Retail Sales Slowing

 Financial FAQs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Harlan Green © 2024

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

Economic Facts Tell the Truth

 Financial FAQs

Here’s another reason we have avoided a recession. Regardless of the looming tax bills due in April that traditionally causes consumers to save more and spend less, consumers are spending more and saving less, per the BEA’s Personal Consumption Expenditure release.

It’s another economic fact that indicates the US economy is doing very well, and that Main Streeters should believe, contrary to what many seem to say per the polls. But will economic facts win out over the irrational pessimism showing up in consumer polls?

In a poll by PEW Research I wrote about last week, “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.”

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Consumers are spending more than they earn because they feel better about their own situation, in spite of what they say about economic conditions. The government’s Personal Consumption Expenditures (PCE) data that the Fed watches closely in February showed consumers’ disposable income (after taxes) increasing 1.0 percent while spending had increased 4.0 percent. The personal savings rate therefore slipped from 4 percent to 3.8 percent.

Fourth quarter economic growth was just upgraded to 3.4 percent from 3.2 percent, and consumer spending, the main engine of the economy, was revised up to a 3.3% increase in the fourth quarter instead of 3% annually as well.

Why the pessimism by ordinary consumers? Because most economic data is basically unintelligible to Main Street consumers. Duncan Foley, an economics Professor at NYU’s New School maintains that the economics profession has become so complex that economists are “becoming priestly figures, with arcane knowledge and special powers” in his book, Adams Fallacy: A Guide to Economic Theory.

He asserts economics is as much philosophy as a social science, since it attempts to measure financial behavior with economic data and formulas, many of which are understandable only by economists.

More importantly “Thinking like an economist comes hard to many people…the economic way of thinking is just as value laden as any other way of thinking and can foster dangerous mistakes of judgement.”

What is hurting consumer finances the most? The Wall Street Prime Rate has risen to 8.5 percent because the Funds rate is 5.25 percent. Consumers must spend more than they save because borrowing costs have soared for those with credit card debt and installment loans.

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How much longer can consumers spend as they have, as their personal savings continue to be depleted? A recent National Bureau of Economic (NBER) working paper concludes that one reason consumers remain unconvinced that economic conditions have improved, is because if borrowing costs were included in the inflation data, the inflation rate would be much higher.

“Consumers, unlike modern economists, consider the cost of money part of their cost of living. Interest rates have reached 20-year highs in the wake of the pandemic. With higher rates, mortgage payments, car payments, and other credit payments required to finance everyday purchases have risen as well.”

So that makes the Federal Reserve part of the problem since the Prime Rate is directly keyed to the Fed Funds rate, and why wouldn’t the price of things be controlled by the cost of said things??

That could be why we see so much irrational exuberance, to use former Fed Chair Greenspan’s term, in which decisions are made via hearsay and word of mouth rather than economic facts.

Consumers must deal with the cost of money when they look at their financial condition, which should mean their mood will improve when the Fed finally decides to cut interest rates.

Harlan Green © 2024

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

When a Return to Normal Growth?

 Financial FAQs

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There is so much confusion in the financial markets, as well as with consumers, over what comes next and little history to compare because we are recovering from a world-wide pandemic, the first one since the Spanish flu pandemic of the 1920s.

So, it is useful to look at interest rates as an indicator of what is normal, namely the Fed Funds rate that the Fed has jacked up to 5.25 percent (per above graph) and the Bank Prime Loan rate—which controls consumer spending and therefore economic growth and job formation—to determine what the U.S. economy might look like over next few years.

The Bank Prime Loan Rate which moves in tandem to the Fed Funds rate (see below FRED graph), is used by most banks to set both short-term credit card as well as longer-term installment loan interest rates for such as autos and appliances. And a high Prime Rate really puts a damper on consumers’ pocketbooks.

It is currently 8.50 percent in the second graph dating from the 1950s, up from its pandemic low of 3.25 percent, which ignited so much consumer spending and the mortgage refinance binge in 2020-21.

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That is too high for any sustained growth. The Bank Prime Loan Rate fluctuated from 7.5 to 10 percent in the 1970s to 2000, as did a higher unemployment rate, before unemployment descended to its current 3 percent lows after the Great Recession (2009), and which is causing the current growth spurt.

Economic growth is accelerating again but the Fed must begin to lower their rates sooner rather than later for growth to continue.

Avoiding another recession will be the miracle of miracles if they don’t lower interest rates soon, since every recession since the 1950s (10 at last count per gray bars in graphs) was mainly caused by the Fed jacking up their Fed Funds rate and hence the Bank Prime Loan Rate to ‘tame’ inflation, which drastically slowed both spending and lending, as I said.

GDP growth expanded 2.1 percent in Q2. And just last week S&P Global Market Intelligence raised its third-quarter GDP estimate by nearly two percentage points to an annualized rate of 4 percent, citing strong retail sales data. It moved its annual estimate up slightly to a historically strong 2.3 percent.

Inflation should continue to decline overall because of the Fed’s past rate hikes, though consumer prices rose again in August to reach a 3.7% yearly rate, based on last week’s release of the monthly consumer-price index. That marked its biggest jump in 14 months, up from 3.2 percent in July and a 27-month low of 3 percent in June.

If we want to avoid a recession then history tells us th e Fed needs to drop its shorter-term rates, so that the Bank Prime Loan Rate returns to its historic norm of 5-7 percent, and its Fed Funds rate in the neighborhood of 3.75 percent, which history says consumers and businesses can tolerate for sustained growth.

But that also depends on supply chains remaining healthy. What about the Ukraine-Russian war? It doesn’t seem to be affecting food and energy prices anymore, since food prices are back to normal and even OPEC had to reduce oil production to boost the price of crude oil which means oil supplies are plentiful.

Returning to a more normally functioning economy also means the Fed must return to a more normal Fed Funds rate to avoid another recession, which hasn’t been the case in the past.

Harlan Green © 2023

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