(What’s Left of) Our Economy: Why the Really Tight U.S. Job Market Isn’t Propping Up Much Inflation

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CCP Virus, consumer spending, consumers, coronavirus, cost of living, COVID 19, Federal Reserve, headline PCE, inflation, inflation-adjusted wages, interest rates, Jerome Powell, monetary policy, PCE, personal consumption expenditures index, prices, recession, stagflation, stimulus, wages, {What's Left of) Our Economy

It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.   

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(What’s Left of) Our Economy: Why the U.S. Inflation Outlook Just Got Even Cloudier

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CCP Virus, China, consumer price index, consumers, core CPI, coronavirus, cost of living, COVID 19, CPI, energy prices, Federal Reserve, food prices, inflation, Jerome Powell, prices, recession, stagflation, stimulus, supply chains, Ukraine War, Wuhan virus, {What's Left of) Our Economy

If the big U.S. stock indices didn’t react enthusiastically to yesterday’s official American inflation figures (which were insensitively released the very day I had a minor medical procedure), that’s because they were too mixed to signal that consumer prices were finally being brought under control.

Lately, good news on inflation-fighting has been seen as good news for stock investors because it indicates that the Federal Reserve may at least pause its campaign to hike interest rates in order to slow economic growth significantly– and even trigger a recession. That’s because a weaker economy means consumers will have less money to spend and that businesses therefore will find it much harder to keep raising prices, and even to maintain prices at currently lofty levels. And all else equal, companies’ profits would take a hit.

So already softening inflation could convince the central bank that its efforts to date have been good enough, and that its goal of restoring price stability can be achieved without encouraging further belt tightening – and more downward pressure on business bottom lines.

Of course, stock investors aren’t always right about economic data. But their take on yesterday’s figures for the Consumer Price Index (CPI), which cover December. seems on target.

The data definitely contained encouraging news. Principally, on a monthly basis, the overall (“headline”) CPI number showed that prices actually fell in December – by 0.08 percent. That’s not much, but this result marks the first such drop since July’s 0.02 percent, and the biggest sequential decline since the 0.92 percent plunge recorded in April, 2020, when the economy was literally cratering during the CCP Virus’ devastating first wave. Further, this latest decrease followed a very modest 0.10 percent monthly increase in November.

So maybe inflation is showing some genuine signs of faltering momentum? Maybe. But maybe not. For example, that CPI sequential slip in July was followed by three straight monthly increases that ended with a heated 0.44 percent in October.

Moreover, core CPI accelerated month-to-month in December. That’s the inflation gauge that strips out food and energy prices because they’re supposedly volatile for reasons having little or nothing to do with the economy’s underlying inflation prone-ness.

December’s sequential core CPI rise was 0.30 percent – one of the more sluggish figures of the calendar year, but a rate faster than a November number of 0.27 percent that was revised up from 0.20 percent. Therefore, these last two results could signal more inflation momentum, not less.

In addition, as always, the annual headline and core CPI numbers need to be viewed in light of the baseline effect – the extent to which statistical results reflect abnormally low or high numbers for the previous comparable period that may simply stem from a catch-up trend that’s restoring a long-term norm.

Many of the multi-decade strong year-to-year headline and core inflation rates of 2021 came after the unusually weak yearly results that stemmed from the short but devastating downturn caused by that first CCP Virus wave. Consequently, I was among those (including the Fed) believing that such price rises were “transitory,” and that they would fade away as that particular baseline effect disappeared.

But as I’ve posted (e.g., last month), that fade has been underway for months, and annual inflation remains powerful and indeed way above the Fed’s two percent target. The main explanations as I see it? The still enormous spending power enjoyed by consumers due to all the pandemic relief and economic stimulus approved in recent years, and other continued and even new major government outlays that have put more money into their pockets (as listed toward the end of this column).

(A big hiring rebound since the economy’s pandemic-induced nadir and rock-bottom recent headline unemployment rates have helped, too. But as I’ll explain in an upcoming post, the effects are getting more credit than they deserve.)

And when you look at the baselines for the new headline and core CPI annual increases, it should become clear that after having caught up from the CCP Virus-induced slump, businesses still believe they have plenty of pricing power left, which suggests at the least that inflation will stay high.

Again, here the inflation story is better for the annual headline figure than for the core figure. In December, the former fell from November’s 7.12 percent to 6.42 percent – the best such number since the 6.24 percent of October, 2021, and the sixth straight weakening. The baseline 2020-2021 headline inflation rate for December was higher than that for November (6.83 percent versus 7.10 percent), and had sped up for four consecutive months. But that November-December 2020-2021 increase was more modest than the latest November-December 2021-2022 decrease, which indicates some progress here.

At the same time, don’t forget that the 6.24 percent annual headline CPI inflation of October, 2020-2021 had a 2019-2020 baseline of just 1.18 percent. Hence my argument that businesses today remain confident about their pricing power even though they’ve made up for their pandemic year weakness in spades.

In December, annual core inflation came down from 5.96 percent to 5.69 percent. That was the most sluggish pace since December, 2020-2021’s 5.48 percent, but just the third straight weakening. But the increase in the baseline number from November to December, 2021 was from 4.59 percent to that 5.48 percent – bigger than the latest November-December decrease. In other words, this trend for core CPI is now running opposite it encouraging counterpart for headline CPI.

Finally, as far as baseline arguments go, that 5.48 percent December, 2021 annual core CPI increase followed a baseline figure the previous year of a mere 1.28 percent. Since the new annual December rate of 5.69 percent comes on top of a rate more than four times higher, that’s another sign of continued business pricing confidence.

But the inflation forecast is still dominated by the question of how much economic growth will sink, and how the Fed in particular will react. And the future looks more confusing than ever.

The evidence for considerably feebler expansion, and even an impending recession, is being widely cited. Indeed, as this Forbes poster has reported, “The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters indicates the highest probability of a recession over the next 12 months in the survey’s 55-year history.”

