“The economy hasn’t lost its mojo.” MarketWatch

 Financial FAQs

“Advance estimates of U.S. retail and food services sales for June 2026, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $768.6 billion, up 0.2 percent (±0.4 percent)* from the previous month, and up 6.7 percent (±0.5 percent) from June 2025.” Census.gov

FREDretailsales

Headlines, such as that consumers “haven’t lost their mojo” have popped up when retail sales rose 0.2 percent in June. It’s a sign of consumers are willing to ‘shop until they drop’, which may keep the U.S. economy growing for some time.

It also means that same level of irrational exuberance of the 1990s is back once again, with the major market indexes at record levels, and consumers seemingly oblivious to the conditions that prevailed during the late 1990s.

 Nobel Laureate Robert Shiller first presented the term irrational exuberance to Alan Greenspan’s Federal Reserve Governors in 1996 to evidence how overvalued stock market levels had become at the time. But it wasn’t until 2000 that the dot-com asset bubble burst that many market commentators and some economists are comparing to the current record market rally.

The MarketWatch headline portrays most of the media’s reaction to the latest Advance Retail and Food sales report by the U.S. Census Bureau. The slightly hysterical headline is really a sign of relief because of the slight drop in monthly gas prices that prevailed during the 60-day cease fire agreement.

But the cease fire has ended. And it reveals how badly the Trump tariffs and Iran war have hurt consumer spending, still the backbone of U.S. economic growth. We have been a consumer-driven economy since the 1950s and end of World War II.

And since retail sales are not inflation adjusted, when adjusted for inflation, gas and food in particular have become less affordable. Retail inflation is still above 3 percent. Retail sales have fluctuated wildly, as per the above graph, rising 6.7 percent in 12 months because consumer bought more in earlier months to get ahead of the rising inflation—i.e., before the Iran War began to jack up everyday prices.

Though sales at car dealers and online merchants both jumped about 2 percent in June, sales fell at grocery, clothing and healthcare stores, says MarketWatch.

So, consumers are still shopping because they must, putting them further in debt. The Consumer Price Index for basic necessities like gas and food is still above 3 percent, as I said, and the wholesale (PPI) price index for raw materials that go into retail goods is 5.5 percent annually, the U.S. Bureau of Labor Statistics reported. It’s still the largest rise in more than three years.

We don’t have to look at just the dot-com bubble to compare, either. I see an unsettling resemblance to the ‘roaring twenties’ of an earlier era from the recovery of another pandemic, the Spanish Flu pandemic of 1919 to 1920 that killed what would be millions of Americans if at our current population level.

It was a long recovery—until 1929 and the Black Friday stock market crash that led to the Great Depression, caused in part by another era of high tariffs that led to product shortages.

How long may this era of irrational exuberance last that has driven the financial markets to record levels with so much wealth pouring into a new space age that will take us years to return to the moon, much less turn a profit?

We are at another turning point in what currently looks like an A.I. revolution, much like the Internet’s introduction that took decades to adopt, and recovered from a Great Recession, let’s not forget.

So the best way to survive another bout of irrational exuberance is to be patient, in my opinion, rather than listen to the crowd that promises the next big thing.

Harlan Green © 2026

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

Biden vs. Trump Presidency

 Popular Economics Weekly

“The Producer Price Index for final demand increased 1.4 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.7 percent in March and 0.6 percent in February. The April increase is the largest advance since rising 1.7 percent in March 2022.” BLS.gov

FREDppi

Trump’s economy vs. Biden’s? It’s no contest. Trump made his major reelection campaign about attacking Biden’s inflation problem, yet the latest wholesale and retail inflation data show President Biden has easily won the inflation battle, as well as that for job creation and economic growth.

The retail Consumer Price Index is the highest in three years, and the wholesale Producer Price Index pictured above is now the highest in four years on Trump’s watch.

There’s no contest with job creation and economic growth as well. A total 234,000 payrolls jobs were added in December 2024, Biden’s last month in office; more than the 181,000 jobs that were created in all of Trump’s first year.

That’s because of Trump’s mismanagement of the illegal tariff war on the rest of the world, the 43-day government shutdown over Obama insurance subsidies (longest in history) that temporally laid off millions of workers and the immigrant deportations.

The illegal tariffs began the inflation surge we are seeing today in import prices. “The 12-month rise in U.S. import prices was the largest over-the-year advance since the index increased 4.2 percent for the year ended October 2022,” per the BLS.

This will also make it even more difficult to lower interest rates in 2026 for the Federal Reserve under new Republican Chairman Kevin Warsh. In fact, the Fed may have to raise their rates if inflation continues to rise and becomes unmanageable as happened during Biden’s term.

That’s because we are not yet accounting for the damage from the Iran war that is elevating prices for all the petroleum byproducts important for jobs and economic growth that are sure to seep into the inflation numbers.

Even if the Iran war is settled soon, predictions are it may take at least one year for a return to normal traffic in the Gulf and Hurmuz Strait that supplies at least 20 percent of the world’s petroleum.

The damage to jobs and economic growth in Trump’s first year shows the extremes to which Republicans will go to ignore basic economic principles (e.g., tariffs are a tax on consumers and producers) to protect their tax cuts.

Even higher inflation is sure to follow. The energy sector is already being hit with higher gas and diesel prices The AI buildout will increase the demand for electricity as the huge AI energy generation centers kick in from the $billions being invested, while Trump continues to cancel more alternative energy solar and wind projects that provide cheaper electricity.

From the start of the Biden presidency through December 2024, the Bureau of Labor Statistics (BLS) recorded an increase of about 16.1 million jobs, the highest total during a presidential term in history, equal to 336,000 per month (my emphasis).

And economic growth averaged more than 3 percent during his four years because of bipartisan plans to modernize the American economy.

What happened on Trump’s watch? Republicans have paid the economic price for refusing to compromise. America’s electorate came to believe that Republicans knew more about economic growth and what it takes to lower everyday prices for Americans.

Harlan Green © 2026

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

Why Start A War?

 Financial FAQs

“The Producer Price Index for final demand increased 0.7 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved up 0.5 percent in January and 0.4 percent in December 2025. (See table A.) On an unadjusted basis, the index for final demand rose 3.4 percent for the 12 months ended in February, the largest 12- month advance since increasing 3.4 percent in February 2025.” BLS.gov

FREDppi

Why start a war when President Trump’s tariffs are already raising the cost of everything? Because “The United States is the largest Oil Producer in the World, by far, so when oil prices go up, we make a lot of money,” Trump said in a post on Truth Social last week.

Who makes a lot of money? Most Americans could be losing a lot of money over the sudden rise in energy prices it is precipitating, but not his family and oil buddies, obviously.

His thoughtless remarks have put him in a bind, which is why he is lashing out at allies and enemies alike because they don’t want to fix the damage it is causing.

Right now it is the boost it has given to wholesale inflation. The Producer Price Index for wholesale goods, imported goods in the main, is climbing again.

And the tariff question is far from settled with the Trump administration required to pay back much of the $1.4 billion in tariffs that were illegal, according to the Supreme Court.

We add to that the resignation of Joe Kent, Trump’s top counter terrorism appointment, who said Trump attacked Iran because Netanyahu told him to, not because of some imminent danger. The former Director of the National Counterterrorism Center said “I cannot in good conscience support the ongoing war in Iran. Iran posed no imminent threat to our nation”.

So with the Strait of Hormuz closed that is choking off 20 percent of the world’s oil supply from going anywhere, the PPI wholesale cost of things is now the highest since February 2025.

This is probably why Fed Chair Powell announcement after Wednesday’s FOMC meeting that there was little chance of more than one rate cut in 2026, and maybe even a rate hike if Trump can’t stop the bombing and find a way to call the bombing campaign a victory. He must also find a way to open the Strait of Hormuz, of course.

The Federal Reserve stuck to its guns that one interest-rate cut this year was likely, but stressed conflict in the Middle East made its forecast uncertain. The Fed voted 11 to 1 to leave its key rate unchanged in the range of 3.5% to 3.75%.

BEA.gov

The Fed Governors also predicted overall GDP growth of 2.4 percent in 2026, even though Q4 2025 Real GDP growth slowed to just 0.7 percent. So I don’t understand the Fed’s optimism over economic growth.

The real culprit behind slowing GDP growth is less consumer spending. Fewer consumers are holding jobs for starters, and essentials like gas and electricity prices are soaring because of the Iran war as well as the tariffs.

So, the Fed wants to lower rates further to encourage more hires but rising inflation is holding them back. And Powell at his press conference said that conditions would have to be much worse for signs of stagflation such as occurred in the 1970s with the OPEC oil embargo.

Powell and the Fed Governors were surprisingly upbeat about our economic future, which is strange when Trump has started a war he never really planned or adequately prepared for.

Harlan Green © 2026

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

Stagflation --II?

 Financial FAQs

“The Producer Price Index for final demand increased 0.5 percent in January. Prices for final demand services advanced 0.8 percent, and the index for final demand goods declined 0.3 percent. On an unadjusted basis, the index for final demand rose 2.9 percent for the 12 months ended in January.” BLS.gov

FREDbls

Why shouldn’t President Trump’s new Gulf War repeat the 1970’s Arab Oil Embargo (OPEC) stagflation—slowing economic growth + higher inflation—that caused several recessions and resulted in the double-digit inflation of the era?

Iran has said it is closing the Gulf of Hormuz. It has been producing three million barrels of oil daily, has 24 percent of Middle East oil reserves and 12 percent of world reserves, and 30 percent of the world’s oil supply goes through the Gulf, according to the U.S. Energy Information Administration.

Though oil is not as important and energy source now as it was then, says Paul Krugman in Substack, it will still cause higher energy prices—maybe 10 percent higher or more, according to the experts—and oil and gas prices are still a major factor in the inflation equation.

The Producer Price Index measures wholesale prices for products and services that go into finished products have been rising throughout last year. So it is the first place economists look to see the direction of inflation.

Wholesale inflation is surging in large part because it measures the import prices of the raw materials, such as auto parts, that have been boosted by Trump’s tariffs.

Defense Department Secretary Hegseth was quick to say in the first press conference that the Iran war wouldn’t be a repeat of the Iraq war that would mire US in another long war.

But the 1970’s era of stagflation was caused by more than scarce oil. Labor unions were stronger then and could lobby for higher wages to pay for the higher prices, which in turn kept inflation rising in a wage-price spiral until it reached an eye-watering 14 percent

And we have a similar labor problem today. Workers can lobby for higher wages today because there are fewer of them in the workforce. Trump is deporting many of the undocumented workers that work in construction and agriculture, and many of the rest of the estimated 11 million are hiding rather than going to work. Also AI, CHAT GBT, and the like are causing more layoffs at major employers such as Amazon, for starters, further shrinking our workforce.

The irony is that the massive investments in building out the AI energy centers is already making electricity more expensive as well as putting more white-collar employees out of work.

This means fewer consumers are shopping when 70 percent of GDP growth is generated by American consumers! So, I see slowing economic growth as well.

A declining workforce pushing for higher wages that faces higher oil, gas and electricity prices will put more pressure on inflation, and could lead to the classic wage-price spiral that was the ultimate cause of 1970’s stagflation. This is while Trump is saying the Iran war could last just weeks?

The DOW Index has plunged more than -1100 points at this writing on fears the war will spread throughout the Middle East and beyond.

So, our stock market’s behavior will probably determine how long our TACO President will want to prolong this war.

Harlan Green © 2026

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

This Inflation Isn't Temporary

Popular Economics Weekly

The Producer Price Index for final demand rose 0.9 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices were unchanged in June and moved up 0.4 percent in May. BLS.gov

 

FREDppi

The Trump administration wants Americans to believe the current inflationary surge is temporary. Why? Because it needs the Fed to lower interest rates to keep economic growth from stalling because of the tariffs. And lowering interest rates in what is still a fully-employed economy is inflationary.

It’s the kind of reverse logic that has characterized so much of the MAGA crowd that wants to believe conspiracies (Epstein?) rather than economic realities.

