Third Quarter U.S. Growth Turns Positive

 Popular Economics Weekly

BEA.gov

The U.S. economy grew 2.6 percent in the third quarter due to exploding exports, declining imports after two quarters of negative growth from the aftereffects of the pandemic, and record GDP growth in 2021.

‘The increase in exports reflected increases in both goods and services,” said the Bureau of Economic Activity (BEA). “Within exports of goods, the leading contributors to the increase were industrial supplies and materials (notably petroleum and products as well as other nondurable goods), and nonautomotive capital goods. Within exports of services, the increase was led by travel and "other" business services (mainly financial services). Within consumer spending, an increase in services (led by health care and "other" services) was partly offset by a decrease in goods (led by motor vehicles and parts as well as food and beverages).”

Travel and leisure activities jumped because Americans fled their homes after two years of pandemic restrictions. Consumer spending held up and spending on capital goods, a good sign of future growth prospects, increased at a 10.8 percent pace, but investment in structures and new housing sank as soaring mortgage rates choked off home sales.

Housing remains the worm in the apple of future growth, and a reason there are predictions of some level of recession next year, because housing construction and sales feed so many other sectors, such as insurance, banking and other professional services, as well as causing homeowners to feel less wealthy, the so-called wealth effect that can imduce consumers to spend less.

For instance, sales of new single‐family houses in September 2022 were at a seasonally adjusted annual rate of 603,000. This is 10.9 percent below the revised August rate of 677,000 and is 17.6 percent below the September 2021 estimate of 732,000, said the Census Bureau.

More importantly, the inflation rate has already declined. The price index for gross domestic purchases increased 4.6 percent in the third quarter, compared with an increase of 8.5 percent in the second quarter. The decline mostly stemmed from a sharp drop in gasoline prices, said the BEA.

This is the disinflation we have been speaking of where the rate of inflation is declining, but it’s not outright deflation when overall prices are actually falling, a sign of recession. It is indicative of a soft landing, a desirable outcome the Fed and economists are looking for.

Inflation fell even more for consumers as the Personal Consumption Expenditure (PCE) Index that measures consumer spending increased 4.2 percent, compared with an increase of 7.3 percent in Q2. Excluding food and energy prices, the PCE price index increased 4.5 percent, compared with an increase of 4.7 percent.

Inflation would decline more quickly if not for the tight labor market. Weekly initial jobless claims rose slightly to 220,000 in the week ended October 22, with companies reluctant to lay off workers. The consensus among economists is that corporate record profits are enabling companies to retain workers, despite their higher costs.   

In fact, their record profits may be a sign of profit-taking, companies (like the oil giants) making excessive profits on the rising demand for their products.

It is not yet a given that growth will remain positive in the fourth quarter, or that inflation will continue to decline in the face of product shortages (like oil and food), but I am banking on the holidays to bring out shoppers and keep growth positive for the rest of this year.

Harlan Green © 2022

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

Is Full Employment Still Possible?

 Financial FAQs

Roosevelt Institute

Paul Krugman has forwarded an excellent blog piece by Roosevelt Institute Fellow Justin Bloesch on why we can maintain near-full employment while inflation is returning to the rate that prevailed prior to the pandemic.

Bloesch maintains that full employment and 2 percent inflation rates are possible because there is no longer a higher “natural rate” of unemployment that the Fed must maintain to bring down inflation.

The Fed believes that the best way to bring down inflation is to slow economic growth by inducing lower consumer spending and capital investment by continuing to boost their short-term interest rate target to somewhere between 4.5 to 5 percent.

But the current 3.5-3.6 percent unemployment rate has prevailed since March 2022 even while wage growth and consumer spending have been slowing that are the major ingredients of inflation.

Top that off with supply-side bottlenecks already easing and commodity prices falling, leading us to believe that inflation will return to more historical levels by the spring of 2023.

The probability of such a return to more historical inflation levels of 2-3 percent that prevailed since the 1990s is further increased should the Ukraine War quiet down and China get its post-pandemic COVID problems resolved.

Justin Bloesch’s graph shows that COVID’s shock to the employment system was uniform across all sectors, and the post-pandemic recovery has been uniform across all job sectors as well. This suggests that the COVID pandemic was the main cause of the inflationary surge, and as infection rates continue to decline, more people will want to return to work, keeping unemployment low, and lowering the pressure for employers to raise wages further.

“The better explanation for a temporarily high V/U ratio (i.e., job vacancy to unemployment), and the overall high level of churn in the economy, is just that the economy was rapidly emerging from the pandemic. Many workers did lose their jobs and took jobs in new sectors, and demand for labor was both high and growing rapidly,” said Bloesch. However, as the economy shifts to a slower pace of growth, it is likely that recruiting activity can fall without triggering layoffs.”

This is while the Fed seems to believe that we can’t maintain full employment and a tight labor market without pushing wages even higher, as employers compete for scarce workers.

We have had lower inflation during the last few decades, an era labeled the “great moderation” by economists, because of modern technologies like speeded up just in time supply chains and improved production facilities jn many Asian and third world countries that created an excess of goods and services worldwide.

Harvard Professor Jeffery Frankel, a member of President Clinton’s Council of Economic Advisors, sees commodity prices in particular continuing downward in a recent Project Syndicate article because of the current economic malaise.

“There are two macroeconomic reasons to think that commodity prices in general will fall further. The (slowing) level of economic activity is a self-evidently important determinant of demand for commodities and therefore of their prices. Less obviously, the real interest rate is another key factor. And the current outlook for both global growth and real interest rates suggests a downward path for commodity prices.”

So there doesn’t have to be such a draconian tradeoff between what has been called a “natural rate” of unemployment and inflation. In fact, the relationship between employment and inflation seems to have created a lower “natural rate” than the Fed and many forecasters are using to determine what is the ideal interest rate target the Fed should be shooting for.

This is important and might prevent the large number of layoffs the Fed is expecting because of their current policies, given today’s market conditions in a fast-changing world.

Tomorrow’s release of the government’s first estimate of Q3 GDP growth may give us a hint of what kind of slowdown we are already experiencing.

Harlan Green © 2022

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

Leading Indicators Say Imminent Recession?

Financial FAQs

Conference Board

One economic growth measure acknowledged by market professionals but few else is the Conference Board’s Index of Leading Economic Indicators (LEI) that attempts to forecast future economic activity. And it is signaling an upcoming recession, according to its director.

“The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The six-month growth rate of the LEI fell deeper into negative territory in September, and weaknesses among the leading indicators were widespread. Amid high inflation, slowing labor markets, rising interest rates, and tighter credit conditions, The Conference Board forecasts real GDP growth will be 1.5 percent year-over-year in 2022, before slowing further in the first half of next year.”

So it is predicting contraction later this year: “The negative contributors—beginning with the largest negative contributor—were stock prices, average consumer expectations for business conditions, the ISM® New Orders Index, the Leading Credit Index™ (inverted), and manufacturers’ new orders for nondefense capital goods excluding aircraft,” said the LEI.

The labor market is slowing but it is still tight with initial jobless claims ultra-low, and inflation beginning to decline, which makes it less likely the U.S. slides into recession this year.

Prices are already plunging is many areas not covered by the standard inflation indexes. The New York Federal Reserve has said its September Survey of Consumer Expectations found that respondents projected their spending will rise by 6 percent over the next year, a sharp drop from the 7.8 percent rise predicted in the August survey. The bank noted that decline in spending expectations was the biggest since the survey began in 2013, while inflation expectations are holding steady, even declining slightly in the near term.

This will be a Federal Reserve induced recession if it materializes. Stock prices and consumer spending are down because of the higher interest rates, with the housing market, another leading indicator, already in recession.

The COVID pandemic and war in Ukraine have thrown a monkey wrench into economic policymaking because inflation reared up so quickly after the worldwide shutdown of economic activity, while governments and Central Banks spent $trillions in various COVID rescue packages in the face of worldwide shortages of goods and services—especially food and energy.

I quoted Adam Tooze, a well-regarded economic historian, last week as sounding the alarm in a recent NYTimes Opinion.

“We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. And raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit capacity and thus reduce future supply”

Yet the Conference Board’s confidence index signals consumers are still upbeat, at least through the holidays, which makes it also less likely we see a downturn this year.

“…purchasing intentions were mixed, with intentions to buy automobiles and big-ticket appliances up, while home purchasing intentions fell,” said the Conference Board. The latter no doubt reflects rising mortgage rates and a cooling housing market. Looking ahead, the improvement in confidence may bode well for consumer spending in the final months of 2022, but inflation and interest-rate hikes remain strong headwinds to growth in the short term.”

In fact, Gross Domestic Product is predicted to grow more than 2 percent in Q3 and slightly less in the fourth quarter. So, no recession is yet in the works—at least this year.

