a six-month low of 46.3 from 48.4 in May. Any reading above 50 in the surveys shows continuing growth.
And Treasury Secretary Yellen has been more optimistic of late, though warned about the danger to growth if the US Fed continues to raise interest rates.
““I’m not going to say it’s not a risk, because the Fed is tightening policy,” she added, referring to the Federal Reserve’s series of interest-rate increases.
The Federal Reserve has announced its first rate pause since it began to raise short term rates last year. But it threatened to raise rates twice more this year after a six week pause to study the impact of its policies to date.
The Atlanta Fed’s survey attempts to take in any and all indicators of the growth trajectory, so I am conjecturing economists cannot agree on which is the better model, but the fact is we are still at full employment, which has defied the US Fed’s attempts to slow consumer demand quickly enough to their liking, which they say must mean more joblessness! That was the mistake of Greenspan’s tenure as Fed Chairman that I’ve been harping on ad nauseum. He kept raising rates until it caused the Great Recession!
“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 1.9 percent on June 20, up from 1.8 percent on June 15. After this morning's housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth increased from -2.1 percent to 2.2 percent.”
I said recently that inflation may have all but disappeared by next year, at least for wholesale goods and services, as the Producer Price Index took a sudden plunge in May to an almost zero inflation rate. And it measures the price of wholesale material costs that go into the PPI.
The Producer Price Index (PPI), the Federal Government’s wholesale inflation indicator, shows the Federal Reserve has already overreacted to the inflation surge. Its index for final demand plunged from 2.3 percent to 1.2 percent YoY in just one month, April to May 2023.
“In May, the decline in the final demand index can be traced to prices for final demand goods, which fell 1.6 percent. The index for final demand services increased 0.2 percent,” said the BLS. “Prices for final demand less foods, energy, and trade services were unchanged in May after inching up 0.1 percent in April.”
These changes will also be reflected in the retail Consumer Price Index in coming months, and we could begin to experience a close to zero overall inflation rate if it continues its downward trend very soon.
And, though I’m in danger of repeating myself too much, another inflation indicator is moving quickly downward, U.S. import prices, which fell 4.6 percent from March 2022 to March 2023. This was their largest over-the-year drop since import prices declined 6.3 percent from May 2019 to May 2020.
This basically means the US economy is at full employment, so why wouldn’t consumers spend more on leisure activities such as dining out and travel?
Compounding the confusion over economic growth, Fed Governors seem as uncertain about the future. Richmond Fed Governor Tom Barkin said it’s too soon to decide on more rate increases.
“I want to reiterate that 2% inflation is our target, and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target,” he said Friday in a speech in Maryland.
“If coming data doesn’t support that story, I’m comfortable doing more,” he said. Barkin is not a voting member this year of the Fed’s interest-rate setting panel.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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