Popular Economics Weekly: inflation rate

“For most of the past half-century, adults in the U.S. Baby Boom generation – those born after World War II and before 1965 – have been the main driver of the nation’s expanding workforce. But as this large generation heads into retirement, the increase in the potential labor force will slow markedly, and immigrants will play the primary role in the future growth of the working-age population (though they will remain a minority of it).” PEW RESEARCH

PEW

I wrote in 2017 that the stakes are enormous if Republicans succeed in removing most of the estimated 11 million undocumented worker (only half of which are from Mexico and the Latin countries), and cut legal immigration in half, as they have promised to do, economic growth will plummet, since it is mainly based on growth of the working age population, as well as labor productivity, which has also fallen since 2000.

America has always had a labor shortage. It’s the reason we have needed immigrants and led in technology to keep our production levels high. And as the 2017 PEW study above highlights, immigrants have been at the core of our national workforce.

This is while the Trump administration continues to trip over itself in every economic sector, repeating the same mistakes it made during Trump’s first term. This is not only with its tariff policy—negotiating with China to lower their tariffs, though China says they are not currently in talks—but is especially true with its immigration policy that is designed to please its MAGA base.

It's pleasing no one else. Former Labor Secretary Robert Reich reports on Substack that one American was detained by ICE in Arizona for 10 days until his relatives produced papers proving his citizenship, because ICE didn’t believe he was American. Meanwhile, ICE handcuffed and deported a group of German teenagers vacationing in Hawaii because they turned up without a hotel pre-booked, which ICE found “suspicious.”

The number of adults in the prime working ages of 25 to 64 – 173.2 million in 2015 – will rise to 183.2 million in 2035, according to Pew Research Center projections. That total growth of 10 million over two decades will be lower than the total in any single decade since the Baby Boomers began pouring into the workforce in the 1960s. The growth rate of working-age adults will also be markedly reduced, says the study.

The Biden administration’s record growth was based in large part because of the immigration surge that Trump is attempting to reverse, but that Trump characterized as criminals to stir up his MAGA base. There was no crime wave; records show immigrants commit fewer crimes than American citizens.

So Trump is creating a worker shortage when he wants to bring back manufacturing. Who will replace the immigrants? We need to develop more labor-saving technologies, which means developing better computer chips that Biden has already funded for more Research and Development grants and the CHIPs Act, but will take time to develop.

Trump has no plan of his own, other than slash the government programs that would create newer technologies, nor is anything being done at the congressional level, except pushing for more tax cuts. This was his only accomplishment during the first Trump administration.

It’s a sad day when Trump, Republicans and his MAGA supporters see immigrants as threats when they are the only readily available resource that will grow our economy.

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

Thursday, April 17, 2025

How Much LONGER Do We Wait?

“The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent on a seasonally adjusted basis in March, after rising 0.2 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.4 percent before seasonal adjustment.”

FREDcpi

Will home sales pick up at all this year? It could happen. Because inflation is declining at the moment, thanks to the tariff chaos. That’s because economic growth is slowing as the supply bottlenecks increase for autos, auto parts, construction materials and just about everything else that is imported.

This will ultimately drive-up prices, unless ultimately resolved, or we have a recession.

Fed Chair Powell said recently that the tariffs are causing too much uncertainty for the Fed to act one way or the other now, which is reflected in the sudden drop in the Consumer Price Index inflation in the above graph. There is the fear of recession in the air, which is discouraging home buyers as well.

It’s also keeping much needed new home construction on the sidelines. “Policy uncertainty is having a negative impact on home builders, making it difficult for them to accurately price homes and make critical business decisions,” said NAHB Chief Economist Robert Dietz. “The April HMI data indicates that the tariff cost effect is already taking hold, with the majority of builders reporting cost increases on building materials due to tariff

Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,324,000. This is 11.4 percent below the revised February estimate of 1,494,000 but is 1.9 percent above the March 2024 rate of 1,299,000.

Housing should be aided by moderating consumer inflation but fixed mortgage rates are still hovering close to 7 percent. Housing construction is attempting to fill the supply void. But prices won’t improve because of the tariffs on Canadian lumber and metals such as aluminum, for starters.

Meanwhile housing costs continue to go up. Newsweek reports that between March 2024 and March 2025, the biggest year-over-year price jumps were reported in the cost of natural gas (up 147.6 percent), copper wire and cable (up 13.4 percent), softwood lumber (up 12.6 percent) and construction sand, gravel and crushed stone (up 8.3 percent).

Who can still afford to buy a home? The NAR's 2025 Home Buyers and Sellers Generational Trends report found that the combined share of younger boomers (ages 60–69) and older boomers (ages 70–78) rose to 42% of all home buyers in the past year. Millennials dropped to 29% of all buyers – down notably from 38% a year ago. Generation X buyers (ages 45–59) held steady at 24%.

So first-time, entry-level homebuyers are being left out of the market at present. Home sales would pick up if the Fed Governors would realize how lower rates would energize buyers. I believe the Fed could lower rates in June, just in case the supply bottlenecks really begin to grind activity to a halt. Everyone seems to be waiting to see what President Trump’s grand plan may be, other than to intimidate every other country on the planet (which won’t work).

So, the tariffs are making home buying even less affordable. It looks like we will have to wait until the Fed begins to cut interest rates again and we see lower mortgage rates.

With the crazies in charge, who knows when?

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

Monday, March 31, 2025

Can We Prevent Stagflation?

During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations…The onset of the embargo contributed to an upward spiral in oil prices with global implications. The price of oil per barrel first doubled, then quadrupled, imposing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. history,state.gov

BEA.gov

The 1970s stagflation, a combination of stagnant growth and high inflation, was not a happy time. It caused then Federal Reserve Chair Paul Volcker to raise the Fed Funds rate to as high as 20 percent to tame the inflation tiger in the 1980s and many bank failures.

