Fed Chair Jerome Powell was as ambiguous as ever at yesterday’s post-FOMC press conference. He reported the Fed Governors decided no more rate hikes were warranted, but they needed to be more confident that inflation had been tamed before actually cutting their Fed Funds rate.
When asked by several reporters how much confidence was needed, he responded they needed “greater confidence” but couldn’t be pinned down on what that meant.
In fact, Powell’s Fed Governors don’t seem to understand the main cause of post-pandemic inflation. Most economists today attribute it to the worldwide economic shutdown that stopped production, which took years to recover, contributing to the scarcities that scared consumers—remember the toilet paper shortage?
So what caused such a precipitous drop in inflation, the fastest drop in post-WWII history? Supply-chains have recovered, and we are beginning to see a large jump in labor productivity, which is a significant increase in the amount of goods and services produced per worker-hour.
I maintain a major reason supply chains have recovered so quickly is the surge in labor productivity that began in the first quarter of 2023. And why not? There had been a large increase in capital expenditures in the second quarter of 2021 as companies ramped up production after the shutdown.
Capital expenditures, or CAPEX, is the seed-money that increases productivity by investing in new technologies and factories. It fell as per the above FRED graph when the Fed began to raise interest rates, but corporations were able to absorb the interest rate increases as their profits soared and the various PPE and PPI aid money began to filter into the equation.
“Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported today, as output increased 3.7 percent and hours worked increased 0.4 percent.”
This is why financial markets are now beginning to push back at Powell’s Fed Governors seeming indecision on when to cut interest rates.
MarketWatch reported that Mohamed El-Erian, chief economic adviser at Allianz, said in a post on X, the social-media platform formerly known as Twitter, Powell’s decision to push back against a March cut “is fueling more questions about the risks of the Fed being late again, albeit in a different direction.”
But the markets like to respond to facts rather than hearsay and we now have a huge revision to the GDPNow growth estimate from the Atlanta Fed that I’ve been following. In fact, GDP growth may be accelerating in 2024.
It’s revision said: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26.”
The revision came after this morning’s construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, as well as first-quarter real gross private domestic investment growth—all showed sharp increases.
So, is the large jump in the Q1 GDP forecast too outrageous? Maybe not, because construction spending is soaring from the various government initiatives, such as the Infrastructure and Inflation Reduction Acts, and the Manufacturing ISM report has turned slightly positive after one year of decline.
Spending just on construction projects rose 0.9% in December to $2.1 trillion, the Commerce Department reported Thursday. It has risen every month in 2023. It is what the government and private companies spend on projects, from housing to highways.
And I also reported on the strong Q1 real gross domestic investment (Capex) growth above.
So, what will higher economic growth do to inflation? It hasn’t hurt the inflation decline to date. Why, because so much of the spending that goes into the GDP is on modernizing the US economy, further increasing US labor productivity.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment