Inflation Still in Decline

 Popular Economics Weekly

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent on a seasonally adjusted basis, the same increase as in July, the U.S. Bureau of Labor Statistics. Over the last 12 months, the all items index increased 2.5 percent before seasonal adjustment,” said the Bureau of Labor Statistics (BLS).

Both the retail Consumer Price Index (CPI) and wholesale Producer Price Index (PPI) iinflation indicators continued to decline in August, which ensures the Fed will keep its promise and begin to cut short-term interest rates next week at its FOMC meeting.

Wholesale PPI prices have declined faster, now down to a 1.8 percent annual rise for raw materials. Retail CPI prices are holding at 2.5 percent annually, mainly because rental rates are still high due to the housing shortage. Gas and home grocery prices continued to decline.

FREDcpi/ppi

The FRED graph compares both indexes, with CPI the dark brown line. The graph shows wholesale PPI inflation (light blue line has been at or below the Fed’s 2 percent target rate several times. Whereas retail CPI prices have been more stubborn, holding at 2.5 percent annually, but plunging sharply from 3.5 percent just this March.

The PPI index actually dropped to zero inflation in June 2023 then rose again. It’s evidence that supply chains have recovered despite the monthly variations, whereas retail inflation is held up by other elements of the supply chain—such as distributors and retail stores adding in their costs and profit margins.

The CPI index for shelter rose 0.5 percent in August and was the main factor in the all items increase. The food index increased 0.1 percent in August, after rising 0.2 percent in July. The index for food away from home rose 0.3 percent over the month, while the index for food at home was unchanged. The energy index fell 0.8 percent over the month, after being unchanged the preceding month.

It’s further evidence of a very soft landing. The all-items CPI was the smallest 12-month increase since February 2021.

So what is next? How will lower interest rates affect the markets going forward?

The Atlanta Fed estimate of Q3 growth was raised to 2.5 percent on September 9, up from 2.1 percent on September 4, mainly from private domestic investment, as higher government spending in infrastructure has kicked in. 

So higher economic growth will mainly be due to even more industrial activity as the cost of borrowing continues to decline. But housing construction is sure to be boosted as well, since construction financing will now be cheaper.

That’s probably why the National Association of Homebuilders (NAHB) reported a surprising rise in new-home sales in July.

Sales rose 10.6% to a 739,000 seasonally adjusted annual rate from “significant upward revisions” in June, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales is up 5.6% from a year earlier.

And this is before any Fed rate cuts. But mortgage rates have already declined substantially with the 30-year conventional Fannie/Freddie fixed rate now as low as 5.75% for one origination point with the best credit record.

“The Census estimate of new home sales is often volatile and subject to revisions and it is possible that the July estimate for sales will be revised lower next month, said chief economist Robert Dietz. “NAHB is forecasting gradual improvements for the home building sector as the Fed eases monetary policy and mortgage interest rates trend lower.”

Another factor in the uptick of home sales is that credit conditions may be loosening for borrowers, reports the Mortgage Bankers Association (MBA).

“Credit availability increased in August, with the conventional credit index reaching its highest level since July 2022. This was driven by increased cash-out refinance and non-QM programs,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist.

Everything is now pointing to a better year ahead with lower interest rates, in other words. But a very large fly in the ointment will be what can happen with the upcoming Presidential election.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Killed America's Middle Class?

 Financial FAQs

A report from the Pew Research Center found that, for the first time since the 1970s, families defined as "middle income" are in a minority in the US - squeezed from both ends by an enlarged poverty-stricken group below them, and an enriched group above them.

Vice President Harris announced in her Convention acceptance speech that a major part of her presidency will be devoted to bring back the middle class.

“Building up the middle class will be a defining goal of my presidency,” she said. “I strongly believe when the middle class is strong, America is strong.”

It's becoming clear that our Middle Class--the midsection of U.S. earners and consumers--has shrunk alarmingly. And this is the main reason for the political polarization today that in the words of journalist Christopher Hedges, has driven the Republican Party "insane"

Our society has become so polarized that Donald Trump needed the support of the Ku Klux Klan, white nationalists, and Vladimir Putin to become President. Whereas it has been such middle class values of probity, honesty and science, first satirized in Moliere's Le Bourgeois gentilhomme, (The Middle Class Gentleman), that has been the stabilizing influence in American politics since WWII.

The main difference between poverty and middle class, and between middle class and the wealthiest, noted one researcher, "is belief in, and planning for, moving up as a working assumption." A report from the Pew Research Center found that, for the first time since the 1970s, families defined as "middle income" are actually in a minority in the US - squeezed from both ends by an enlarged poverty-stricken group below them, and an enriched group above them.