It might happen again, but not because of an energy shortage. Friday’s report on the Commerce Department’s Personal Consumption Expenditure Index (PCE) raised alarms that inflation was on the rise, which is one of the two main components of stagflation. Inflation hasn’t been tamed, as it rose 2.5 percent, 2.8 percent without food and energy prices, per the BEA graph.

Stagflation last happened in the 1970s because of the 1973-74 Arab oil embargo that caused gas stations to run out of gas and consumer prices to soar. It ultimately resulted in a 14.8 percent CPI inflation rate in 1980. And it was more than a decade before inflation and interest rates dropped back to single digits, and we lived through three recessions.

This was also the beginning of the Second Gilded Age so well documented by political scientists Jacob Hacker and Paul Pierson in Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class that was initiated by President Reagan and supported by the Business Roundtable of Chief corporate Executives.

It began the huge transfer of wealth from wage earning Americans to the owners of capital with successive tax cuts and restrictions on labor organizing, as well as the massive deregulation of industries such as the airlines and telecommunications.

US Corporations took advantage of the globalization of technologies and began the massive move of factories overseas, along with the blue-collar jobs that had built middle America, to countries with cheaper wages and fewer environmental regulations.

The gutting of rust belt jobs in the Midwest resulted in the red state-blue state split we have today, with right to work laws in those states that restrict the right of unions to collect dues from their members, many with wages still stuck at the national $7.25 per hour minimum wage.

This is while economic growth, the other main element of stagflation, is slowing. Why? Consumers are not happy with the high prices and economic uncertainty caused by Trump’s tariffs and Elon Musk’s DOGE massive job cuts, so they aren’t spending as they did in the past, and consumers are the main driver of economic growth.

The loss of tens of thousands of federal jobs and depopulating the service sector industry, the fastest growing economic sector that depends on undocumented workers, will do the same.

This is reflected in falling consumer confidence. The University of Michigan’s final February survey said: “Consumer sentiment extended its early month decline, sliding nearly 10% from January. The decrease was unanimous across groups by age, income, and wealth. All five index components deteriorated this month, led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff induced price increases are imminent.

All of these factors make a reduction in first quarter economic growth more likely. In fact, the Atlanta Fed’s estimate of first quarter growth declined further into negative territory.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on March 28, down from -1.8 percent on March 26. The alternative model forecast, which adjusts for imports and exports of gold as described here, is -0.5 percent.

Can we prevent a recurrence, in which we again have double digit inflation and slow to no growth? Trump would have to learn how to negotiate with congress rather than issue unlawful executive orders and take away Elon Musk’s chainsaw for that to happen.

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

Saturday, November 16, 2024

Holiday Sales Boom

Popular Economics Weekly

FREDretailsales

The Commerce Department reported Retail trade sales were up 0.4 percent (±0.5 percent)* from September 2024, and up 2.6 percent (±0.5 percent) from last year. Nonstore retailers were up 7.0 percent (±1.4 percent) from last year, while food services and drinking places were up 4.3 percent (±2.1 percent) from October 2023

Sales of new cars and trucks jumped 1.6% in October to lead the charge among retailers. Auto sales account for one-fifth of all retail sales. Restaurant sales are also booming, so maybe consumers are breathing a great sigh of relief that the election is over.

So holiday sales are strong even though it will be two weeks before we know if the 12,000 new payroll jobs is a fluke in the October unemployment report because of the hurricane damage and 30,000 striking Boeing machinists, which is now settled.

Even the east coast docks’ strike was settled. Was it because the strikers wanted to enjoy the upcoming holidays with more money in their pockets? We won’t know if the September jobs report was a fluke, as I said, until October’s numbers come out, but Fed Chair Powell is now saying the Fed is not in a hurry to lower interest rates further if retail sales stay strong, especially with stronger inflation news.

Both wholesale inflation and retail inflation rates were higher than forecast in October, which is another sign that consumer spending hasn’t slowed, and will continue to push up prices.

So, was too high inflation the main reason Republicans won a landslide, as exit polls have said? Then why do consumers keep shopping, and pushing up prices even higher, if a majority was so unhappy with their costs?

Maybe there were other, more cultural factors that kept consumers from realizing how lucky we are to have the fastest growing economy in the western world with no worries about energy shortages.

I find it hard to believe that most consumers were unhappy with their own circumstances, since they have spent so much for leisure activities.

Americans continue to signal that travel is splurge-worthy and are again setting new records for vacation spending in 2024, according to Allianz Partners USA, a travel insurance company. Americans have more than doubled their projected summer vacation spending since the inception of the pandemic. The 2024 figure represents an approximately 3.5% increase over last year, but a whopping 118% jump compared to 2019.

Maybe consumers want to forget about the results of the presidential race that has left the country still split in two? But the majority was mad enough to bring in Donald Trump once again in a big way, after voting him out four years ago for doing so little.

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

Thursday, October 3, 2024

NO MORE INFLATION

The Fed is no longer worrying about inflation, since its preferred inflation gauge, the Personal Consumption Expenditure Index (PCE), recently dropped to a 2.2% inflation rate, close to the 2.0% target rate.

Fed Chairman Powell said recently the Fed is more worried that the job market is faltering, hence the -.50% Fed Funds rate cut last week with at least two more rate cuts in the offing this year. It would cut the Bank Loan Prime Rate to 7.50% that is the basis for most credit card and installment loan rates.

