US Economy Has Landed

 Popular Economics Weekly

There’s no longer any doubt with the initial estimate of fourth quarter GDP growth just in. The US economy has made a soft landing. The economy grew 3.3 percent in Q4 after a 4.9 percent increase in Q3, and 2.5 percent for the full year.

This is while inflation, as measured by the most comprehensive inflation indicator for Personal Consumption Expenditures (PCE), has been rising at just 2 percent for the past two months!

Consumer spending was the main engine of growth, which “reflected increases in services (led by health care) and goods (led by recreational goods and vehicles),” said the BEA.

BEA.gov

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? 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 for goods and services. But also, labor productivity, the amount of goods produced per worker-hour, has risen sharply in the last 12 months, largely because of new technologies such as AI, which has stream-lined supply chains, shortening delivery times.

Real GDP also reflected increased spending in exports, state and local government spending, nonresidential fixed investment, federal government spending, private inventory investment, and residential fixed investment. Spending and investing has increased across the board.

Why wouldn’t consumers keep buying? Americans are fully employed, and average hourly wages are rising faster than inflation (+4.1%). Inflation has been falling particularly sharply over the past 6 months (1.9%-2.5%, depending on which inflation measure we look at), I said last week.

And health care spending is soaring, as a record 21.3 million people have officially signed up for healthcare insurance through the HealthCare.gov Marketplace for 2024, marking a third consecutive banner year for the program, per the press release.

HHS Secretary Xavier Becerra said, “Once again, a record-breaking number of Americans have signed up for affordable health care coverage through the Affordable Care Act’s Marketplace, and now they and their families have the peace of mind that comes with coverage.”

So I would add another reason for the improving mood of consumers: a healthier workforce is a more productive workforce.

Oh yes, and U.S. new-home sales rose 8% to an annual rate of 664,000 in December from a revised 615,000 in the prior month, the Commerce Department reported Thursday; even with very high interest rates.

The median sales price of a new home sold in December fell to $413,200 from $426,000 in the prior month partly because for sales inventories have risen to an 8-month supply.

These are all signs of recovery that will accelerate when the Fed governors finally decide inflation is no longer a danger and begin to lower their interest rates.

Harlan Green © 2024

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

We Have A Soft Landing (if the Fed is listening)

 Financial FAQs

FREDdurablegoods

After four consecutive 0.75 percent rate hikes, the Fed should slow down its rate increases, say at least three Federal Reserve Governors. That is good news as we try to assess the likelihood of another recession.

It’s good news because there are already signs of a possible soft landing in 2003, if the Fed will take their foot off the economic brakes until there is more certainty of its tightening efforts down the road.

Reuters quotes the Chicago Fed’s Charles Evens (San Francisco and Richmond Fed Presidents also advocate slowing) that it is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed and slow the pace further once risks become more "two-sided," (i.e., a possible recession) Chicago Fed President Charles Evans said on Friday.

"From here on out, I don't think it's front-loading anymore, I think it's looking for the right level of restrictiveness," Evans told Reuters in an interview, referring to the U.S. central bank's string of supersized rate hikes.

If the Fed did nothing more this year, we could have a ‘soft landing’ since growth is already slowing in both the manufacturing and service sectors of our economy.

New orders for factory goods are down, for instance (see top line in above FRED graph from 2/92) and holding at a lower level of activity. Orders for manufactured goods rose 0.3 percent in September, the Commerce Department said last Thursday, and orders have risen eleven months of the past year. The factory sector led the economy’s recovery from the pandemic because of huge pent-up demand for things like automobiles and other durable goods after the pandemic.

The ISM’s manufacturing index is now close to breakeven. The S&P global U.S. manufacturing PMI inched up to 50.4 in its “final” reading in October from the “flash” reading of 49.9. This is down from a reading of 52 in September.

“The U.S. manufacturing sector continues to expand,” said ISM Chair Timothy Fiore, “but at the lowest rate since the coronavirus pandemic recovery began. With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand.”

The Institute for Supply Management (ISM) serviced sector (non-manufacturing) Index that measures conditions at companies such as retailers and restaurants fell to 54.4 percent in October and touched the lowest level since the U.S. lockdowns in 2020, pointing to a slowing U.S. economy. A number above 50 signals expansion; but settling in a more normal range typical of a slower growing economy.

Granted this is before the Fed’s latest rate hikes take hold that could reduce the demand for goods and services even further, Consumer borrowing that is reported by the Fed is a better indicator of consumer wherewithal, since they wouldn’t be shopping as much as they have been if they fear an imminent recession.

Consumercredit

Consumer credit has been declining slowly, but again it is back to more normal pre-pandemic levels (see above Fed chart from 1/04). Revolving credit, like credit cards, rose 8.7 percent in September, less than half of the 18.1 percent gain in the prior month. Nonrevolving credit, typically auto and student loans, rose 5.7 percent, up from a 4.5 percent growth rate in the prior month. This category of credit is much less volatile.

The growing danger is to continue to tighten while there are still shortages of food and energy supplies, while demand is already shrinking in the rest of the world.

China’s economic woes are one example. Reuters reports “China's exports and imports unexpectedly contracted in October, the first simultaneous slump since May 2020, as a perfect storm of COVID curbs at home and global recession risks dented demand and further darkened the outlook for a struggling economy.”

The San Francisco Fed has also flagged the danger with its own published research that suggests we have already tightened too much. U.S. monetary policy is tighter than the Federal Reserve's policy rate suggests, according to research published Monday by the San Francisco Fed, with financial conditions by September 2022 reflecting the equivalent of a 5.25 percent policy rate, which it the top boundary of Chairman Powell’s own prediction.

"Accounting for the broader stance of policy and comparing the proxy rate to simple rules suggests U.S. monetary policy tightened sooner and more sharply than has been generally recognized," the Letter said.

Given what could be a brutal economic winter for much of the world, and demand maybe reaching parity with supply so that risks become more "two-sided" in Chicago Fed President Charles Evans words, we may now see a more benevolent Federal Reserve and enjoy the possibility of a soft landing.

Harlan Green © 2022

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

Strong Job Growth Continues

 Popular Economics Weekly

MarketWatch

The unemployment rate slid to 3.6 percent in March from 3.8 percent in February, the government said Friday. The big news was that with an additional 431,000 nonfarm payroll jobs added in March, a total of 2.273 million jobs have been created over the past four months. This is the fastest payroll increase since 1939.

I find little that foretells trouble ahead in the Labor Department’s jobless survey. Job growth is surging, and this will help bring down inflation because more people are returning to work, so more will be produced, easing supply-chain worries.

Rising wages are also helping consumers—the annual average is up 5.6 percent—since most of the wage increase is for service workers that need it the most.

MarketWatch’s Andew Keshner listed those sectors where wages rose faster than the inflation rate:

• In transportation and warehousing jobs, the year-over-year growth rate in hourly earnings was 7.9%. Paying an average hourly rate of $27.79, these workers have been much-needed with e-commerce sales booming and supply chains trying to unsnarl.
• In leisure and hospitality jobs, the year-over-year growth was even higher, at 11.8%. Hotels, restaurants and bars kept staffing up, accounting for roughly one-quarter of all the March jobs gains and paying an average $19.68 an hour in March.
• Jobs in retail trade saw 6.5% average hourly earnings growth, paying an average $22.89 per hour. This sector includes work in everything from grocery stores to gas stations, clothing, hardware and more.
• Jobs in “professional and business services” had a 6.6% increase, paying an average $38.18 an hour. In March, this sector — covering all sorts of white-collar work from accountants and lawyers to call centers and administrative staff — added 102,000 jobs.

Calculated Risk

It has been one of the fastest recoveries since the 1981 recession per Calculated Risk’s graph (red line on graph), despite the one-month-old Ukraine war. The U.S. economy was going strong before the pandemic and has almost returned to its pre-pandemic level of February 2020; in part because the recession lasted just two months—March to April 2020.

We are already seeing what a ‘new normal’ might look like in the years to come. Government has had to step up spending to tame the pandemic, just as it did during Roosevelt’s New Deal to recover from the Great Depression. Now, President Biden’s proposed $5.8 trillion budget for the 2023 fiscal year must address what might become a prolonged European war.

“Budgets are statements of values, and the budget I am releasing today sends a clear message that we value fiscal responsibility, safety and security at home and around the world, and the investments needed to continue our equitable growth and build a better America,” said President Biden on its release.

Now isn’t the time to worry about inflation or the Fed engineering a soft landing, or any ‘landing’ at all. It is is precisely during such uncertain times that we need elevated growth, and a government that steps up while partisan politics step down, even with an upcoming election in November.

Harlan Green © 2022

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