Graph: Fortune Magazine

This graph shows the shrinkage of those defined as middle class from 1979 to 2014 -- from 38.8 percent (gray line) to 32.09 percent (blue line), according to the Pew study. The shrinkage reads like a textbook example of the future that French economist Thomas Piketty predicts for the world in his 2014 best-selling, Capital in the Twenty-First Century. In 1971, there were 80 million households in the US defined as middle income - compared with a combined 52 million in the groups above and below. Now, there are 120 million middle-class families, but 121 million rich and poor - "A demographic shift that could signal a tipping point," says Pew.

So who or what is at fault for the result; record income inequality last reached in 1929 that led to the Great Depression? We can fault President Reagan, who was first to break the unions with his firing of all federally employed Air Traffic Controllers that belonged to PATCO, the traffic controller’s union.

Or, conservatives' espousal of the Reagan motto, "government is the problem," which caused the massive downsizing of government regulation, as well as the ensuing de-regulation of whole industries, such as the airlines, telecommunications, and financial markets.

But the truth was that Democrats were also implicated -- in fact, from the Presidency of Bill Clinton. For it was President Clinton who veered so far to the right in his 1966 reelection campaign that he preempted the Republican platform by continuing to deregulate the financial markets with the repeal of the Glass-Steagall Act that separated FDIC depositor-insured banking from higher risk investment banking, financed the addition of 100,000 more police to combat the drug epidemic, and downsized poverty programs with welfare reforms that required welfare recipients to take low-paying menial jobs to receive even a limited amount of financial support.

The Republicans, as Chris Hedges said, were driven politically insane. They no longer had those bread and butter issues (such as law and order, smaller government) that were once their own, which led to formation of the Tea Party, and a new political civil war declared on Big Government ruled by the northern elites. It was our 150 year-old Civil War taking a new form—red states vs. blue states—but with almost the same mix of combatants.

Even more significant is the record income and wealth inequality since 1979 that has resulted; a more partisan and unequal electorate fearing further losses in their status as Americans.

Vice President Harris has said building up the middle class again is one of her priorities. So let us hope a majority of Americans realize this as well in November; that our prosperity and stability rest on a middle class that hasn't given up hope for a better future.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Antonin Scalia’s White, Male Legacy

 Answering Kennedy's Call

Supreme Court Justice Antonin Scalia's passing is a shock to die-hard conservatives for good reason. He was the bastion and spokesperson of the originalist interpretation of the Constitution, which meant any law had to divine the original intentions of the founding white male fathers of our nation.

AK-47

The two students and two teachers at Appalachee High School were killed by a 14-year old student with an AR-15 assault rifle has brought back the debate on the causes of such gun violence than kills more than 30,000 Americans every year.

Wednesday’s mass shooting marked the 45th school shooting of 2024 and the deadliest US school shooting since the March 2023 massacre at The Covenant School in Nashville,” said CNN.

Military-style assault rifles had been banned for 10 years during the Clinton administration, but the Republican-led Bush administration didn’t renew the ban. Why? One man, SCOTUS Justice Antonin Scalia, was almost solely responsible for the Supreme Court ruling that legalized assault rifles for use by common citizens.

I wrote about it in Huffington Post at the time of Scalia’s death in 2016.

“Supreme Court Justice Antonin Scalia's passing is a shock to die-hard conservatives for good reason. He was the bastion and spokesperson of the originalist interpretation of the Constitution, which meant any law had to divine the original intentions of the slave-owning, landowning, founding white male fathers of our nation, which excluded women and non-landowning males (and slaves, of course) from representation.”

So that meant turning the clock back at least one century to a time when the white male patriarchy still ruled, which was a much less democratic time. Scalia's most noted opinion was to expand Second Amendment gun owners' rights, which 'protected' every citizen's right to own a gun almost without restriction, because he convinced the majority of SCOTUS that the Second Amendment right to bear arms also protected an individual's right of self-defense.

The result has been record gun sales and gun deaths (30,000+ per year), as well as mass shootings, and no limit to the purchase of military-style assault rifles with unlimited magazines. Another little-noted result was the higher incidence of gun violence in households with guns, according to the Law Center to Prevent Gun Violence.

In fact, "Research published in the New England Journal of Medicine found that living in a home where guns are kept increased an individual's risk of death by homicide by between 40 and 170 percent," said the Law Center. "Another study published in the American Journal of Epidemiology similarly found that "persons with guns in the home were at greater risk of dying from a homicide in the home than those without guns in the home." This study determined that the presence of guns in the home increased an individual's risk of death by homicide by 90 percent.

Whereas other developed countries without that Second Amendment 'right', such as Australia, do not allow the purchase of a gun for self-defense to be a sufficient reason for owning such a weapon. And Australia has not had a single incidence of mass shootings since 1996 and the passing of its gun control legislation.

Does it make sense for anyone to own a military-style assault rifle for self-defense when it was manufactured for wartime? The definition of the word, assault, means just that. It was made to assault an enemy during wartime. What purpose could it have in a home, even as a semi-automatic—where children live?