It is still too high for most borrowers, but auto sales have picked up, which is a sign consumers are still buying, that in means that Q3 GDP growth could also match second quarter’s GDP growth of 3.0 percent.

This is remarkable growth, even with the labor market slowdown, and the unemployment rate up to 4.3 percent in a year.

FREDpceindex

From the same month one year ago, the PCE price index for August increased 2.2 percent. Prices for goods decreased 0.9 percent and prices for services increased 3.7 percent. Food prices increased 1.1 percent and energy prices decreased 5.0 percent. Excluding food and energy, the PCE price index increased 2.7 percent from one year ago.

Job formation is slowing, as the BLS JOLTS report showed 8 million job vacancies, with 5.3 million Hires and 5.0 million Separations in the month. The 300,000 difference approximates the net number of new hires in August.

We are still fully employed, in other words, but the number of vacancies posted by employers looking for workers has come down considerably from the 12 million job opening high during the pandemic and lockdowns.

(That’s why it’s called the Job Openings and Labor Turnover Survey.)

Consumer spending is the biggest ‘tell’ on future employment and economic growth and it barely dropped to 2.7 percent annual growth from 2.8 percent in August. The savings rate is still a healthy 4.8 percent, close to historical norms, so the surge in vehicle sales is no fluke.

Business activity in the service sector is soaring (mainly dining out, travel, leisure activities), but the manufacturing sector is still contracting.

“In September, the Services PMI^® registered 54.9 percent, 3.4 percentage points higher than August’s figure of 51.5 percent. The reading in September marked the seventh time the composite index has been in expansion territory this year,” said survey Director Sterve Miller.

Whereas, manufacturing “Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy — which the U.S. Federal Reserve addressed by the time of this report — and election uncertainty,” said survey director Timothy Fiore.

I see good growth this year. More reductions in interest rates will certainly boost manufacturing, and consumers are still saving, another sign they aren’t tapped out.

But with one political party wanting to cut back on Bidenomics, the policies spurring much of the growth, economic and job growth next year could depend on which party wins the White House in November.

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

Tuesday, July 16, 2024

Retail Sales Falter

Fed Chair Powell has said it again. Second-quarter economic data including last week’s consumer price report “do add somewhat” to confidence that inflation is heading down to the central bank’s 2 percent goal at an Economic Club of Washington interview— a condition for rate cuts, report various media. He repeated that labor markets are now in a “better balance,” and an unexpected weakening in labor markets would also be a reason to adjust rates.

That is already happening with the latest revisions to unemployment data and the unemployment rate now up to 4.1 percent. It ticked up to 4.1 percent in June from 3.8 percent in March. The sudden rise in the unemployment rate in the middle of the work year should alarm Fed officials.

Further evidence of slowing job growth is that average hourly wage growth fell to 3.9 percent. It makes up to two-thirds of production costs for most businesses and is now the main driver of inflation.

1another reason a rate cut seems more likely is that retail sales were unchanged in June once again. It actually fell when inflation is factored. It’s now been flat for three consecutive months.

FREDretail

Advance of U.S. retail and food services sales for June 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.3 billion, virtually unchanged (±0.5 percent)* from the previous month, but up 2.3 percent (±0.5 percent) above June 2023. Total sales for the April 2024 through June 2024 period were up 2.5 percent (±0.5 percent) from the same period a year ago.

Housing is another reason a rate cut is needed sooner. Though for sale inventories are up to a 3.7-month supply, according to Realtors, builders have been slashing prices because of the sky-high mortgage rates.

Nearly one third of home sellers in Sun Belt cities are slashing their asking prices as the number of properties for sale in those markets surges.

The share of home listings with a price cut was the highest in metropolitan areas across the South as homeowners competed to entice buyers, according to June monthly data from real-estate company Realtor.com. The report includes data for home listings in the 50 largest U.S. metropolitan areas going back to 2016, said the NAR.

Total existing-home sales¹ – completed transactions that include single-family homes, townhomes, condominiums and co-ops – retreated 0.7% from April to a seasonally adjusted annual rate of 4.11 million in May. Year-over-year, sales were down from 4.23 million in May 2023.

"Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months," said NAR Chief Economist Lawrence Yun. "Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions."

It is also putting more affordable housing on the market. In the NAR’s June report, as in the previous four months, the growth in homes particularly priced in the $200,000 to $350,000 range outpaced all other price categories, as home inventory in this range grew by 50.0 percent compared with last year, surpassing even last month’s high 45.1 percent growth rate. This increase is again primarily fueled by a greater availability of smaller and more affordable homes in the South.

Total housing inventory² registered at the end of May was 1.28 million units, up 6.7 percent from April and 18.5 percent from one year ago (1.08 million). The 3.7-month supply at the current sales pace is up from 3.5 months in April and 3.1 months in May 2023.

All the discounting won’t cure the housing shortage but it will create more affordable housing.

Consumer spending itself has now slowed for three consecutive months because of too high interest rates, as has the job market, which has now taken a dangerous downturn.

So why wait for a September rate cut, as many are predicting? The Fed’s FOMC meets next in July.

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

Thursday, July 11, 2024

Prices Are Falling!

Today could be historic for inflation watchers. It’s the first time since July 2022 that retail prices in June as measured by the U.S. Consumer Price Index (CPI) have declined.

It will be history making and effect the financial markets, housing, and maybe the presidential election where inflation has seemed to be Americans’ major worry—at least according to the polls.

The easiest signs of actual deflation for consumers are the drop of gas prices to pre-pandemic levels. Gas prices dropped 3.8% in June, the government said. And the cost of used cars and trucks fell 1.5%.

I said last month that it will probably be hard to believe for many scarred by the post-pandemic inflation scare that still believe inflation is too high, but there was no inflation increase in May for both wholesale (PPI) and retail (CPI) inflation indexes.

FREDcpi

The FRED graph illustrates that we now have had two months of no price increases. It could have been predicted because consumers have known for months that stores were discounting, and been frequenting big box retailers like Target, Walmart and Costco.

It also tells us that housing (rents) have been declining after an initial uptick in the first quarter due to various shortages. Housing inventories have increased some 40 percent year over year, per the National Association of Realtors.

This will cause bonds in particular to rally because interest rates, including mortgages, will finally begin to decline from their two-year highs.

San Francisco Fed Chairman was the first to jump on the rate cutting bandwagon this morning. She said she now supports cutting interest rates.

“With the information we have received today, which includes data on employment, inflation, GDP growth and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Daly said in a roundtable with reporters cited my MarketWatch’s Greg Robb.

The increase in rents in the past 12 months slowed to 5.1% in June from 5.3% in the prior month and touched the lowest level since April 2022. Rents are expected to slow even further, but just how much is unclear. Before the pandemic, they were rising about 3.5% to 3.9% a year.

The cost of "imputed" housing, meanwhile, rose a scant 0.3% in June. That's the smallest increase since July 2021. This category, known to economists as OER, is a indirect proxy for how much the cost of housing is rising.

The Biden administration’s Treasury Department is doing its part with funds to support building more affordable housing.

“Executive agencies have the power to act quickly to promote homeownership. We applaud the Biden Administration’s comprehensive, multi-agency response targeting solutions at every level of government. It will take an all-of-government approach to yield results in this fight,” said NAR’s Chief Advocacy Officer Shannon McGahn.

So, Fed Chair Powell was correct in saying at his latest congressional testimony that the Fed will not have to wait for inflation to decline to its 2 percent target rate before cutting interest rates

He was making a brave statement, because the inflation hawks will now say easing credit could stimulate another inflation surge, because consumers will therefore be able to borrow more, thus increasing the demand side of the supply-demand equation.

But lower interest rates will also stimulate more home building, increasing the supply side of the housing shortage that has kept most housing unaffordable for entry-level and first-time homebuyers.

The rather sudden drop in prices could mean more, maybe economic growth itself slowing further, and we see actual deflation? Let’s wait and see.

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

Friday, June 28, 2024

Are Consumers Confused?

What are we to make of the Conference Board’s latest confidence survey?

"The decline in confidence between May and June was centered on consumers aged 35-54. By contrast, those under 35 and those 55 and older saw confidence improve this month,” said Dana M. Peterson, Chief Economist at The Conference Board.

Conference Board

We are in the midst of one of the greatest economic recoveries in history—from the worst pandemic in more than 100 years. Yet most consumers lack confidence because they don’t know where to look for information on the real economy, as opposed to what is on social media or in mass media headlines.

“Confidence pulled back in June but remained within the same narrow range that’s held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future. However, if material weaknesses in the labor market appear, confidence could weaken as the year progresses,” said Peterson.

I believe this reflects the fact that most consumers like their current circumstances, but not outside events that may forecast the future. Why isn’t the rest of the world doing as well as Americans, say the headlines?

A lot of the confusion unfortunately comes from social media which doesn’t differentiate fact from fiction. A recent poll maintained that 50 percent of those surveyed believe we are in a recession, when real GDP growth has averaged 2 percent since the pandemic, and we are at full employment.

It reflects what I have called irrational pessimism. The other side of the coin is irrational exuberance, when excessive optimism that prices will almost always rise can cause asset bubbles.

Nobel laureate economist Robert Shiller has written about it. That’s because most market investors rely on hearsay and word of mouth, rather than research that would paint a more accurate view of market conditions.

Much of Main Street, ordinary working adults in the main, have become irrationally pessimistic for that reason. Surveys such as a recent poll by PEW Research show this.

“About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

I also believe most Americans are emotionally exhausted and still recovering from the pandemic, so they are now spending less which is slowing economic growth.

BEA.gov/CRFB

That is reflected in the major inflation indexes which were all flat in May. The Fed’s preferred Personal Consumption Expenditures (PCE) monthly inflation index didn’t rise at all on Friday in line with retail CPI prices (in blue line) reported earlier this month as seen in above graph.

When will consumers begin to realize this? Maybe in September when the Fed is now predicted to begin to lower their interest rates. That should make all of US happier!

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

Wednesday, May 29, 2024

Where's the Recession?

The most recent Harris-Guardian poll found 56 percent of those surveyed thought the US was in a recession. And 49 percent believed unemployment was at a 50-year high.

How is that possible when the economic facts are exactly the opposite? Unemployment is at a 50-year low, and there hasn’t been a recession since the short-lived 2-month COVID-19 recession in March-April 2020.

The Harris poll said:

· 55% believe the economy is shrinking, and 56% think the US is experiencing a recession, though the broadest measure of the economy, gross domestic product (GDP), has been growing.

· 49% believe the S&P 500 stock market index is down for the year, though the index went up about 24% in 2023 and is up more than 12% this year.

· 49% believe that unemployment is at a 50-year high, though the unemployment rate has been under 4%, a near 50-year low.

"What Americans are saying in this data is: ‘Economists may say things are getting better, but we're not feeling it where I live,'” said John Gerzema, CEO of the Harris Poll. “Unwinding four years of uncertainty takes time. Leaders have to understand this and bring the public along.”

There may be a lot of confusion over what exactly defines a recession, but I believe there’s a better explanation for the pervading pessimism among those surveyed. Many polls have found that most Americans do in fact feel good about their own financial circumstances, but not so good about where the US economy is heading.

Then what must those surveyed compare today’s economy to, since public news reports document that the US has recovered the quickest from the pandemic with the fastest growing economy among developed countries in the world?