The Producer Price Index of wholesale goods just out is another unwelcome fact that inflation isn’t temporary because of the tariffs. The tariffs paid by American importers at ports of entry are already showing up in the prices of raw materials producers must pay that will ultimately be passed on to American consumers and businesses.

The PPI is showing July wholesale prices (dark red line) have risen much faster than retail prices (light red line) in the above FRED graph—3.3% vs. 2.7% in a year.

Coffee prices are already up 15%, for instance. Could that have to do with the 50% tariff Trump has levied on Brazil, a major coffee grower, because he doesn’t like its socialist government?

So an unfavorable PPI is another measure of inflation the Trump administration will want to ‘cook’ if their choice for a new head of the Bureau of Labor Statistics is confirmed by the Senate.

 It prices the raw materials and services that go into the retail CPI Index that measures the final consumption of finished products and services. That’s no surprise because material input costs have been rising since April 2 and the announcement of the tariff wars, which belies Trump’s lies that the countries exporting to us will bear the cost of those import taxes for the great privilege of selling to US, yet are ultimately paid by Americans!

All eyes are now on what Fed Chair Powell will say at the Kansas Fed’s Jackson Hole conference this week. Will the 12 Fed Governors that vote at the FOMC meetings decide once again that there is little likelihood of an interest rate cut in September?

They may have to, because the biggest rise in wholesale prices was in the service sector that powers almost two-thirds of consumer activities (leisure, travel, dining out, transportation, and construction).

The index for final demand services moved up 1.1 percent in July, the largest advance since rising 1.3 percent in March 2022. It showed importers are also increasing their profit margins and so passing on the increased costs to consumers and businesses.

Over half of the broad-based July increase is attributable to margins for final demand trade services, which 

And consumers are beginning to notice, according to the University of Michigan’s consumer sentiment survey.

“Consumer sentiment fell back about 5% in August, declining for the first time in four months. This deterioration largely stems from rising worries about inflation. Buying conditions for durables plunged 14%, its lowest reading in a year, on the basis of high prices,” reports survey Director Joanne Hsu.

Though it hasn’t done much damage to retail sales just yet. Retail sales rose 0.5% last month following a nearly 1% increase in June, reports the Census Bureau.

Automobile sales rose for the second month in a row, said MarketWatch’s Jeffry Bartash. Car buyers have been buying vehicles for the past few months to once again avoid anticipated price increases in the coming months as tariffs take full effect.

So the damage is already being done by Donald Trump’s tariffs. Even grocery prices are soaring that depend on what is produced domestically. Now why would grocery prices also be increasing that aren’t taxed by tariffs? Could it be that there are fewer farm workers to harvest the crops this year?? The ICE folks could answer that question!

Harlan Green © 2025

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

 

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

Where's the Inflation--Part II?

 Popular Economics Weekly

We can also look at the behavior of wholesale prices to see if inflation has been conquered. The Producer Price Index has been at or below the Fed’s target 2 percent since May 2023. It’s the cost of raw materials that go into finished products, so it should have told Fed officials that retail inflation will soon follow that is now rising at 3.2 percent.

What is holding up retail CPI prices? Market scarcities that have enabled producers to temporarily boost their profit margins. But the PPI tells us that scarcities are quickly disappearing; in autos and gas, for instance, where prices had the largest drop in the PPI.

FREDppifinaldemand

“The Producer Price Index for final demand fell 0.5 percent in October, seasonally adjusted, after advancing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. The October decline is the largest decrease in final demand prices since a 1.2-percent drop in April 2020.”

What more proof does the Fed need to begin thinking about dropping interest rates? Corporations are reporting record profits in the third quarter due to those pandemic-induced scarcities and 98 percent reporting in the third quarter say they are increasing their dividends, a sure sign of increased profits.

The PPI is slightly higher without volatile foods, energy, and trade services, advancing +0.1 percent in October, the fifth consecutive rise. For the 12 months ended in October, prices for final demand less foods, energy, and trade services moved up 2.9 percent.

This may be the ‘head fake’ that Chairman Powell was talking about at a recent conference. What if food and energy scarcities surface again with all the geopolitical uncertainty?

If it wasn’t for the huge 4.9 percent Q3 GDP growth, economists will begin to worry that falling inflation shows a drop in the demand for goods and services, which does signal a slowdown.

Slowing retain sales can be the first sign of any slowdown in activity. Are shoppers already shopped out for the holidays? Retail sales have declined, falling 0.1 percent in October for the first time in seven months, but the decline is unlikely to last as Americans enter the holiday-shopping season, especially if prices are no longer rising.

There was better news with housing. The 30-year fixed-rate mortgage dropped a quarter of a percent to 7.50%, the largest one-week decrease since last November, according to Freddie Mac, the guarantor of mortgages.

It should kick start more housing sales, according to Lawrence Yun, the NAR’s chief economist. Yun forecasts that interest rates will drop to between 6-7% by the spring buying season and anticipates that more sellers will enter the market.

“Builders are back on their feet, up 5% in newly constructed home sales year to date,” said Yun. “Builders can simply create inventory. In a housing shortage environment, builders are really benefiting.”

What happens next year may depend on the housing market, which traditionally takes up approximately 7 percent of GDP activity, but is also a leading indicator of market direction.

The overall decline in interest rates we are already seeing will give a boost to almost every sector of economic activity going into next year.

Harlan Green © 2023

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

What Happened to Inflation?

 Popular Economics Weekly

FREDppifinaldemand

What happened to the inflation problem? The latest wholesale inflation data show the Fed has more than succeeded in its campaign to tame inflation.

The wholesale Producer Price Index (PPI) for final demand in wholesale goods and services barely grew at all (see the FRED graph above) in the Bureau of Labor Statistics latest release.

Wholesale prices rose just 0.1 percent in June, extending a string of weak readings that suggest inflation in the U.S. is likely to continue to decelerate. Over the past 12 months the PPI plunged to 0.1 percent from 1.1 percent in the prior month. That’s the lowest reading since September 2020.

This is while Americans are still fully employed. The Fed consensus had postulated at least a 5 percent unemployment rate would be needed to bring inflation down to their 2 percent target rate. And former Treasury Secretary Larry Summers infamously said unemployment could go as 7 percent with the loss of several million jobs to tame the inflation tiger.

It will only intensify the debate among economists whether there will be a ‘soft landing’, or whether there will be no landing at all—a ‘no landing’ scenario in which economic growth continues to be positive into next year, regardless of the predictions that higher interest rates must ultimately lead to a recession (i.e., negative growth).

In fact, wholesale inflation (mainly the cost of raw materials) is in danger of turning negative, which means retail prices could also fall. (This would be a danger sign if not for other factors, since falling prices are a deflationary trend if passed on to retail prices, which usually means a looming recession.)

But with the current 3.6 percent unemployment rate, and $trillions being invested in modernizing US infrastructure this decade, this is unlikely. Americans will be employed in better-paying jobs for years to come.

Even the so-called core prices the Fed loves to cite as a more stubborn indicator of inflation decelerated to 2.6 percent from 2.8 percent, marking the smallest increase since March 2021.

Why this sudden deceleration in inflation, after all the predictions that it will remain high and become embedded in consumers’ expectations?

Firstly, the supply-chain shortage has disappeared, and every country is racing to resupply themselves from the effects of the pandemic,

I earlier cited a Global Finance Magazine article that touted the increased capital spending everywhere today, not just in the US, since the pandemic:

“Despite concerns that economic growth may slow as central banks tap the brakes to combat inflation, companies around the globe are in a spending boom for capital such as factories and for things like digitalization and automation, 5G networks and the transition to clean energy.”

The other concern has been that wage increases might cause inflation expectations to become ‘embedded’ in prices for years to come.

FREDwagesandsalaries

Yet household incomes haven’t kept up with inflation since the 1970s, as portrayed in the FRED graph dating from 1950. They are now rising at just 1.2 percent quarterly, seasonally adjusted, in the face of full employment, according to the latest FRED data.

So now we have the means and opportunity to begin the process of renewing the American economy with governments spending again, and maybe avoiding any recession with a ‘no landing’ outcome.

Harlan Green © 2023

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

No More Inflation?

