The debate is raging on when the Fed will begin to lower their short-term rates in time to prevent a recession. A number of pundits and economists, such as Nobel Laureate Paul Krugman, have said the inflation battle has been won. And most Fed Governors are now saying they should not raise interest rates any higher.
The problem is the bond market doesn’t’ believe so, even believes the latest robust economic data show growth not slowing enough to pacify the Fed, hence 10-year and 30-year bond yields are soaring above 4 percent and fixed mortgage rates above 7 percent in the expectation that the Fed will cause a recession.
Well, retail sales might save us from a recesssion. Sales are surging, far above consensus estimates, recovering from negative sales growth in February and March 2023. Consumers are supposed to slow spending when the Fed raises the cost of borrowing, aren’t they? What is going on?
“Advance estimates of U.S. retail and food services sales for September 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.9 billion, up 0.7 percent (±0.5 percent) from the previous month, and up 3.8 percent (±0.7 percent) above September 2022,” said the Census Bureau’s press release.
I said last week economic growth is increasing because there has been a huge surge in job formation—336,000 new jobs in September alone with higher revisions in the past two months. And wages are now rising faster than inflation for the first time in years, so why wouldn’t consumers want to spend with the upcoming holidays?
And we have the Atlanta Fed in its latest forecast saying, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. The consensus for Q3 economic GDP growth is a bit lower, probably in the 3-4 percent range.
I maintain there’s also another reason, a rise in what is called multifactor productivity, which measures capital inputs (machines, new technologies) as well as labor productivity, and it is soaring per the below FRED graph. It rose to 3.6 percent in 2021 from zero in 2020. This will create a greater supply of things, which puts downward pressure on prices, as do more workers producing more.
Is it because of the increased use of AI, which is a capital input? That’s too soon to know, but Doctors are already reporting more accurate diagnoses using AI to quickly find bad genes to determine what should be done with a cancer tumor.
“Over the last decade, the supply chain landscape has witnessed a transformative evolution, largely propelled by technological advancements. Such innovations as AI, the Internet of Things (IoT), blockchain and sophisticated data analytics have automated and optimized various aspects of supply management,” said an Institute for Supply Management article on automation.
The real key to staying fully employed while taming inflationary surges is also to avoid too much geopolitical uncertainty (wars), and preparing better for future pandemics that disrupt said supply chains.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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