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Economy Has anded--Part II

 Popular Economics Weekly

Fed Chairman Powell finally admitted the U.S. economy has made a soft landing at this year’s Jackson Hole Federal Reserve Conference. “The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” he said in his speech.

FREDunemployment

It’s a very soft landing. The unemployment rate dropped back to 4.2 percent from 4.3 percent in July and just 142,000 nonfarm payroll jobs were created in August U.S. job gains in July were also lowered to 89,000 from 114,000, and in June revised down to 118,000 from 179,000.

The Fed is now playing catchup in the opposite direction. They waited too long to begin to restrict credit when the inflation rate first shot up in 2020 and perhaps waited too long to cut interest rates, since the downward momentum of lower job creation has begun.

This doesn’t mean a looming recession, however. It’s possible that third quarter economic growth will remain positive. Most estimates for Q3 growth are in the 2 percent range, down from the 3 percent Q2 GDP growth rate.

The Atlanta Fed estimate of Q3 growth said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.1 percent on September 4, up from 2.0 percent on September 3,” because consumer spending has slowed but there was an increase in domestic investment.

The New York Fed’s ‘Nowcast’ growth estimate for Q3 is 2.6%.

The Fed’s tools to ‘brake’ inflation have always been crude since they must look in the rearview mirror for data to buttress their policies. They must convince the financial markets as well as the public that their moves are credible with data that measures past months to spot trends—mainly consumer spending and employment.

Better news is that the so-called yield curve (the relation of 2-year bond yields to 10-year bond yields) is no longer inverted. The 2-year bond yield has plunged to 3.67% and 10-year bond yield is 3.87% at this writing.

It has been a credible recession indicator when yields are inverted because banks can’t lend at a lower rate than their cost of money.

The yield curve is steepening again, in other words, because conditions are looking better for investors so that long-term yields are higher than short-term bond yields, which is where they should be in more normal times.

Consumers must now adjust as well—and save a bit more for any future uncertainties. But they are still solvent and fully employed. And the fact that the Fed is now poised to loosen the credit tourniquet that has stifled growth in many sectors (such as housing and manufacturing) should mean several years of rising prosperity for most Americans.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why No Recession?

 Financial FAQs

I said last month we know why the US economy is still growing. Consumers keep spending, and the unemployment rate, though rising, is just 4.3 percent. The second revision of second quarter economic growth confirms this as well, jumping from 2.4 to a 3.0 percent growth rate.

But the downward revision of -818,000 nonfarm payroll jobs by the BLS from March 2023 to March 2024 showed not as many jobs were created as originally estimated, and it has begun to panic the financial markets.

And if consumers don’t keep spending where they spend the most—leisure and healthcare—what will keep US from a recession? It’s government spending via Bidenomics, President Biden’s legislation to modernize the economy. We should ignore the protests from conservatives of too much government spending and too much public debt for the moment. It’s what is keeping us at full employment.

Paul Krugman opined earlier in the year on the particulars of President Biden’s ‘New’ New Deal legislation, which is investing as much in the U.S. economy as Roosevelt’s New Deal.

“The fact, however, is that Biden has put in place a very ambitious agenda — major enhancements of Obamacare, student debt relief, big infrastructure spending, large-scale promotion of semiconductors and green energy that have led to a surge in manufacturing investment.”

FREDmanfacturing

It has led to a very big jump in Manufacturing investment, for starters, that is creating more high-paying jobs—800,000 manufacturing jobs to date. Although overall manufacturing activity has been shrinking per the latest surveys—even with investments in the construction of new Manufacturing facilities having soared from $78 billion in 2020 to $237 billion this July—it should means better days ahead for the manufacturing sector.

This is important because July’s BLS Job Openings and Labor Turnover Survey (JOLTS) report shows a weakening labor market. The number of job openings dropped to 7.7 million from its high of 11 million openings in 2022 as the economy rushed to recover from the COVID-19 pandemic. (That’s still a lot of jobs looking for workers.)

The number of job openings decreased in health care and social assistance (-187,000); state and local government, excluding education (-101,000); and transportation, warehousing, and utilities (-88,000). Job openings increased in professional and business services (+178,000) and in federal government (+28,000).

 BLS.gov

This is further evidence that growth will continue and perhaps keep consumers shopping for bargains, which is why inflation and rising prices should no longer be a problem, even as the Fed begins to cut interest rates this month.

Consumer confidence is rising again as well, which should help sustain the rally, as consumers seem to be worrying less about their job, per the Conference Board survey, even though personal savings have declined to dangerous lows.

“The Conference Board Consumer Confidence Index® rose in August to 103.3 (1985=100), from an upwardly revised 101.9 in July. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—improved to 134.4 from 133.1 in July.”

So we still depend on consumers to carry most of the load to sustain the strong growth, but government has to give a hand to keep them “in the game,” as I’ve been saying.

We will know more come Friday’s unemployment report.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen