Retail Sales Decline Worrying

Financial FAQs

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 © 2024

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

Why the Inflation Confusion?

 Popular Economics Weekly

Most pundits (and propagandists) don’t know who to blame for ‘sticky’ inflation, so they blame those who haven’t caused it—such as the current administration or the Federal Reserve.

But the sudden rise in prices was caused by supply shortages and empty shelves from the COVID pandemic and lockdowns that followed. And this happened in all countries. Now add to this several wars that have disrupted more supply chains, including a developing cold war with China, and global warming which is causing massive droughts and floods that have disrupted food supplies and displaced whole populations.

Leading economists, such as Nobelist Paul Krugman, have said the Fed with its policy tools can’t bring down prices in most sectors, just slow the rise in prices, which it has done so that inflation is now rising much more slowly.

It would take another full-blown recession and the loss of millions of jobs to cause prices to return to pre-pandemic levels, as has happened in every other recession portrayed in the FRED graph from 2000 (gray bars are recessions).

FREDcpi

It happened during the brief pandemic recession, for instance, when retail CPI inflation fell to zero percent in May 2020 and everyone out of work before rising to 9% in June 2022, and the earlier Great Recession when retail price inflation fell to a negative -2% in 2009, with the loss of more than 8 million jobs.

The worldwide pandemic lockdowns and supply chain stoppages were the most obvious cause of the supply shortages that brought on inflation rise to 9% in 2022, and steady decline of inflation since then as supply chains opened again to bring it down to the present seasonally adjusted 3.5% inflation rate.

It’s not easy for discontented consumers to blame the worst pandemic in 100 years for the sticky inflation figures because the COVID pandemic was such an unusual event that the trauma of one million US deaths has been quickly forgotten.

And it’s just as difficult to for consumers to imagine how the Middle East and Ukraine wars can disrupt oil and food supplies, as well as that due to global warming.

What is the best answer to this dilemma of higher prices and looming supply shortages? Faster economic growth, which the Biden administration with some bipartisan assist is doing with its New, New Deal Bidenomic policies that have employed millions.

The CHIPS Act is bringing back manufacturing jobs, the Inflation Reduction Act is countering global warming by funding alternative energy sources to fossil fuels, the Infrastructure and Jobs Act is spending $1 trillion to fix our infrastructure and projected to create more than 2 million jobs over the next decade.

But it requires consumers to think of its future benefits to know that we are in a better place, and can positively answer the question, are we better off today than four years ago?

Harlan Green © 2024

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

Less Need to Worry in 2024?

 Financial FAQs

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 © 2024

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

What Should Fed Do--Part II?

 Popular Economics Weekly

Friday’s ‘official’ April US unemployment report was even more surprising than Fed Chairman Powell’s dovish remarks after the Fed’s May FOMC meeting, as if Powell might have known that April’s unemployment report would be weaker.

It was, with the unemployment rate rising to 3.9 percent from 3.8 percent and just 175,000 nonfarm payrolls jobs added, vs. last month’s 315,000 jobs added after slight revisions.

"I think it is unlikely that the next rate move would be a hike,” said Powell at the time. “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”

FREDunemployment

And the US economy is moving towards the Fed’s desired goal of slightly higher unemployment and slower wage growth, which economists are saying is the ‘goldilocks’ condition similar to what it was in the last decade—not too hot (inflation) nor too cold (employment).

Average hourly earnings rose just 0.2% from the previous month and 3.9% from a year ago, both below consensus estimates and an encouraging sign of lower inflation.

The jobless rate tied for the highest level since January 2022. A more encompassing rate that includes discouraged workers and those holding part-time jobs for economic reasons also edged up, to 7.4%, its highest level since November 2021.

Health care led job creation, with a 56,000 increase. Other sectors showing significant rises included social assistance (31,000), transportation and warehousing (22,000), and retail (20,000). Construction added 9,000 positions while government, which had shown good gains in recent months, was up just 8,000 after averaging 55,000 over the previous 12 months.

Revisions to previous months took the March gain to 315,000, or 12,000 from the initial estimate, and February to 236,000, a decline of 34,000.

Do Powell’s remarks and the weaker jobs report are causing some economists to predict the Fed could once again begin to cut interest rates in June or July, with at least one more rate cut later this year.

Another sign of weakening inflation was the just released ISM service sector index that measures non-manufacturing jobs in areas such as healthcare, construction and transportation. The Institute for Supply Management said on Tuesday that its service-sector PMI dropped sharply to 49.4% in April from 51.4% in the prior month.

“In April, the Services PMI^® registered 49.4 percent, 2 percentage points lower than March’s reading of 51.4 percent,” said Anthony Nieves, Chair of the Institute for Supply Management. ‘The composite index indicated contraction in April after 15 consecutive months of growth since a reading of 49 percent in December 2022, the first contraction since May 2020 (45.4 percent). The Business Activity Index registered 50.9 percent in April, which is 6.5 percentage points lower than the 57.4 percent recorded in March.”

The service sector has been powering most economic growth since the end of the COVID pandemic, so it will also affect the Fed’s decision on when to begin to lower interest rates.

This is big news in an economy still at full employment, as I have said. The herd behavior (follow the leader mentality) typical of market movements means investors will take time to register what Powell and the Fed Governors are now hinting.

Economist Claudia Sahm, who I’ve mentioned before, is looking more like a truth-teller than ever. Her “Sahm rule” that if the unemployment rate rises +0.5 percent over the last three-month average, a recession is looming, has risen from its most recent low of 3.7 percent in January 2024 to 3.9 percent in April.

So who is right? We will now see if the more hawkish Fed Governors that had been hinting there may be no rate reductions this year will begin change their tune in upcoming speeches.

Harlan Green © 2024

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

What Should the Fed Do?

 Popular Economics Weekly

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.

Harlan Green © 2024

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

Inflation Target Reached?

 Financial FAQs

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 © 2024

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

Q1 GDP Better Than Estimate

 The Mortgage Corner

The initial estimate of first quarter 2024 Gross Domestic Product (GDP) growth was lower than expected, causing financial markets to panic, even though economic growth is better than the initial estimate is reporting.

The lower GDP estimate happened because Americans bought more imports than sold exports overseas. So consumers are still spending, which is the mainstay of growth, and even continued to invest in factories and infrastructure.

First quarter GDP growth was 1.6 percent, below expectations, after 3.4% growth in Q4 and 4.6% growth in Q3 2023.

Why the decline in Q1? Imports were higher that subtract from GDP and product inventories were down, as nobody was restocking their shelves yet, which is common while wholesalers and retailers wait to see the demand for their products in the New Year. But consumer spending held up (+2.5%).

That’s because the job market is still hot, with jobless claims in the latest week down to 207,000 from the more average 215-220,000. But the markets are seeing danger signs that the Fed may be less likely to lower interest rates.

Why? The product shortage is raising inflation as consumers must pay more because of the depleted inventories.

BEA.gov

“The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment, said the US Bureau of Economic Administration (BEA). Imports, which are a subtraction in the calculation of GDP, increased.”

The U.S. trade deficit in goods widened 1.7% to $91.8 billion in March, according to the Commerce Department’s advanced estimate released Thursday. That’s the largest deficit since last April.

Wholesale inventories fell 0.4% in March after a 0.4% gain in the prior month. Nonauto retail inventories fell 0.1% after a 0.3% rise in February.

Inflation has stalled, as there is now a supply shortage because inventories are not being replenished. But that will be cured soon enough as producers gear up production once again.

The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter, said the BEA. The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.

In fact, there’s a drop in exports because of the strong US Dollar in relation to other currencies, which makes exports more expensive. And that’s due to the sky-high interest rates the Fed is not yet reducing.

But despite soaring mortgage rates, pending home sales rose 3.4% in March from the previous month that reflect transactions where the contract has been signed for the sale of an existing home, but the sale has not yet closed. It’s another sign that consumers are still spending.

“March’s Pending Home Sales Index – at 78.2 – marks the best performance in a year, but it still remains in a fairly narrow range over the last 12 months without a measurable breakout,” said NAR Chief Economist Lawrence Yun. “Meaningful gains will only occur with declining mortgage rates and rising inventory.”

The temporary inflation boost what is worrying the markets, but Treasury Secretary Yellen was reassuring markets today that it is temporary.

Thursday morning’s GDP report showed the Fed’s preferred measure of inflation, core PCE, rising to 3.7% in the first quarter of 2024, up sharply from 2% in the prior period that is mainly due to lagging rental rates based on annual rental contracts that aren’t yet reacting to growing supply of rental housing.

“When we look at the market for new rentals or for rents on single-family houses, what we see is those rents have stabilized, in some cases fallen,” Yellen said. “Ultimately that is what, over time, will govern increases” in the inflation statistics.

So it’s really a temporary supply shortage of everything this time of year that has boosted inflation, and the markets will soon realize this.

Harlan Green © 2024

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