 Financial FAQs

FREDppifinaldemand

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.

Inflation may have all but disappeared by then, at least for wholesale goods and services that took a sudden plunge in May.

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.

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.

All signs are now pointing to lessening demand from consumers and businesses. So, do consumers and businesses want to live in a zero-inflation rate environment if the Fed keeps raising interest rates?

No, is the short answer because when prices stop rising they quickly begin to fall in such a consumer-oriented economy as ours. That's good, isn’t it? But not too much because it’s a sign of falling demand for products, and less demand means businesses see shrinking markets and soon begin to cut jobs.

This hasn’t happened yet but we have a good example in the last decade as it recovered from the Great Recession. PPI for Final Demand was at zero inflation from January 2015 to August 2016 YoY, and quarterly GDP growth was less than 1 percent during the period, per the St. Louis FRED.

It looks like Ian Shepherdson’s remarks are coming true that I quoted recently.

“The forces that drove up inflation since the onset of the Covid pandemic are reversing rapidly,” said Ian Shepherdson, chief economist at Pantheon Economics, in a recent Barron’s article. “Over the next year, both the headline and core rates—the latter excludes food and energy prices—will drop sharply. By the end of 2024, inflation is likely to be below the Federal Reserve’s 2% target, and policy makers will be trying to stop it falling too far.”

The irony is that Fed Chair Powell has said they may have to continue to raise rates even if it causes job losses, if they are to meet their 2 percent inflation target.

He just said inflation has not moved down as much as they would like at his latest press conference. What would it take to convince him and the Fed Governors otherwise, another recession?

Harlan Green © 2023

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

Fed Now Fears a Recession

 Financial FAQs

BEA.gov

It is no longer lost on the Fed Governors that the record speed they have raised short-term interest is causing a possible recession. They have even said so in their just released minutes from the latest FOMC minutes.

Three medium-sized regional banks have already failed and several dozen are on the FDIC watchlist, who have overinvested in uninsured assets that are devaluing fast as interest rates have risen.

And inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.

In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March. Prices for final demand goods decreased -1.0 percent, and the index for final demand services moved down -0.3 percent—all plunging the largest monthly amount in three years.

So, alarm bells are sounding for the Fed to move in the opposite direction—to not only pause but reverse course, if they believe what they say—and inflation is no longer a problem.

Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.

It turns out the Fed Governors have been too good at their job, catching banks and regulators flat-footed from the effects of their rate hikes and a probable cause of a recession sometime later this year.

Why? Because Fed officials are now seeing signs that banks are tightening their credit standards as well, following the Fed’s guidance, which will harm business investments and even homebuyers who will find it more difficult to qualify for a loan or mortgage.

“Financial conditions tightened considerably over the intermeeting period as a whole,” said the minutes. “Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes.”

Given their assessment of the potential economic effects of the recent banking-sector developments, the Fed’s staff now sees “a mild recession starting later this year with a recovery over the subsequent two years.”

The minutes also show that “many” officials said that the likely effects of the banking stress had led them to lower their estimate of the peak rate that would be needed to bring inflation under control, according to the minutes of the March 21-22 meeting.

With such fears it would be far wiser to anticipate other inflation indicators plunging as fast. And once that happens what other dominoes may fall?

But instead, FOMC officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage point, the ninth increase over the past year. That brought the fed funds rate to a target range of 4.75%-5%, its highest level since late 2007.

Other economic sectors are beginning to plunge as well. Sales at retailers dropped 1 percent in March and declined for the fourth time in the past five months, said the Census Bureau. Watch out below if this reflects consumers beginning to close their wallets.

The problem the Fed Governors haven’t understood in their panicked reaction to the initial inflation surge was that conditions outside of the Fed’s control have caused most of the inflation. A historic pandemic that shut down worldwide economic activity and a European war have been the main cause shrinking world-wide production, while governments pumped in excess liquidity to keep their economies afloat.

There is now the real possibility that the Fed intends to cause a recession, which is the only result that will bring down the inflation rate to 2 percent, which they seem fixated on doing, despite the possibility of more bank failures.