If they’re right, inflation may keep cooling modestly for a time but still remain worrisomely warm. And the Fed may react either by keeping interest rates lofty for longer than expected – as Chair Jerome Powell has already said – or even raise them faster. 

Nonetheless, although the recession that did take place during the first and second quarters of last year convinced numerous observers that worse was yet to come, the third quarter saw a nice bounceback and the fourth quarter could be even better. So if a downturn is coming, it will mean that economic activity will need to shrink very abruptly. Hardly impossible, but hardly a sure thing.

And if some form of economic nosedive does occur, it could prompt the Fed to hold off or even reverse course to some extent, even if price increases remain non-trivial. A major worsening of the economy may also lead Congress and the Biden administration to join the fray and approve still more stimulus to cushion the blow.

Complicating matters all the while – the kind of monetary stimulus added or taken away by the central bank takes months to ripple through the economy, as the Fed keeps emphasizing.  Some of the kinds of fiscal stimulus, like the pandemic-era checks, work faster, but others, like the infrastructure bill and the huge new subsidies for domestic semiconductor manufacturing will take much longer.

Additionally, some of the big drivers of the recent inflation are even less controllable by Washington and more unpredictable than the immense U.S. economy – like the Ukraine War’s impact on the prices of energy and other commodities, including foodstuffs, and the wild recent swings of a range of Chinese government policies that keep roiling global and domestic supply chains. 

My own outlook? It’s for a pretty shallow, short recession followed by a comparably moderate recovery and all accompanied by price levels with which most Americans will keep struggling. Back in the 1970s, it was called “stagflation,” I’m old enough to remember that’s an outcome that no one should welcome, and it will mean that the country remains as far from achieving robust, non-inflationary growth as ever.  

(What’s Left of) Our Economy: The New Productivity Numbers Look Awfully Inflation-y

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consumers, demand, Federal Reserve, inflation, Labor Department, labor productivity, non-farm business, productivity, supply, {What's Left of) Our Economy

The new official U.S. figures on productivity growth are a good-but-mostly-bad news story.

The good news is that, at least for now, the American economy’s efficiency by this measure is no longer sinking like a stone – which was a real fear based on the absolute sequential declines recorded in the first and second quarter.

Further, even the feeblest improvement in productivity deserves applause because a more productive economy is (a) one better able to spur higher living standards on a sustainable basis; and (b) one less vulnerable to inflation (because it’s better able to close the gap between Americans’ demand for goods and services and the supply that’s available).

In addition, in the second quarter, labor productivity (which RealityChek regulars know is the narrower but timelier data tracked by Washington) sagged year-on-year by 2.06 percent. That figure for non-farm businesses (the Labor Department’s headline category) was slightly upgraded from the preliminary second quarter result, but that was still, as Labor reminded, “the largest [such] decline in the series, which begins in the first quarter of 1948.”

This morning’s data, the final (for now) numbers for the third quarter, show that  non-farm business labor productivity was off by just 1.25 percent on an annual basis. Moreover, on a sequential basis, labor productivity broke a two-quarter losing streak. After plummeting by 6.02 percent annualized in the first quarter and 4.13 percent at annual rates in the second, it grew by percent.

But the bad news is that this recent, ongoing annual decrease in non-farm business labor productivity has come on the heels of a long period of weakening U.S. performance on this front. Here are the numbers for total non-farm busnesses productivity growth presented for the last few stretches of American economic expansion (which generate the best apples-to-apples statistics):

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.60 percent

And even though since the deep but brief pandemic-induced downturn ended in the second quarter of 2020, and the economy has remained massively distorted by the virus and its after effects, it’s still worth noting that since then, non-farm business productivity has sagged by 1.44 percent. This lower efficiency means, all else equal, that the economy has become less able to increase supply as fast as demand has grown, and therefore is more inflation-prone.

As also known by RealityChek regulars, the productivity statistics should be viewed at least somewhat skeptically, since especially when it comes to the service sector that dominates the U.S. economy, output per hour per worker (which yields the labor productivity numbers) is difficult to quantify. But the recent productivity deterioration has been so marked for so long that it can’t be seriously challenged. And until someone figures out how to get U.S. productivity growing vigorously again, expect too many dollars in the nation’s economy to keep chasing too few goods and services (a classic definition of inflation), and the price of these purchases to remain way too high for comfort – unless and until the Federal Reserve’s efforts to tame inflation really do succeed by crushing consumers’ buying power.      

(What’s Left of) Our Economy: And Now, Holiday Shopping Uncertainty

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Black Friday, CCP Virus, consumers, coronavirus, COVID 19, DeLoitte Insights, Federal Reserve, holiday shopping, inflation, Jeanna Smialek, stimulus, The New York Times, Vera Gibbons, Yahoo Finance, {What's Left of) Our Economy

So here I am watching the Michigan-Ohio State football game, not really planning to post anything today, but surfing around on the web anyway, and what do I come across? A Yahoo Finance report from yesterday presenting a decidedy upbeat picture of the new holiday shopping season – whose ultimate results will go pretty far toward influencing the final state of the U.S. economy during these inflationary times, and especially of lower-income consumers, who tend to get hit hardest by high inflation. (See, e.g., here.)

This post was noteworthy because it bucked that last piece of conventional wisdom. Indeed, veteran personal finance journalist Vera Gibbons emphasized the finding from one major consultancy that “We’re seeing greater participation among lower-income households (those who earn less than $50,000 per year).

They’ve “settled into the ‘new normal,’” this analyst from Deloitte Insights told her “and are feeling more stable — and hopeful — given wage growth.” “They’re going to jump in and spend,” he declared.

And he had some numbers to back up his prediction, saying that (in Gibbons words) “this group of shoppers plan to spend an average of $671 this holiday season. That’s 25% more than last year. On the flip side, high-income earners (those who make more than $100,000 per year) plan to cut back by 7%, bringing their spending down to an average of $2,438.”

But this assessment left my head spinning not just because of its clash with the conventional wisdom. It also drew exactly the opposite picture that appeared in a New York Times article from the very same day. The header should explain why: “This Holiday Season, the Poor Buckle Under Inflation as the Rich Spend.”

Specifically, correspondent Jeanna Smialek spotlighted Federal Reserve data (which I described more generally here) showing that

“after 18 months of rapid price inflation — some of which was driven by stimulus-fueled demand — the poor are depleting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — by the middle of this year, based on Fed estimates, but about $1.35 trillion of it was held by the top half of earners and just $350 billion in the bottom half.”

Also showing that poorer Americans are feeling an especially tight inflationary squeeze:

“Credit card data from Bank of America suggest that high- and middle-income households have replaced lower-income households in driving consumption growth in recent months. Poorer shoppers contributed one-fifth of the growth in discretionary spending in October, compared with around two-fifths a year earlier.”

And don’t expect the confusing reports on holiday shopping or the low-income consumer to stop any time soon. As noted in this post, “preliminary Black Friday reports contain almost no useful information about the state of the economy” and “early Black Friday sales figures are at best unreliable and at worst completely useless [even] for predicting overall holiday sales.”

Keep in mind, moreover: That last post was written in 2015 – well before the CCP Virus pandemic, the sharp economic downturn and blazing recovery that followed, and gargantuan stimulus programs began turning the U.S. economy into a $20-some-odd trillion mass of conflicting signals and developments.  As a result, all that seems certain going forward about the economy is that along with peak inflation uncertainty and recession uncertainty, for the time being we’ll have to deal with holiday shopping season uncertainty as well. 

(What’s Left of) Our Economy: Manufacturing Takes the Recent U.S. Job Creation Lead

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aircraft, aircraft engines, aircraft parts, automotive, computer and electronics products, consumers, Employment, fabricated metal products, Federal Reserve, housing, Jobs, machinery, manufacturing, non-farm payrolls, non-metallic mineral products, personal protective equipment, pharmaceuticals, PPE, private sector, recession, semiconductors, surgical equipment, textiles, transportation equipment, vaccines, wood products, {What's Left of) Our Economy

Maybe the next sets of official figures will show that U.S.-based manufacturing is finally succumbing to a series of formidable obstacles that have been placed in its way recently and not-so-recently: signs of a slowing U.S. economy, a Federal Reserve whose anti-inflation policies seem certain to undercut growth, major troubles in the big export markets so important to domestic industry, a super-strong dollar that harms its price-competitiveness all over the world, and continuing supply chain snags.

Yet as of the October jobs data released on Friday, domestic industry has continued to hire – which is almost always a sign of optimism from the employers with skin in the game.

Domestic industry added 32,000 workers on month in October, and revisions were positive. September’s initially reported gain of 22,000 was bumped up to 23,000. After being revised up from 22,000 to 29,000, the August numbers received another upgrade, to 36,000. And July’s final figure came in at an upwardly revised 37,000.

As a result, manufacturing payrolls are now 1.07 percent greater than in February, 2020, the last full data month before the CCP Virus pandemic began massively weakening and distorting the entire economy. As of last month’s jobs report, the pandemic-era gain had been 0.74 percent.

In fact, manufacturers’ hiring in October was so strong that it moved into the national post-February, 2020 job-creation lead. Employment in the overall private sector has expanded by just 1.03 percent since then, and in the entire American jobs universe – which includes public sector jobs and which the U.S. Labor Department calls “non-farm payrolls” (NFP) – is up only 0.34 percent.

As a result, manufacturing jobs now make up 9.87 percent of all U.S. private sector jobs, versus the immediate pre-pandemic figure of 9.83 percent, and 8.43 percent of all non-farm jobs, versus the 8.38 percent figure in February, 2020.

The October increases, moreover, kept manufacturing employment at its highest level (12.880 million) since November, 2008’s 13.034 million.

October’s biggest manufacturing jobs winners among the broadest sub-sectors tracked by the U.S. Labor Department were:

>the computer and electronics products industries, which boosted employment by 5,400 – its best such perfomance since the 6,300 workers added in June, 2020, early during the strong recovery from the first wave of the CCP Virus.

Revisions overall were mixed, though. September’s initially reported increase of 400 was downgraded to a loss of 500. August’s performance was first downgraded from a 4,500 increase to a 3,600 advance and then back up to one of 4,200. And July’s originally reported ise of 3,300 remained at 4,200 after being revised up to 3,900.

Consequently, computer and electronics employment is now up 1.41 percent since February, 2020, versus the 0.94 percent calculable as of last month. And although the increase seems small, it’s important to remember that these companies only cut headcounts modestly during the deep but short recession brought on by the virus’ first wave and lockdowns and voluntary behavior curbs it sparked;

>fabricated metal products, whose payrolls climbed by 5,200. Revisions were negative on balance. September’s initially reported increase of 6,300 – the best since May’s 6,600 – was revised down to 5,500. August’s improvement, already downgraded from 4,700 to 2,800, was upgraded to 3,100. And after an upgrade from 4,200 to 4,600, July’s increase is now judged to be 4,300.

Yet this big sector’s employment closed to within 1.04 percent of its February, 2020 level, versus the 1.36 percent gap that remained as of last month;

>transportation equipment, another very big group of industries, which expanded headcounts by 4,700 in October. Revisions? They were huge and generally positive. September’s initially reported increase of 8,400 was revised down to 4,700. But August’s figures, which had been upgraded all the way from a 2,400 gain to one of 10,500 saw a near-doubling 20,900 – the best such total since March’s 25,000 burst. July, also massively upgraded from a 2,200 increase to one of 12,600, remained at a further upgraded 13,600.

These revisions were enough to push transportation equipment employment higher than its February, 2020 level for the first time (though by just 0.14 percent). As of last month’s jobs report, these industries’ workforces were still 0.52 percent below; and

>non-metallic mineral products, a smallish sector that made 3,200 net new hires in October, and enjoyed generally positive revisions. September’sinitially reported 1,500 loss was upgraded to one of just 200. August’s original 2,800 gain was revised up a second time – from 3,400 to 4,100. But July’s initially reported 1,000 increase remained at a downwardly revised 700 improvement after being upgraded to 1,100.

October’s biggest manufacturing jobs losers among the broadest sub-sectors tracked by the U.S. Labor Department were:

>wood products, where employment slipped by 900, and revisions were generally negative. September’s initially reported gain of 2,200 – this sector’s best since May’s 3,600 – is now judged to be no gain. August’s initially reported loss of 100, first revised down to one of 600, it now estimated as a fall-off of 2,200 – the worst performance since the 30,200 nosedive in April, 2020, when the pandemic-driven downturn was at its worst. At least July’s initially reported rise of 200 has been upgraded to one of 700 and finally to 1,300.

These setbacks drove wood products jobs levels down from 6.76 percent higher than in immediately pre-pandemic-y February, 2020, to 5.60 percent greater since then;

>textile mills, whose jobs decline of 700 was its weakest such perfomance since the same decline in January. Revisions were slightly positive. September’s initially 500-jobs reduction is now estimated as a gain of 300. August’s initially reported loss of 400 jobs has now been gone unrevised twice, and July’s initially reported decrease of 600 has now gone unrevised three straight times.

Textile mill employment has now shrunk by 6.94 percent since February, 2020, versus the 7.03 percent retreat calculable last month; and .

>textile product mills, which saw an employment dip of 600. Revisions were slight and mixed. September’s initially reported payroll loss of 700 stayed unrevised. August’s initially reported employee decrease of 1,000 was first upgraded to one of 800 but then revised back down to 900 (the worst since an identical contraction in September, 2021). And July’s results, first upgraded to no change and then revised down to a decrease of 100 are now judged as a flat-line.

Still, whereas last month, textile product mill payrolls were down by 6.59 percent versus their numbers just before the pandemic struck, the gap has now widened to 7.22 percent.

Two industries followed closely by RealityChek throughout the CCP Virus period registered good employment gains in October.

The automotive sector saw jobs growth of 4,800 – and that was its worst performance since it shed 14,000 positions in February. As with the broader transportation equipment sector in which it’s placed, revisions were dramatic and generally positive. September’s initially reported increase of 8,300 was revised down to 7,400. But after having been upgraded from a drop of 1,900 to a rise of 4,000, August’s results were then revised all the way up to 12,100 – the best gain since March’s 18,400 surge. And July’s initially reported decrease of 2,200 has been upgraded to an increase first of 3,600 and then to its final figure of 8,400.

These gyrations brought automotive employment 3.54 percent above its February, 2020 levels, as opposed to the 2.33 percent calculable last month.

Machinery, a manufacturing and economy bellwether because its products are so widely used, generated good jobs news in October, too, with net hiring hitting 3,000 – the best such performance since April’s 5,800 increase. September’s initially reported decline of 1,700 (the worst since last November’s 7,000) was upgraded to one of just 300. August’s gains were upgraded to 2,800 after having been revised down from that level to 2,200. But July’s initially reported increase of 3,400 stayed at the 2,800 level estimated after being downwardly revised to 3,300.

Machinery employment has now closed to within 0.90 percent of its level in immediately pre-pandemic-y February, 2020, versus the 1.40 percent shortfall calculable last month.

As known by RealityChek regulars, data for several other industries of special interest since the CCP Virus arrived in force are always a month behind the figures for these broader categories. Unfortunately, their September results varied considerably.

The semiconductor industry, whose shortages have bedeviled numerous other manufacturing sectors (especially vehicle and parts makers), grew headcount by 800 – which seems OK until you realize that this increase was its smallest since March’s 400. Revisions were mixed, with August’s initially reported 1,200 increase upgraded to 1,500; and July’s initially reported 2,300 advance was downgraded to 2,200 (still the best such result since the payrolls jumped by 3,000 in June, 2020, during the first pandemic wave recovery) and then unchanged.

Employment in the sector is now up 5.74 percent since just before the virus’ arrival in force, versus the 5.15 percent calculable last month. But as with the broader computer and electronics products category in which it’s placed, it needs to be remembered that semiconductor makers cut almost no jobs during the height of the pandemic.

Aircraft manufacturers added 1,300 jobs on month in September, and revisions were positive. August’s initially reported 1,300 increase was upgraded to 1,700, and July’s initially reported 2,400 gain remained at an upwardly revised 2,500 – their best such results since June, 2021’s 4,400.

U.S. aircraft manufacturing has been harmed not only by the pandemic-era travel restrictions, but by Boeing’ssafety woes. But the recent increases have pulled employment by these companies to within 7.41 percent of their immediate pre-CCP Virus levels, versus the 8.11 percent calculable last month.

This progress, however, didn’t extend to the rest of the aerospace indsustry. Aircraft engines- and engine parts-makers reduced payrolls by 100 in September – the first decrease since July, 2021’s 200. But the August and July results of job growth of 800 each were left unrevised. (The initial July estimate was 900.)

Payrolls in this sector are now 8.83 percent lower than in February, 2020, versus the 8.62 percent calculable last month.

Non-engine aircraft parts- and equipment-makers lowered their headcounts by an even greater 500, and evisions were mixed. August’s initially reported net new hiring of 1,100 was upgraded to 1,300 (the best such result since January’s 1,400). But July’s initially reported loss of 600 jobs stayed at a downgraded one of 800 (the worst such performance since December’s 900).

Consequently, these companies’ payrolls have now shrunk by 14.36 percent since the pandemic first struck, versus the 14.10 percent calculable last month.

Employment also dipped in the surgical appliances and supplies category, which supplies so many of the Personal Protective Equipment (PPE) and other medical products used to fight the pandemic. But even though the industry cut 200 jobs in September (the first monthly loss since June’s 800), revisions were positive. August’s initially reported gain of 700 was revised up to one of 900 (the best since March’s 1,000), and July’s results, first pegged at a 700 gain, remained at an upwardly revised increase of 800.

Surgical appliances and supplies employment is now up by 5.11 percent since February, 2020, versus the 4.11 percent calculable last month.

Results were mixed as well in pharmaceuticals and medicines. Companies in that category boosted payrolls by 1,000 in September, but revisions were significantly negative. August’s initially reported job growth of 1,700 was downgraded to an increase of 300, and July’s results, first estimated as a gain of 500 positions, remained as a downwardly revised loss of 1,000 – the worst such result since an identical reduction in March, 2019 – before the pandemic.

Employment in this industry is still much higher than just before the pandemic’s arrival, but by 11.58 percent versus the 11.71 percent calculable last month.

And in the medicines subsector containing vaccines, those companies expanded headcounts by 200 in September, but revisions were mixed, too. August’s initially reported 900 jobs increase is now estimated as a loss of 600 (the biggest drop since the 1,100 positions eliminated in December, 2018), but July’s initially reported cut of 200 remained at an upwardly revised decrease of 100.

Up 26.90 percent from February, 2020 levels as of last month, payrolls in this subsector are now 25.58 percent higher.

The short-term employment outlook for U.S.-based manufacturing looks unusually uncertain even by the unusually high standards of an American economy that’s still greatly distorted by the pandemic and pandemic responses.  Reasons for optimism? They include the vast amount of money American households and businesses still have to spend, which should keep propping up domestic demand for American manufactures, the lag between the time when Federal Reserve inflation-fighting tightening began and the time when it starts meaningfully slowing economic activity, and the continued easing of supply chain snags. And the new legislation to revive U.S. semiconductor manufacturing should start generating more hiring in that sector and its suppliers before too long. 

At the same time, pessimists can point to developments like a widely forecast global slowdown bound to reduce foreign demand for U.S. domestic manufactures; manufacturing giant China’s insistence on keeping its Zero Covid policy, which has seriously disrupted both the economy of the People’s Republic and worldwide transportation networks;  and continued high inflation (including for the energy used by U.S.-based industry) that presumably will start giving American spenders pause at some point. (The interest rate-sensitive housing sector, a big user of manufactured products, is already reeling from Fed tightening.)    

So just like the Fed, RealityChek will stay data dependent as it monitors and especially prognosticates on domestic manufacturing’s future.         

(What’s Left of) Our Economy: Trade Leads to Resumed and Healthier U.S. Growth

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consumers, expansion, exports, Federal Reserve, GDP, goods trade, gross domestic product, imports, real GDP, real trade deficit, recession, services trade, stimulus, trade deficit, {What's Left of) Our Economy

You couldn’t ask for a better official first read on American trade flows and U.S. economic growth for the third quarter of this year than the one that came out on Thursday – unless you’re into making unreasonable requests.

On top of that report on the gross domestic product (GDP – the leading measure of the economy’s size) showing a return to expansion that ended the recession that marked the first half of the year; and on top of the trade deficit shrinking for the second straight quarter (a first since the third and fourth quarters of 2019), the trade gap shrank in the best possible way, for the best possible reason.

Here’s why. The new GDP figures (which will be revised twice more in the next two months, as is the case for every such release) estimated that the nation’s output of goods and services rose in inflation-adjusted terms (the measure most closely followed) by a solid 2.54 percent at annual rates.

And as real GDP climbed, the after-inflation trade deficit decreased from $1.4305 trillion annualized to $1.2740 trillion. That’s important because there’s nothing unusual about the trade shortfall declining when the economy contracts. In fact, that’s often the case. After all, a slumping economy pulls in fewer imports. But a smaller trade deficit during a quarter of growth? That’s unusual, and genuinely exciting, since it means that the growth has been healthy and, all else equal, sustainable – driven by production and not consumption.

Better yet, improvement was registered on both sides of the trade ledger, with exports up and imports down. The export progress was especially impressive, given that selling U.S.-origin goods and services abroad should be getting harder because of an economic slowdown in most of the rest of the world, and the surging U.S. dollar – which reduces their price competitiveness abroad (and at home, for that matter, too).

The third quarter constant dollar trade deficit hit its lowest level since the third quarter of last year ($1.2675 trillion annualized), and the consecutive declines were the first since the stretch between the fourth quarter of 2019 and the second quarter of 2020 – that’s of course when the CCP Virus began ripping through the nation and triggering a short but deep economic slump.

In addition, this latest sequential narrowing of the price-adjusted trade gap was the biggest in relative terms (10.94 percent) since the second quarter of 2009, when the economy was still mired in the Great Recession produced by Global Financial Crisis.

As a result, the real trade deficit as a share of constant dollar GDP sank to 6.36 percent – its lowest level since the second quarter of 2021 (6.16 percent). And the drop in this ratio from the 7.19 percent it reached in the previous quarter (11.54 percent) was the biggest also since the second quarter of 2009 (17.89 percent).

Trade’s contribution to third quarter growth was noteworthy as well. By generating 2.77 percentage points to the total quarterly after-inflation GDP increase of 2.54 percent annualized, it bolstered the economy by the greatest amount in absolute terms since the second quarter of 1980 – when it increased constant dollar GDP by 3.99 percentage points during a stretch when the economy shrunk overall by 5.48 percent at an annual rate. (As with any element of GDP, the trade contribution can be greater than the overall growth rate when other elements decrease.) 

Another way to look at this development:  All else equal, without this trade boost to growth, the economy would have shriveled by 0.23 percent at annual rates in the third quarter, and by the most influential measure, the recession would still be on.  

But again, it’s pretty standard for the trade to support growth during a contraction. Therefore, it’s also worth observing that its latest role during an expansion quarter was the biggest since the third quarter of 1980, when it added 2.96 percentage points to that period’s 2.66 percent annualized rebound.

Nonetheless, this trade contribution to growth was far from the biggest on record in relative terms. (This statistical series reports quarterly data going back to 1947.) For example, during the second quarter of this year, the decline of the trade deficit added 1.16 percentage points of growth while the economy contracted by 0.58 percent in real annual terms.

Moreover, it’s crucial to keep in mind that the third quarter’s trade deficit was still the fourth largest ever. (These quarterly data go back to 1947, too.) And it’s fully 52.98 percent higher than its level in the fourth quarter of 2019 – the last full quarter of data before the CCP Virus began roiling and warping the economy.

That third quarter export increase that helped the overall trade deficit shrink hit 3.43 percent – rising from $2.5619 trillion at annual rates in the second quarter to $2.6032 trillion. The result was a new all-time high. (The old record was the $2.5823 trillion annualized level in the first quarter of 2019.) This second straight quarterly improvemet in overseas sales of goods and services also finally pushed them above their immediate pre-pandemic level – by 1.22 percent.

On the import side, after setting five straight quarterly records, U.S. inflation-adjusted purchases of foreign goods and services sank by 1.78 percent sequentially in the third quarter, from $3.9475 trillion at annual rates to $3.8772 trillion. In fact, this quarterly retreat was the first since the second quarter of 2020, when the pandemic was spreading and depressing economic activity rapidly.

Yet this after-inflation import total was still the third highest on record, and the level of these total purchases remains 13.88 percent higher than in the immediate pre-pandemic fourth quarter of 2019.

Goods trade dominates U.S. trade flows and helped the total constant dollar deficit decrease by falling 9.51 percent sequentially in the third quarter, from $1.5846 trillion at annual rates to $1.4339 trillion. This second straight narrowing brought the goods deficit to its lowest level since the third quarter of last year $1.4144 trillion.

The improvement, moreover, was the biggest in percentage terms since the 12.63 percent plunge in the second quarter of 2009, when the economy was still mired in the Great Recession that followed the Global Financial Crisis.

Yet the goods trade deficit remains 48.57 percent above its level in that immediate pre-pandemic fourth quarter of 2019.

Meanwhile, the longstanding services trade surplus advanced by 7.43 percent in constant dollar terms, from $149.4 billion at annual rates to $160.5 billion. The increase in this sector followed two straight sequential drops in this surplus, and reflecting the outsized CCP Virus hit taken by this sector, is still down 31.93 percent since just before the pandemic’s arrival.

Real goods exports set their third consecutive record in the third quarter, growing 4.04 percent, from $1.8249 trillion at annual rates to $1.8986 trillion. These foreign sales are now 6.27 percent higher than in the fourth quarter of 2019.

After-inflation goods imports dipped for the second straight time, and by 2.26 percent – from $3.4095 trillion annualized to $3.3325 trillion. These purchases are still up 16.80 percent since just before the pandemic’s arrival.

Services exports in the third quarter advanced for the ninth straight time – climbing 2.03 percent, from $709.5 billion at annual rates to $723.9 billion. Yet they remain 7.99 percent below those pre-CCP Virus fourth quarter, 2019 level.

Services imports edged up by 0.59 percent in the third quarter. This sixth straight increase, from a $560.1 billion annualized level to $563.4 billion, brought them to 2.25 percent above their fourth quarter, 2019 level.

The big concern hanging over the good GDP news is the economy’s continued dependence on the massive stimulus provided to households and businesses during the pandemic era by Presidents and Congresses, and by the Federal Reserve – even though consumers are steadily spending down their windfalls. (See this post for the key consumer finance data.) That means that more towering inflation will be with Americans for many more months unless government policies change dramatically.

But however good the trade deficit and growth quality news, wild cards and potential headwinds and crosswinds still abound. Among them: the growth slowdown that’s coming as tighter Fed monetary policy works its way through the economy, to continuing economic woes in the major markets for U.S. exports, to the ongoing dollar surge, to the distinct possibility that the Fed will chicken out on the inflation-fighting front, and that the rest of the government will want to juice consumer spending power again if recession fears return. The last two developments, of course, could well draw in disproportionate amounts of imports, and as the next national election approaches, the odds that they play out seem certain to grow.  

(What’s Left of) Our Economy: No Shortage of U.S. Inflation Fuel

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CCP Virus, consumers, coronavirus, cost of living, COVID 19, debt, Federal Reserve, housing, inflation, interest rates, monetary policy, quantitative tightening, revolving credit, savings, stimulus, stock market, Wells Fargo, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve repeatedly written (e.g., here) that sky-high U.S. inflation is going to remain sky high until the prices of the goods and services bought by consumers become genuinely unaffordable – and that their current towering levels make clear that we’re far from that point.

That’s why it’s so great that a team of economists from Wells Fargo bank have so clearly laid out the evidence for how much spending power remains with households – and therefore how much pricing power remains with businesses.

The two key facts entail how much in extra savings households have amassed since the CCP Virus pandemic struck in force in early 2020 and ushered in a period of both greatly reduced spending opportunities and greatly increased stimulus payments from Washington. As shown in this chart, the resulting “excess savings” zoomed up starting then and continued through mid-2021, when they peaked at about $2.5 trillion.

Source: U.S. Department of Commerce and Wells Fargo Economics

They’ve come down since – but still stood at just short of $1.3 trillion as of this past summer. Moreover, don’t forget – that number doesn’t tell us the actual level of consumer savings. It tells us how far above the pre-pandemic normal it stands.

For an idea of the actual amount of cash households have to spend, check out this second graph. It shows that even factoring in inflation, Americans’ checking and savings accounts hold a total of $13.9 trillion (the dark blue line), and that this figure is way up since the beginning of the pandemic, too.