FREDcpi

Maybe they remember the pre-pandemic economy of the prior decade when both the unemployment and inflation rates (see cpi graph) were at or below 3 percent. It was a goldilocks time, while choosing to forget the severe trauma from two years of lockdowns that began in 2020 with images of refrigerator trucks lined up in the larger cities to hold many of the one million dead that mortuaries couldn’t hold.

Such a collective amnesia has happened before, more than 100 years ago during the Spanish flu pandemic. The Roaring Twenties excess that followed may have helped to erase those horrific memories when more than 675,000 died, say historians.

A Smithsonian Magazine article highlights some of the Roaring Twenties’ history of the 1920s that could confirm my thesis.

The Smithsonian article mentions Harper’s editor Frederick Lewis Allen’s 1931 account of the previous decade, Only Yesterday. Allen labels the Twenties as the “post-war decade” (of World War One) and mentions the pandemic a grand total of once.

“My guess is it did not sit with the story that Americans tell about themselves in public. It’s not the story that they want to put in fifth-grade U.S. history textbooks, which is about us being born perfect and always getting better,” says Bristow, who wrote American Pandemic: The Lost Worlds of the 1918 Influenza Epidemic.

“Americans believed themselves “on the verge of putting infections disease to rest forever,” she explains, and instead, “We couldn’t do anything more about it than anybody else.” Indeed, President Woodrow Wilson, who held the office throughout the multi-year pandemic, never once mentioned it in his public comments,” said Allen.

The Smithsonian also cites Yale sociologist and physician Nicholas Christakis who hypothesizes that the 1918 pandemic falls into an ages-old pandemic pattern, one that our Covid-19 present may mimic, too.

In his 2020 book, Apollo’s Arrow: The Profound and Enduring Impact of Coronavirus on the Way We Live, he argues that increasing religiosity, risk aversion and financial saving characterize times of widespread illness. Christakis expects the Covid-19 crisis to have a long tail, in terms of case numbers and social and economic impacts.

“People are going to want to make sense of what happened,” he says, positing that “we’ll likely see an efflorescence of the arts” post-pandemic. That’s not to say our A.C. (After Covid-19) reality will be all rosy. “We’ll be living in a changed world.”

A majority of Americans polled also believe Republicans are better stewards of their wealth. Yet the COVID-19 pandemic occurred during the Trump administration, and its one million death toll might have been lower if Trump hadn’t denigrated scientists and encouraged anti-mask and anti-vaccine doubts among his followers.

Certainly many Republicans might then want to dwell on the years just before the pandemic and erase their memories of the ineptness of the Trump administration when their President suggested injecting chlorine into their veins as a cure.

My thesis is up for discussion as are all theses, of course. I welcome comments on what is still a puzzle to most economists. How can opinions differ so much from public facts? Maybe lasting memories of a more peaceful decade still dominate over our vastly changed, post-pandemic world?

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

Thursday, May 23, 2024

Whose Inflation Is Too High?

Declining inflation has stalled in the first quarter, which is hurting prospects for any Fed rate cuts, and causing consumers to buy less. The inflation rate is currently stuck in the 3 percent range, though much lower for goods earlier in the supply chain, so large retailers like Walmart and Target are having to cut prices.

Monthly retail sales didn’t increase at all in May, after two consecutive months of 0.8 percent growth and almost 3 percent annual growth.

Walmart said on May 16 that it has rolled back prices on nearly 7,000 items in its stores, reports CNN, noting deflationary trends in general merchandise.

“Our combination of everyday low prices plus a large number of rollbacks is resonating” with consumers, Walmart CEO Doug McMillon said on a call with analysts.

CNN also reported that Target slashed prices on more than 1,500 items, ranging from laundry detergent to cat food to sunscreen, with thousands more price cuts expected over the summer.

It’s a sign that’s made Federal Reserve Governors more hopeful inflation will continue to decline, and prices even begin to fall, rather than continue to rise more slowly.

Federal Reserve officials at their last policy meeting indicated they still had faith price pressures would ease, if only slowly, according to the minutes of the central bank’s April 30-May 1 session.

"Participants ... noted that they continued to expect that inflation would return to 2% over the medium term," the minutes said, but "the disinflation would likely take longer than previously thought."

AtlantaFed

Inflation trends seem to be in the eye of the beholder. Businesses are now seeing much lower inflation, according to recent surveys. Year-ahead inflation expectations had fallen to 2.3 percent in May 2024 from as high as 3.8 percent in March 2022 for businesses, according to the Atlanta Federal Reserve.

Whereas the Federal Reserve Bank of New York’s Center for Microeconomic Data today released the April 2024 Survey of Consumer Expectations, which went in the opposite direction.

It shows that inflation expectations increased at the short-term and longer-term horizons, while decreasing at the medium-term horizon: to 3.3% from 3.0% at the one-year horizon (remaining below its 12-month trailing average of 3.5%).

The main culprit seems to be housing prices. “Median home price growth expectations increased to 3.3% after remaining unchanged at 3.0% for seven consecutive months. This is the highest reading of the series since July 2022,” said the NY Fed.

Year-ahead consumer commodity price expectations also rose across the board in April for gas, food, medical care, and college education.

Why aren’t consumers seeing the lower inflation expectations of businesses? Target and Walmart are telling us why. Simply put, retail prices are much higher than the raw cost of goods and services charged to businesses for several reasons. There’s the transportation and distribution costs, for starters, and profit margin that retailers must retain to stay in business.

The truth is that consumers are seeing higher costs than businesses and are beginning to rebel by choosing cheaper products. It also refutes an economic maxim about consumer behavior that higher inflation expectations will cause consumers to spend more, not less.

There is some good news for consumers. New-home prices are falling as the supply of new homes has increased.

Sales of newly built, single-family homes in April fell 4.7% to a 634,000 seasonally adjusted annual rate from a downwardly revised reading in March, 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 in April is down 7.7% from a year earlier.

The median new home sale price in April was $433,500, down 1.4% from March, and up 3.9% compared to a year ago. This is because of the increased supply. There’s a 9.1-month supply of new homes for sale.

Dear US Fed Governors, please pay attention to this. Shoppers can act rationally when their pocketbook size is at risk!

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

Thursday, May 16, 2024

Retail Sales Decline Worrying

The bad news might be good news, though it presages further grief for some consumers. Retail sales didn’t increase at all in April, and the Consumers Price Index showed lower inflation, with its annual rate dropping to 3.4 percent from 3.5 percent.

The bad news-good news had financial markets rallying, since lower retail sales and CPI inflation were a sign of slowing growth that have traders now betting on at least two Fed rate cuts this year, instead of maybe no rate cuts if inflation doesn’t continue to edge closer to the Fed’s 2 percent target rate.

Retail sales jumped 3.1% at gas stations, which offset weakness in several sectors. Sales at furniture stores fell 0.5%, car sales fell 0.8% and internet sales were down 1.2%., said MarketWatch.

Why are shoppers not shopping as much after two months of great gains, per the St. Louis Fed’s (FRED) graph?

FREDretailsales

Consumer sentiment has soured, for starters. And this should be a signal to Fed officials that credit has become too restrictive. Borrowing costs have skyrocketed, especially with middle and low-income shoppers that must borrow with the Prime Rate still 8.5 percent that controls credit card and installment debt.

The University of Michigan’s April sentiment survey reported “While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”

Their pessimism was confirmed by the Federal Reserve in its monthly survey of consumer credit. Total consumer credit had risen more slowly in March; at a 1.5% annual rate, down from a 3.6% rate in the prior month. Consumers borrowed a total $6.3 billion in credit card and installment debt in March, following a $15 billion gain in February.

What are consumers sensing? A recent NBER Working Paper 32006 that studied European consumers found that “individuals’ fears of becoming unemployed, as tracked in household surveys, rose in the months before both the Great Recession and the COVID-19 recession.”

Why wouldn’t that be the case with American consumers? Then add a mounting unease from wars and a warming climate, not to speak of the upcoming US Presidential election.

Fed Chair Powell is doing his best to talk down the fears of a ‘sticky’ inflation rate that might keep Fed officials from giving borrowers some relief by cutting rates sooner.

Powell’s latest remarks, delivered in Amsterdam at a Foreign Bankers conference, indicated he expected inflation to cool to the level of the low monthly inflation points seen late last year, said MarketWatch. “However, I would say my confidence [in that forecast] is not as high as it was, having seen the readings in the first three months of the year,” said Powell.

In fact, there are other signs of a slowdown that consumers will find hard to miss. Weekly initial jobless claims have risen of late, jumping from 209,000 in April to 231,000 in the first week of May. It was hovering between 210,000 to 220,000 last fall.

And both Institute for Supply Management Indexes (ISM) that measure overall business activity have fallen of late. The ISM’s service sector contracted below 50 percent for the first time since December 2022, and its index that measures the manufacturing sector activity has been positive just one month over the past 17 months.

So, we mustn’t blame consumers’ growing pessimism, who have held on and been the backbone of the post-pandemic recovery, for saying enough is enough and it’s time for the Fed to release its chokehold on the economy, or else.

So much depends on their confidence in a better future.

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

Thursday, May 9, 2024

Less Need to Worry in 2024?

It’s time to catch our breath. Wars and protests can unsettle economies, but much of the economic uncertainty is for more mundane reasons.

The last few weeks have unsettled the financial markets, to say the least. The DOW and S&P are at record heights, but so are mortgage rates.

The initial Q1 2024 GDP growth estimate had shrunk to 1.6 percent vs. 3.6 percent in Q4 2023. Inflation has also been spiking in Q1, which has rattled the Fed so much that Fed Chair Powell had to reassure markets the Fed is done with raising interest rates but is taking a wait-and-see approach on when to cut those rates.

Inflation surprised to the upside in the first quarter, with the core personal consumption expenditures price index going up at a 3.7% annual rate after two straight quarters at a 2% rate of increase.

As if to highlight said uncertainties, the Atlanta Fed’s GDPNow forecast project is now showing a huge jump in Q2 GDP to 4.2 percent! How can that be when most economists are predicting no more than 2 percent Q2 growth?

Part of the answer is conflicting signals in the first quarter. Growth slowed because companies didn’t restock their shelves after a gangbuster holiday season for shoppers, even though consumers continued shopping in the New Year.

And businesses typically raise prices at the same time as most employees get their annual pay raises in January. The result was that soaring labor costs got ahead of things being produced, hurting labor productivity and further depressing those optimists that hoped inflation would continue to decline.

So Q2 is shaping up as catch up time. More things will be produced to increase supplies and help restock shelves, which will boost economic growth. That’s why economists are predicting better Q2 growth.

AtlantaFed

For starters, the Atlanta Fed’s GDPNow model estimate for real GDP growth I like to report (seasonally adjusted annual rate) in the second quarter of 2024 is 4.2 percent on May 8, up from 3.3 percent on May 2. Both consumer spending and real personal consumptions expenditures are growing; real personal consumption expenditures growth (consumer spending) is up from 3.1 to 3.9 percent and second-quarter real gross private domestic investment growth (capital expenditures) from 4.1 percent to 6.8 percent.

This is while the annual inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the production cost of things.

Quarterly labor productivity has been surging, despite poor first quarter results. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023 I said last week, as output increased 3.5 percent and hours worked increased just 0.3 percent.

It’s not clear to economists if such a productivity surge has to do with happier workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.

It’s probably a combination of the two. The contrast between Q1 and Q2 growth is going to be huge—Q1 will probably be upgraded in the 2^nd and 3^rd estimations with more information, as well.

That’s why markets should settle down, even with several wars and maybe protests continuing into the summer of a presidential election year.

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

Thursday, May 2, 2024

What Should the Fed Do?

The big surprise at Federal Reserve Chairman Powell’s latest press conference was despite strong job numbers and inflation still above the Fed’s 2 percent target rate, the Fed governors are acting more dovish.

Why? They don’t want a repeat of the 1970’s stagflationary era, when economic growth slowed but inflation remained high.

The just released minutes of its last FOMC meeting highlighted the Fed Governors’ worries. And Powell at the press conference said, "I think it is unlikely that the next rate move would be a hike…the Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”

Powell also said, as quoted on MarketWatch, “I was around for stagflation, and it was 10% unemployment, it was high-single-digit inflation,” he said. “Right now we have 3% growth, which is pretty solid growth, I would, say by any measure, and we have inflation running under 3%.”

“So I don’t see the ‘stag’ or the ‘flation,’ ” he said.

That’s all true. Last year’s GDP growth rate averaged 3 percent and the annual inflation rate with its preferred PCE index had declined to 2.5 percent.

Calculated Risk

This is big news in an economy still at full employment. The latest JOLTS report showed more than 8 million job openings in April, basically unchanged, according to the latest Bureau of Labor Statistics report. (Black line in graph shows job vacancies.) Whereas the Federal Reserve and financial markets have been hoping for weaker job numbers as insurance that inflation would continue to decline.

“Over the month, the number of hires changed little at 5.5 million while the number of total separations decreased to 5.2 million,” said the BLS.

That means there were 300,000 more hires than total separations, which could mean Friday’s official April unemployment report would be basically unchanged from last month’s 303,000 nonfarm payrolls increase.

The monthly inflation figures have ticked up slightly of late but remain in the 2-3 percent range annually. It has upset some markets (e.g., bond funds are currently losing money.)

Why hope for slower growth, anyway? Isn’t Wall Street supposed to react to corporate earnings? Some 80 percent of businesses reported higher earnings in the first quarter, even though the initial first quarter GDP growth estimate was just 1.6 percent, down from last quarter’s 3.6 percent.

It’s the dilemma that our Federal Reserve has put the markets in. The Fed refuses to concede that there is a soft landing, which means interest rates will remain at record heights for the present, as high as they were in 2008 that caused the Great Recession.

But the Great Recession was also caused by slack or no market oversight by a Republican administration that allowed A+ ratings on junk bond and mortgage securities that ultimately busted the housing bubble.

Powell also cautioned that the economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

It was a remarkable press conference designed to assure Americans that the Federal Reserve wasn’t going to be the spoiler of this post-pandemic recovery in an election year.

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

Saturday, April 27, 2024

Inflation Target Reached?

Inflation is probably as close to the Federal Reserve’s inflation target of 2 percent as possible this year, according to its favorite inflation index, the Personal Consumption Expenditure Price Index (PCE) that is the best overall measure of consumer price trends.

FREDpce

In fact, all of the inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the cost of things to produce.

It’s mostly in the service sector, where the rising cost of recreation, entertainment, health care and the like has been the biggest source of recent inflation. The manufacturing sector has been stalled, however, because of the high interest rates.

Service prices rose 0.4% last month, the government said Friday. The biggest increases took place in housing, health care, recreation, dining and hotels. Over the past year the cost of services has risen 4%, far too high for the Federal Reserve's comfort. Before the pandemic service inflation averaged 2.2% a year.

Why? The culprit in the Fed’s eyes is too high wages and salaries that must come down to tame inflation “sustainably”, in their words. Yet without slightly higher incomes consumers wouldn’t be able to ‘sustain’ the higher economic growth that will pay for the current wars the US is supporting, modernization of US economy, and mitigation of global warming.

Of course, there are those inflation hawks (mostly Republicans) who say we cannot afford such largesse. There’s too much debt that will overwhelm the debt markets, collapse the Dollar’s value and similar forebodings.

But they forget that such spending also boosts labor productivity and economic growth! That is why GDP growth has surged, rising 4.9% and 3.6% over the last two quarters of 2023, respectively.

FREDlaborproductivity

And labor productivity has been surging. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported, as output increased 3.5 percent and hours worked increased just 0.3 percent.

Productivity was shrinking, just -2.4 percent at its most recent low point in Q2 2022, meaning the number of hours worked was rising faster than output. But it increased to +2.6 percent in Q4 2023, a swing of more than 4 percent in 6 quarters.

It’s not clear if such a surge has to do with workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.

But we do know that the $trillions in President Biden’s New, New Deal are being spent on developing new technologies, such as the CHIPs Act that is financing new factories in several states.

We had even more debt as a percentage of GDP during WWII. We couldn’t have won World War Two without it. And we also know the new technologies it financed created the American middle class and gave us the boom years after World War Two.

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

Monday, March 11, 2024

Consumers Confident No Recession

There is a good reason why we have avoided a recession. Consumers don’t believe it will happen. And consumers drive some 70 percent of US economic activity. So their attitudes tend to make or break economic growth. When they decide conditions are worsening, they save more and spend less.

But that isn’t happening today. Consumers continue to spend into the New Year, and surveys that measure their attitudes show they feel good enough to continue to spend.