Harlan Green © 2022

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Why Are Consumers Buying Less?

Financial FAQs

Wrightson.com

President Trump tweeted this morning that U.S. and China were close to a “really big deal”, and stocks rallied with the S&P up as much as 30 points and the DOW 250 points higher in early trading. Yet both chief economic spokesman Larry Kudlow and OMB chief Mick Mulvaney said there was no agreement on reducing or eliminating the December  tariff increases on Chinese imports of consumer goods.

A report from the Wall Street Journal indicated U.S. trade negotiators are offering to cancel new China tariffs and reduce existing levies on Chinese goods by up to 50% on $360 billion worth of imports.

So there is no agreement of even a Phase I trade agreement with China, as I said yesterday, which is why inflation has remained moribund for so long. And today’s decline in the Producer Price Index for final demand—a term that describes the demand for wholesale prices that go into product prices—confirms that fact. That is the surest sign of falling prices, which is the real measure of economic growth.

The PPI is an index economists understand, but few others. It measures how much consumers and businesses want and are able to buy, because it filters into retail inflation, the market price consumers pay, which hasn’t risen much above 2 percent, either.

“The November results held the YOY increase in the headline final demand PPI steady at the October level of 1.1 percent,” said Reuters’ ICAP summary, “but trimmed the YOY rise in the narrow core index from 1.5 percent to 1.3 percent.  That is the smallest 12-month increase in the core measure since September 2017.”

This tells us why predictions for Q4 GDP growth are now below 1 percent, when third quarter GDP growth was revised slightly upward to 2.1 percent. Falling final demand is a stark result of the toll from an erratic foreign policy that the Trump administration uses to play to public popularity rather than a foreign policy that serves the public interest.

It turns out that reducing tariffs on $360 million Chinese imports would be a good thing for consumers, since consumers are buying fewer imported goods, and Midwestern farmers’ bankruptcies have skyrocketed due to the lost revenues that combine with record floods decimating crop yields.

Yet Trump seems to be holding out for China to agree to $60 billion in agricultural purchases from farmers, whereas it has historically never been higher than $20 billion per year and is currently just $8 billion. Meanwhile China has gone to Brazil and other countries that grow lots of corn and soybeans to replace that from Trump’s Midwestern constituents. Will those farmers ever recover from their lost revenues that Trump has been replacing with taxpayer money, and that contributes to the $1 trillion annual budget deficit?

So in the end it is Americans who are really paying for the tariff wars that are not in the public interest; which has been obvious for a long time.

Harlan Green © 2019

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

U.S. Growth is Slowing!

Financial FAQs

Late Monday, the U.S. blacklisted 28 Chinese companies because of their alleged role in human-rights violations against Muslim minorities ahead of the high-level discussions which will be led by China Vice Premier Liu He on Thursday.

Bloomberg also reported the Trump administration is moving ahead with discussions around possible restrictions on capital flows into China, with a particular focus on investments made by U.S. government pension funds.


These unilateral actions by the Trump administration will be enough to bring on a mild recession sometime next year. Why? Because attempting to isolate the 2^nd largest, or largest economy in the world—depending on which economic measure is used—can only harm international trade on which U.S. and world economic growth depends these days.

Manufacturing activity is already contracting, signaling that it is in a recession. The service sector will take longer to see the effects of the U.S. decoupling from China and international trade in general from the various trade wars because services are less dependent on foreign trade.

And last week Trump also said he would add a 10 percent tariff in September to the remaining $300 billion in Chinese imports that had previously been excluded from earlier U.S. duties. China retaliated by suspending purchases of American farm crops and letting the value of its currency fall, effectively making Chinese goods cheaper to buy and negating some of the damage from U.S. tariffs.

The Chinese imports being taxed are consumer goods, such as TVs, computers, wash machines that American consumers buy.

FRED

The result? Both the Producer Price Index for wholesale goods (red line in graph), and probably the upcoming Consumer Price Index (dark blue line) shows where we are heading.

Wholesale prices in the PPI index are falling because of declining demand for unfinished goods, which are the raw material for finished products. The increase in wholesale inflation over the past 12 months slid to 1.4 percent from 1.8 percent, marking the lowest level in almost three years.

