Wednesday, September 18, 2024

Retail Sales Slowing

 Financial FAQs

Breaking News: The Federal Reserve just announced it’s first rate cut of 0.50%, which lowers its Fed Funds rate from 5.25% to 4.75%.

Advance estimates of U.S. retail and food services sales for August 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $710.8 billion, an increase of 0.1 percent (±0.5 percent)* from the previous month, and up 2.1 percent (±0.5 percent) from August 2023, said the Commerce Department..

Retail sales are slowing, which is another sign that economic growth may be slowing in the third quarter. Total sales for the more recent June 2024 through August 2024 period were up just 2.3 percent (±0.5 percent) from the same period a year ago without accounting for the current 3 percent inflation rate. It means consumer spending isn’t even keeping up with rising prices at the moment.

Vice President Harris announced in her Convention acceptance speech that a major part of her presidency will be 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.”

What can she do? It's becoming clear that our Middle Class--the midsection of U.S. earners and consumers—is finding it more difficult to maintain their standard of living.

For starters, it is finally time for the Fed to act to loosen credit with some interest rate cuts that will help everyone. How many cuts are needed will be the question.

Looking at the history of past growth cycles with the Bank Loan Prime Rate that most installment loans are keyed to, (which is now 8.5%). The Prime Rate was held at 3.25% for almost seven years after the Great Recession—2009-16—and again at 3.25% for two years after the COVID-19 pandemic—2020-2022 before being raised to its current 8.50% rate.

That is a tall order, needless to say. It means bringing down credit card interest rates that are mostly 20 percent today down to 15 percent where they were during the so-called period of Great Moderation, 2019-2016. The Bank Prime Rate moves in tandem with the Fed Funds Rate with a 3.25 percent margin (5.25%+3.25%=8.50%).

These were also the periods when GDP growth was within its long-term average of 2 percent, which the Fed has always labored to achieve in its stated goal of balancing maximum employment with stable prices.

The Fed raised its Fed Funds rate 11 times from March 2022 to July 2023 before holding it at the current 5.25 percent (the equivalent of an 8.5 percent Bank Prime Rate, as I said). The Fed must therefore bring it down 2 percent to return to the historical norm of 3.25 percent.

There are many things presidential candidate Harris can do as well: a $25,000 tax deduction for first-time homebuyers, expanded childcare tax deductions, and a middle-class tax cut for those earning less than $400,000 annually that she has touted in speeches.

But let’s start with some draconian interest rate cuts that will lower borrowing costs for everyone. The Fed Funds rate was raised 11 times in 17 months. It can bring it down in one year, if it chooses—0.25% per FOMC meeting times its regular eight meeting per year, for those readers that like numbers.

This will give a huge boost to the middle class, and maintain future growth as well.

Harlan Green © 2024

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

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