Harlan Green © 2022

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

 

Homebuilders Losing Confidence

The Mortgage Corner

Calculated Risk

Builder confidence in the market for newly built single-family homes dropped eight points in October to 38—half the level it was just six months ago—according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today.

This is the lowest confidence reading since August 2012, except for the onset of the pandemic in the spring of 2020, and means the housing sector has been hit hardest by higher interest rates, which have reached nosebleed territory for prospective homebuyers.

“This will be the first year since 2011 to see a decline for single-family starts,” said NAHB Chief Economist Robert Dietz. “And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues. While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out many prospective buyers.”

Existing-home sales look no better. The National Association of Realtors reports year-over-year, sales faded by 19.9% (5.99 million in August 2021).

"The housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve's interest rate policy changes," said NAR Chief Economist Lawrence Yun. "The softness in home sales reflects this year's escalating mortgage rates. Nonetheless, homeowners are doing well with near nonexistent distressed property sales and home prices still higher than a year ago."

This is small comfort to a housing market already in recession, said economist Diane Swonk.

“Mortgage demand plummets 86% from year ago as refis continue to evaporate along with new mortgage demand. The data adds to the collapse we saw in home builder sentiment earlier this week and marks a 25 year low. The housing market recession will get demonstrably worse,” she said in a recent Tweet @DianeSwonk.

The real problem hurting housing is inflation that has spiked higher interest rates, something that President Biden and Democrats have little control over. Worldwide food and energy prices first began to surge with Russia’s invasion of the Ukraine.

The UK just reported its consumer-price index increased 10.1 percent in September year-on-year, up from 9.9 percent in August, according to data from the U.K.’s Office for National Statistics published Wednesday.

The rise in inflation was driven by higher food and non-alcoholic beverage prices, which increased by 14.5 percent on year compared with 13.1 percent in August. Meanwhile, the continued fall in the price of motor fuels made the largest downward contribution, the ONS said.

The UK has one of the better inflation numbers. Turkey, Russian, Brazil and many other countries hit hard by the supply shortages still have double-digit inflation rates.

So, let’s put the blame for high inflation where it belongs—China’s troubles with COVID lockdowns, a war, and lingering hangover from the pandemic, ok?

Harlan Green © 2022

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

 

Retail Sales, Inflation Slowing

Popular Economics Weekly

FREDretailsales

Another part of the inflation puzzle is retail sales; probably the most important picture of consumer demand since consumers power some 70 percent of economic activity. Any decline in retail sales helps the Federal Reserve decide when consumer demand for goods and services cools enough to slow rising inflation, and hence interest rates.

So, its good news to see that retail sales dropped sharply in one month—from 15.5 percent in March 2022 to just 5 percent in April 2022 YoY.

That’s also when Putin began his invasion of Ukraine and food and energy prices began to surge. It’s a sign that consumers pay attention to inflation and are cutting back on spending of their own accord.

FREDcpi

What the headlines don’t yet grasp is that retail sales flattened out in April, as did the 40-year spike in the Consumer Price Index, which has risen just 2 percent over the past three months.

Retail sales are rising at 7.7 percent YoY in September and are barely keeping up the with the 8 percent inflation rate. Total sales were flat rather than up 0.2% in September as we had expected, said Reuters:

“Retail sales are slowing as spending shifts back to services. Sales at auto dealerships slipped 0.4% last month, while receipts at service stations dropped 1.4%. Furniture store sales fell 0.7%, while those at building material and garden equipment retailers decreased 0.4%.”

A survey from the University of Michigan on Friday showed consumer sentiment improved further in October, but inflation expectations deteriorated a bit as average national gasoline prices moved towards $4 per gallon after falling over the summer.

“Continued uncertainty over the future trajectory of prices, economies, and financial. markets around the world indicate a bumpy road ahead for consumers,” said survey director Joanne Hsu. “The median expected year-ahead inflation rate rose to 5.1%, with increases reported across age, income, and education. Last month, long run inflation expectations fell below the narrow 2.9-3.1% range for the first time since July 2021, but since then expectations have returned to that range at 2.9%.”

It looks like consumers via their spending habits will know and be the first to tell the Fed when the inflation dragon has been tamed.

Harlan Green © 2022

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

 

Inflation Already Slowing!

 The Mortgage Corner

AtlantaGDPNow

The Atlanta Federal Reserve has just upped their estimate of Q3 economic growth to +2.9 percent after two quarters of negative growth. Why are they thinking that economic growth will resume when the Fed says it intends to push interest rates even higher?