“Similarly, a more closely followed measure that strips out volatile food, energy and trade-margin costs was flat in September. The increase in the so-called core PPI over the past year dropped to 1.7 percent from 1.9 percent,” according to MarketWatch.

Another sign of declining demand is the 10-year Treasury yield declining to 1.55 percent; also recession territory, as investors flee stocks to the safe haven of U.S. Treasury securities.

It means the Fed will probably continue to lower their interest rates in an attempt to boost spending, which could keep consumers in the game for a while longer, but at a lower level of consumption as they save more of their earnings. 

Hence there is the possibility of a mild recession next year when consumers begin to realize that current U.S. economic policies only interested in punishing China, rather than negotiating a beneficial outcome in good faith, will harm American consumers as well.

Harlan Green © 2019

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Are Higher Interest Rates Ahead?

Popular Economics Weekly

Econoday.com

The benchmark 10-year Treasury Bond Yield that determines mortgage and other long term rates ended at 3.13 percent today from 3.11 percent last week with the continued stock market selloff. It was as high as 3.22 percent at times. The Fed is on track to raise short term interest rates another one-quarter percent in December, which will boost the Prime Rate used for credit card and installment debts to 5.50 percent. What does that mean for continued job and economic growth?

The jury is out on the answer, but market interest rates are barely moving. Consumer confidence is booming, but stocks are fluctuating madly because investors are fretting over what happens next year, which is what investors always attempt to predict—i.e., how much to discount future corporate earnings.

A majority of S&P 500 companies reported higher earnings than predicted in Q3, so there should be a minimal discount. And corporations are using most of their extra profits from the December tax cut to buy back stock. But that is a one-time booster shot that investors worry will soon end the stimulus.

If interest rates continue to rise, it will cut into consumer spending, while bond traders worry about incoming inflation. But the Producer Price Index and Consumer Price Index show inflation remaining below 3 percent—hardly a level that could diminish asset valuations. Both indexes continue to hover around 2.5 percent before seasonal adjustment and inflation are factored in.

Econoday

The U.S. economy isn’t overheating, in other words. The US Bureau of Economic Analysis reported that the Personal Consumption Expenditure Index of inflation has been basically flat for months; at 2.0 percent, right on the Fed’s inflation target. Robust growth with little inflation is the Goldilocks economy we all yearn for, and the stock market should be applauding, not fearing, as I’ve been saying.

Consumers’ holiday spirits are also cheery, with the U. of Michigan sentiment survey close to its 12-month high. “Inflation expectations are mixed with the year-ahead reading down 1 tenth to 2.8 percent, said Econoday, “but the 5-year outlook up 2 tenths to 2.6 percent. These levels have been steady all year and, for the Federal Reserve, confirm that inflation expectations remain fully anchored.”

What about jobs? The economy looks to be fully employed for another year, at least. The Labor Department’s most recent JOLTS report indicates the gap between openings and hires, which had been widening in previous months and reached a record high of 1.386 million in August, shrank in September—to a still wide 1.265 million. 

That means 1.265 million jobs lack applicants, which could put a brake on future growth. Employers aren’t finding enough qualified workers to expand production, but wages are finally rising above inflation and consumers are spending more as a result.

What’s not to like about this economy? Even the National Federation of Independent Businesses (NFIB); made up mainly of small business owners that are the creators of most new jobs; reported record-high optimism in its October survey.

“Small business optimism continued its two-year streak of record highs, according to the NFIB Small Business Optimism Index October reading of 107.4,” per its press release. “Overall, small businesses continue to support the three percent-plus growth of the economy and add significant numbers of new workers to the employment pool. Owners believe the current period is a good time to expand substantially, are planning to invest in more inventory, and are reporting high sales figures.”

It seems U.S. consumers aren’t yet reacting to the higher tariffs on imported wash machines and other appliances hit by rising aluminum and steel prices. But higher vehicle prices are sure to follow. Total vehicle sales are booming at the moment, topping 18 million units in October, according to the St. Louis Fed.

What can go wrong, you ask??

Harlan Green © 2018

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