Source: Federal Reserve Board and Wells Fargo Economics

You might have read that one big reason for worrying about the sustainability of consumer spending – and as a result, one big reason for optimism that inflation will soon peak or has already topped out – is that “Inflation is driving consumers to rack up more debt to purchase essentials.” Sounds like a sign of soaring desperation, right? Not if you look at the big picture.

Sure, credit card use has boomed over the last year (a high inflation year) in particular. Indeed, as shown in the third chart, it’s not only above pre-CCP Virus levels. It’s above its levels during the bubble years that preceded the Global Financial Crisis which ended in the worst economic downturn America had suffered to that point since the Great Depression of the 1930s. (The pandemic recession of 2020 was deeper than the Great Depression, but was much shorter.)

Source: Federal Reserve Board and Wells Fargo Economics

But that’s only one side of the credit card story, and not the most important side. The other side is how that “revolving” credit card and other consumer debt compares with consumers’ spend-able incomes. And as the chart below shows, although the “Household Financial Obligations Ratio” has worsened a lot recently, in absolute terms it’s not only considerably below its levels just before the CCP Virus’ arrival in force. It’s still at post-1990s lows – and by a wide margin.

Source: Federal Reserve Board and Wells Fargo Economic

As the Wells Fargo economists point out, this consumer spending power has to run out at some point, especially since households have been buying more than they earn, since their net worth (and therefore their ability to borrow robustly) is down some because both housing and stock prices have been sinking, and since the Federal Reserve’s inflation-fighting interest rate hikes and other tightening measures keep making such borrowing more expensive. Inflation-adjusted wages keep falling, too. 

Nevertheless, rate hikes (which only began this past March) can take up to 18-months to slow spending and the entire economy. The Fed is also reducing its balance sheet, which skyrocketed to astronomical levels as the central bank bought vast quantities of bonds during the worst of the pandemic in order to flood the economy with cheap money and keep it afloat during the worst of the CCP Virus downturn. But for what it’s worth, the consensus among economists to date is that this “quantitative tightening” isn’t severe enough depress economic activity significantly for some time, either. (See, e.g., here.)

And don’t forget – Washington keeps putting more money in consumers’ pockets directly and indirectly, most recently with an increase in Social Security payments to compensate for…high inflation, and another release from the Strategic Petroleum Reserve to dampen down oil prices.   

So it’s still true that, ultimately, the surest cure for high prices is high prices. But it’s just as true that everything known about consumer finances and the inflation fuel they represent says that these prices have a long way to go before those consumers start crying “Uncle!”

(What’s Left of) Our Economy: So What’s with U.S. Inflation Now?

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baseline effect, Biden, businesses, consumer price index, consumers, core inflation, CPI, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, {What's Left of) Our Economy

Just my luck! I get invited to an exciting conference in Florida last week, and two days of it took place when the latest U.S. inflation figures, covering retail and wholesale prices for August, came out.

I was able, though, to note in a tweet after perusing them quickly, I couldn’t “do my usual monthly #CPI dive. But when I do, I bet I find that the baseline effect that had somewhat misleadingly boosted 2020-21 y/y #inflation #s is starting conversely to misleadingly dampen 2021-22 annual results somewhat.”

Well, now I’ve had the chance to examine the new Consumer Price and Producer Price Indices (CPI and PPI, respectively), and it turns out I’d have won that bet. And these findings provide ample reason for skepticism that peak inflation is over for Americans.

It may not be likely to spiral up further, as President Biden suggested last night on Sixty Minutes. But the August data indicate that, on an annual basis, just as a good share of the higher increases businesses charged consumers and each other earlier during the current burst of inflation stemmed from statistical quirks that produced artificially hot numbers, the last few months’ year-on-year results are artificially tame because of that statistical quirk working in reverse.

That is, consumer and business prices may stop accelerating, and may even decline slightly from where they are now. But in absolute terms, goods and services will probably remain painfully expensive and keep straining household and company budgets – at least until the Federal Reserve’s inflation-fighting moves or other developments kill enough economic demand (as intended) to destroy most of the pricing power companies presently enjoy.

Sharp-eyed RealityChek regulars will understand that, of course I’m talking about the baseline effect. Specifically, late last year and early this year, much of the  scary-looking multi-decade high yearly price increases could be attributed to the fact that the previous annual inflation numbers were rock-botton low because of the sharp economic downturn and its aftermath created by the CCP Virus’ first wave in the spring of 2020. Because price increases virtually stopped then (and in some months actually fell in absolute terms), the return to the recent norm in year-on-year inflation rates resulted in deceptively high inflation figures.

As chronicled here, e.g., the baseline effect then began fading – signaling that more of the still-worrisome official inflation data coming out of Washington was due to changes in actual economic conditions, and that consequently price increases would have more staying power.

Lately, though, as the second calendar year of high inflation has dragged on, the statistical distortions may be leading to excessive complacency. The reason? What modest dips have been recorded in annual inflation rates are now coming off baseline figures that were already close to historic highs, as opposed to being stuck near zero.

So this tells me that if goods and service providers have been able to raise prices over the past year by, for example, about eight percent on top of the seven percent increases they successfully pushed through the year before, they must be pretty confident that they can keep prices at or near these towering levels until the economy tanks for whatever reason.

And my reading of the numbers bears out this thinking.

Let’s start with the so-called headline CPI figure, which showed an 8.25 percent annual increase in August. That’s the best such performance since the 8.22 percent reported for April. But this latest April year-on-year figure followed a 4.15 percent headline CPI read between the previous April’s. August’s baseline figure was considerably higher – 5.21 percent.

The so-called core CPI read for August wasn’t quite as encouraging, mainly since this measure strips out food and energy prices due to their supposedly unusual volatility. And energy prices in particular are well off their peaks ovewhelmingly because of American drivers’ unwillingness to pay those $5 per gallon gasoline prices that prevailed in late spring into early summer, and because of the major economic slowdowns being seen in China and Western Europe.