Part of the problem, according to renowned economist Professor Jeremy Siegal of the Wharton School in a recent CNBC interview, is the Fed bases its outlook on inflation indicators six months to a year behind actual inflation trends.

They should instead base their actions on current economic indicators, says Siegal, such as the real money supply and disposable incomes, which have been falling sharply. The amount of money in circulation controls much of the economic activity of banks as well as consumers and higher interest rates will shrink the M2 money supply even further.

MarketWatch

MarketWatch economist Rex Nutting’s above graphs show that the real money supply, disposable income (i.e., after taxes), and home prices that measure real wealth for the two-thirds of American households that own homes, have been declining for months.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) is also based on actual economic indicators—such as employment and wholesale trade. As of October 7, its latest forecast for the third quarter of 2022 is 2.9 percent, up from 2.7 percent on October 5.

“After this morning's employment situation report by the US Bureau of Labor Statistics and the wholesale trade report from the US Census Bureau,” said the GDPNow press release, “the ‘nowcast’ of third quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 1.1 percent and -3.6 percent, respectively, to 1.3 percent and -3.4 percent, respectively.”

Part of the problem may be the Atlanta Fed looks at numbers affecting all Americans vs. Fed Chair Powell looking at numbers that rely on indexes that measure data affecting 30 to 40 percent of our population, such as rents and food prices that have seen the highest price increases.

There are also other leading indicators of inflation, including commodity prices, supply times, the value of the dollar BUXX, 0.25% DXY, 0.16%, says Nutting. Almost all of these have peaked and are now declining. These are other signs that inflationary pressures are lessening.

“The biggest risk to the economy is that the Fed and other central banks will tighten too much, according to 55% of economists surveyed by the National Association of Business Economics,” he said.

If economic growth is positive for the rest of this year, it may be a sign that the actual inflation indicators Professor Siegal and Nutting advocate show that inflation has already slowed sufficiently, though the 'official' government indexes won't reflect that until next year.

Will the Federal Reserve realize this in time to avert another recession?

Harlan Green © 2021

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

Too Much Disinflation Is Bad Planning

 Financial FAQs

FREDcapex

The rumblings of an oncoming disinflationary spiral are becoming louder. And it may be as difficult to tame as the current inflationary spike that so worries the Federal Reserve.

What is disinflation as opposed to outright deflation? It’s when prices are still rising but at a lower inflation rate, vs. outright deflation when prices are falling, which occurs during a recession. Deflation last happened during the Great Recession and busted housing bubble.

The COVID pandemic and war in Ukraine have thrown a monkey wrench into economic policy-making because inflation reared up so quickly after the worldwide shutdown of economic activity, when governments and Central Banks spent $trillions in various COVID rescue packages in the face of worldwide shortages of goods and services—especially food and energy sources

The problem is how to cure inflation without causing a recession, since raising interest rates too rapidly harms future economic investment, particularly capital expenditures (capex), as well as consumer spending. Capex investment has abruptly declined after its rapid rise post-COVID, per the above FRED graph.

Adam Tooze, a well-regarded economic historian, is one of the loudest sounding the disinflation alarm in a recent NYTimes Opinion.

“We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. And raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit capacity and thus reduce future supply”

Former Fed Chair Ben Bernanke, one of three economists just awarded the 2022 Economics Nobel Prize, is contributing to the chorus. He warned that our Fed’s attempt to “fine tune” economic stability risks with interest-rate policies was not a good idea. “I don’t think we understand that well enough, except in perhaps extreme conditions, to try to fine-tune financial stability using monetary policy,” he said when interviewed at the Brookings Institute.

What is our Federal Reserve to do when the Produce Price Index for raw materials and wholesale goods that came out today is still rising? The increase in wholesale prices over the past year is up 8.5 percent, down slightly from 8.7 percent in the prior month. Inflation is still running near a 40-year high.

But prices are already plunging is many areas not covered by the standard inflation indexes. The New York Federal Reserve has said its September Survey of Consumer Expectations found that respondents projected their spending will rise by 6 percent over the next year, a sharp drop from the 7.8 percent rise predicted in the August survey. The bank noted that decline in spending expectations was the biggest since the survey began in 2013, while inflation expectations are holding steady, even declining slightly in the near term.

Adam Tooze’s plea echoes what many economic planners worry about. It’s taken more than two years to bring the COVID pandemic under control. Why not give the world’s economies more time to recover?

Harlan Green © 2022

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