I like the Conference Board’s confidence survey that states, it “…reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.”

And this is also reflected in their “perceived likelihood” that a recession is less likely this year.

Conference Board

“February’s write-in responses revealed that while overall inflation remained the main preoccupation of consumers, they are now a bit less concerned about food and gas prices, which have eased in recent months. But they are more concerned about the labor market situation and the US political environment,” said its Chief Economist Dana Peterson.

Their main concern seems caused by the primary elections and sloganeering that goes with the election season. But consumers are beginning to realize they have benefited from the record number of jobs created over the past two years.

Consumer spending is the main reason growth has been so strong. Spending was revised upward from 2.8 percent to 3 percent annually in last week’s Personal Consumption Expenditure survey.

The University of Michigan’s sentiment survey also followed by economists (and pundits) is even more upbeat.

Survey Director Joanne Hsu commented, “Consumer sentiment moved sideways this month, slipping just two index points below January and holding the gains in sentiment seen over the past three months. Expected business conditions remained substantially higher than last autumn, with short-run expectations now 63% above and long-run expectations 46% above November 2023 readings.”

Consumers seem to remain one step ahead of the pundits and pay less attention to the headlines and hysteria generated by mass media and more attention to their personal financial wellbeing.

This is a heartening sign that facts can win over fiction and consumers will keep the post-pandemic recovery alive.

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

Friday, March 8, 2024

It's A Soft Landing

A terrific February employment report is further evidence the US economy has made a soft landing.

FREDemployment

Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate ticked up slightly to 3.9 percent from 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Education and Health created 85,000 new jobs, Leisure & Hospitality 58,000, and Government 52,000 more jobs. Construction, Retail trade, and Transportation- warehousing created another 62,000 jobs in February.

What does this really mean? That employment and economic growth have stabilized in a very good place, with more good new jobs created, the unemployment rate still below 4 percent and average hourly ages rising faster than inflation.

American consumers and Fed officials can breathe easier this year, and the Fed can begin to lower interest rates to hedge against the damage from future shocks to the economy, rather than worry about higher inflation ahead (i.e., the danger of deflation rather than inflation).

Former St Louis Fed President James Bullard believes Chairman Powell’s Fed will now lower interest rates sooner. Otherwise the Fed may get behind on rate cuts if the economy normalizes over the second half of the year, he said in an interview with MarketWatch’s Greg Robb. It would be awkward for the Fed to have inflation close to 2% with the Fed’s benchmark policy rate in the range of 5.25%-5.5%, Bullard said.

This is while “The price index for gross domestic purchases (GDP) increased 1.9 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter. The personal consumption expenditures (PCE) price index increased 1.7 percent, compared with an increase of 2.6 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, the same change as the third quarter.”

Why has inflation fallen so dramatically? I’ve been saying there are a number of reasons, beginning with the fact that the supply chain of goods and services has caught up to the demand by consumers and companies after the pandemic. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply, largely because of new technologies such as AI, which has stream-lined supply chains and shortened delivery times.

FREDlaborproductivity

The productivity of American workers rose at a 3.2 percent annual rate in the fourth quarter. Year over year, productivity has increased by a revised 2.6 percent. That’s the largest increase since the first quarter of 2021.

This will keep inflation low for the rest of this year, maybe too low if the Fed doesn’t listen to Bullard, and the unemployment rate continues to tick higher in months ahead.

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

Wednesday, March 6, 2024

More Jobs in Year Ahead?

The US economy hasn’t slowed. Fourth quarter Gross Domestic Product (GDP) growth was revised downward from 3.3 percent to 3.2 percent in the second estimate, and predictions for first quarter 2024 GDP growth are hovering between 2-3 percent.

The focus now shifts to Friday’s upcoming unemployment report. Today’s Job Openings and Labor Turnover Survey (JOLTS) will help to predict the jobs picture. The JOLTS report is holding at 8.9 million job openings, same as last month, so Friday’s unemployment rate should remain at a very low 3.7 percent.

Calculated Risk’s wonderful graph gives us the best visual portrayal of monthly changes in job creation. The black line portrays job openings, dark blue line portrays hires, and red bars show total separations. Net job formation has been in a downward trend since the Fed began to raise interest rates.

“The number of job openings changed little at 8.9 million on the last business day of January, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.”

The difference between hires and job separations is closer to the actual number of new jobs created in February—400,000 in this case. But after seasonal adjustments that attempt to ascertain the increase over last year at this time, new nonfarm payrolls jobs should be around 200,000 in Friday’s report, a very strong jobs report.

Calculate Risk

It shows us why there has been a record number of jobs created over the past two years.

Consumer spending is the main reason growth has been so strong. It was revised upward from 2.8 percent to 3 percent annually in last week’s Personal Consumption Expenditure’s report.

Inflation has been tamed as well. The personal consumption expenditures (PCE) price index increased just 1.8 percent, an upward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.1 percent, an upward revision of 0.1 percentage point.

So why is the Fed waiting any longer to drop interest rates? They seem to be wanting consumers to spend less. Yet regional banks that specialize in commercial loans have been hurting since commercial office vacancy rates have soared. They need lower interest rates so they can refinance all those commercial loans about to come due.

Fed Chair Powell in his latest congressional testimony, said "What we want is just more evidence that will give us more confidence that inflation is on a path down to 2% sustainably."

But annual inflation is already below 2 percent with the PCE and wholesale Producer Price Indexes. What more evidence do they need?

The Fed is again playing its historical role of being the last to react to changing economic conditions—in this case the possibility of more bank failures if they don’t begin to lower short term interest rates soon.

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

Wednesday, February 28, 2024

Higher Growth Ahead?