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.”

BEA.gov

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

COVID-19 is Making US Richer

Financial FAQs

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More Americans are richer, thanks to the COVID-19 pandemic, believe it nor not. The pandemic has spurred congress and the Biden administration to act as if we are coming out of another Great Depression.

The U.S. is growing faster than in other developed countries that haven’t invested as much in the recovery. And those investments are going to Americans that need it the most.

Just since the American Rescue Plan passed in March 2020, 4.3 million more people have found employment. Wages and real disposable income are up, especially for low-wage workers, who are disproportionately women and people of color and who have experienced consistent wage growth since April 2021, say Rose Khattar and Andres Vinelli of the Center For American Progress, a progressive think tank.

It’s the New Deal all over again, but instead of the 1930s and a looming World War Two, congress and the Biden administration have acted to save the U.S. economy from the worst pandemic since the Spanish flu pandemic of 1918.

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“The U.S. is the only leading advanced economy to have exceeded its pre-pandemic levels, according to the Organization for Economic Co-Operation and Development,” say Khattar and Vinelli. “In fact, data from the most recent quarter shows that our real GDP—which is GDP adjusted for inflation—is around 13% larger than the end of the COVID-19 recession.”

It is largely due to Biden’s American Rescue Plan of last March that especially raised the lowest income brackets. Economist Gene Sperling, its White House Coordinator, says such growth not only helps lower-income folk, but children most of all with the child tax credit that alone has halved the child poverty rate.

And don’t forget the $1400 payments sent out to most Americans at a time when the pandemic lockdowns were in full force.

More evidence of the record post-pandemic growth is that service-oriented businesses making up two-thirds of economic activity---such as banks, retailers and drug stores—grew in November at the fastest pace on record, even as companies grappled with major shortages of labor and supplies.

The Institute for Supply Management’s services PMI climbed to 69.1 percent last month from 66.7 percent in October, when 50 percent is break-even growth, marking the biggest increase on record.

In a rarity, all 18 of the service sectors tracked by ISM said they grew in November. The biggest problem is supplying all the services that customers want. Companies can’t find enough people to fill a near-record number of open jobs. They’ve also struggled to obtain badly needed supplies.

“It goes back to the pent-up demand,” said Anthony Nieves, Chair of the Institute for Supply Management® Services Business Survey Committee. “You can look at other tangible things such as mall traffic and online distribution increasing, which are contributing factors to business activity being up. Many people are going back to work, and consumer confidence is up.”

And if the newest Omicron variant proves less deadly, as initial test results are showing, then there’s nothing to hold back consumers and businesses from building America back better than ever.

Harlan Green © 2021

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

 

Economic Growth is Slowing

Financial FAQs

BEA.gov

Gross domestic product, the official report card on the economy, grew at a 2.1 percent annual pace from the start of April to the end of June, the government said Friday. GDP slowed from a 3.1 percent gain in the first three months of the year.

American consumers don’t seem to care about signs of slowing growth in manufacturing and housing, as most can find good jobs and rising wages in the service sector of the economy, and they are flush with cash. The BEA reports disposable personal income increased $193.4 billion, or 4.9 percent, in the second quarter, compared with an increase of $190.6 billion, or 4.8 percent, in the first quarter. Real disposable personal income (after inflation is factored in) increased a very impressive 2.5 percent, compared with an increase of 4.4 percent in Q1.

But they are becoming more cautious about the future as the personal saving rate -- personal saving as a percentage of disposable personal income – is at 8.1 percent in the second quarter, compared with 8.5 percent in the first quarter, which are highs for this recovery.

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment, said the BEA. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending.

Economists had been predicting the slowdown for some time, as businesses are investing less this year. Manufacturing is the culprit, as no one wants to invest more in plant and equipment with the ongoing trade wars, as we have been saying. There is too much economic uncertainty in China and the EU, and growth in the rest of the world is also slowing because of the overall decline in foreign trade due to the uncertainties, according to the IMF.

The surge in consumer spending was also predicted by the jump in retail sales reported last week. Retail sales rose in June for the fourth month in a row, quieting concerns that the trade wars and weaker manufacturing output would also drag down consumer spending. The most surprising strength in the report was a 0.7 percent jump in auto sales, which the only component of manufacturing seeing steady growth. Nonretailers (Internet), which continue to feed off of traditional retailers such as department stores, was also surprising with a 1.7 percent for the second month in a row.

So any further decline in GDP growth will probably be due to a slower accumulation of inventories and capital investments (as seen in the above capital-goods orders graph) and a growing negative imbalance in exports vs. imports with the decline in manufacturing.

If the Trump administration and Republicans would realize the damage confrontational trade wars and other fear-mongering policies do to GDP growth, they would end such tactics. But it is obvious they only see an upside in their continuing confrontation with allies and adversaries alike, which should come back to haunt them next year when the inevitable worldwide growth slowdown impacts US, and the Presidential election.

And guess what?  The price index for gross domestic purchases increased 2.2 percent in the second quarter, compared with an increase of 0.8 percent in the first quarter, which is a sign of looming inflation, and makes it more unlikely the Fed will want to lower their short term interest rates anytime soon.

Harlan Green © 2019

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