Indeed, August’s annual 6.32 percent rise was the highest since March’s 6.44 percent. But the baseline effect means that such inflation was even worse than it looks, for the March annual result followed a core CPI increase of just 1.66 percent between March, 2020 and March, 2021. The August number followed a previous annual surge of 3.96 percent – more than twice as strong.

The “reverse baseline effect” has been even more dramatic for the Producer Price Indices. August’s annual wholesale inflation mark of 8.69 percent was the best for the entire year, and decidedly lower both than July’s 9.78 percent and way weaker than the recent peak of 11.67 percent reported for March.

That torrid March pace, though, followed a 2020-21 increase of 4.06 percent. The new August inflation rate comes on the heels of an 8.58 percent PPI worsening between August, 2020 and August, 2021. Even worse, that 2020-21 percent producer prices inflation rate was a striking example of catch-up. From August, 2019 to August, 2020, wholesale prices fell in absolute terms by 0.17 percent. That can only mean that powerful momentum still lies behind these producer prices.

The same story has played out for core producer prices. This August annual result – 5.61 percent – was also the year’s best. And not only was it much better than the peak number of 7.11 percent in March. It represented the fourth straight decrease.

But that March core PPI result followed a 3.15 percent annual increase in these prices between the previous Marches. The baseline figure for this August’s result was 6.19 percent – as with the headline PPI data, nearly twice as high.

This is why the strongest argument that peak inflation has been hit comes from the month-to-month numbers. For headline CPI, prices edged up sequentially in August by just 0.12 percent. Although that’s a slightly worse performance than July’s 0.02 percent monthly decrease, it’s a veritable nosedive from this year’s highest figure – June’s 1.32 percent.

If you believe, with fall and winter just around the corner and the Ukraine War still disrupting global oil and gas trade and supplies that the energy prices paid by U.S. consumers will keep falling at the August monthly rate of five percent, you’ll be optimistic about core CPI. If you have your doubts…not so much.

The monthly core CPI increases have fluctuated less than the headline, and generally have been lower in absolute terms. But August’s 0.57 percent sequential increase was actually stronger than July’s 0.31 percent, and not much slowing is evident this year in this inflation measure.

The monthly PPI figures look more peak inflation-y – especially since when businesses have to pay higher prices for the goods and services their operations need, they do their darndest to pass these higher costs on to consumers. At the same time, as I’ve noted in posts on tariffs and inflation, the converse can’t be counted on. Businesses generally won’t give consumers a price break even when their own costs decrease unless demand slacks off, too.

All the same, even though energy is mainly responsible, it’s important that in August, headline PPI weakened sequentially for the second straight month – sinking by 0.13 percent. As with core CPI, core PPI rose faster on month in August (0.23 percent) than in July (0.14 percent). But these last two figures were two of the year’s best.

Still, in line with my oft-stated position that data over longer time periods is more reliable than data over shorter time periods, I’m putting more stock in the annual figures – again, until and unless the economy slows significantly or tips into recession.  And they’re making clear that the nation faces a near-term future f historically and troublingly high prices, if not continually soaring prices,    

(What’s Left of) Our Economy: More Evidence That Stimulus-Bloated Demand is the Main U.S. Inflation Driver

Tags

CCP Virus, China, consumer price index, consumers, coronavirus, COVID 19, Covid relief, CPI, demand, inflation, Jobs, population, retirement, stimulus, Sun Belt, supply, supply chains, The New York Times, Ukraine War, workers, Wuhan virus, Zero Covid, {What's Left of) Our Economy

The New York Times just provided some important evidence on the big role played by super-charged consumer demand in super-charging inflation – this article showing that the Sun Belt has been the U.S. region where prices have been rising fastest.

The finding matters because a debate has been raging among politicians and economists over the leading causes of multi-decade high inflation rates with which Americans have been struggling over the last year and a half or so.

On one side are those who claim that overly generous government stimulus spending is the main culprit, because it’s increased U.S. buying power much faster than the supply of goods and services has grown. On the other side are those who focus on the inadequate amount of goods and services that companies are turning out, stemming from supply chain disruptions rooted in the stop-and-go nature of the American economy from successive waves of pandemic downturns and slowdowns to the Ukraine war to China’s ridiculously draconian Zero Covid policies.

Clearly, all these developments deserve blame, but the regional disparities in inflation rates provide pretty convincing support for emphasizing bloated demand.

Here’s the latest annual disparity in the headline Consumer Price Index as presented in the Times article:

U.S. total:    8.5 percent

South:          9.4 percent

Midwest:     8.6 percent

West:          8.3 percent

Northeast:   7.3 percent

It correlates roughly, by the way, with the data in this report last spring from the Republican members of Congress’ Joint Economic Committee.

And here’s a principal, demand-related reason: The Sun Belt states of the South and West have been the U.S. states that have gained the most population during the pandemic period. Indeed, according to the latest U.S. Census data, eight of the ten states with the fastest overall population growth between July, 2020 and July, 2021 was a southern or southwestern state, and the same holds for five of the ten states with the fastest population growth in percentage terms.

It’s true that population growth often increases supply, too – by boosting numbers of workers. The U.S. government doesn’t break out job creation along the above regional lines, but a look at individual state totals doesn’t conclusively brand the Sun Belt as an national employment leader. On average, relatively speaking, Arizona, California, Florida, Nevada, and Texas have created more jobs from the pandemic-period bottom in April, 2020 through last month, as shown in this table:

U.S. total:    +16.87 percent

California:   +17.98 percent

Florida:        +21.05 percent

Texas:          +17.31 percent

Arizona:       +16.02 percent

Nevada:        +30.92 percent

But don’t forget – many of these states have outsized travel and tourism sectors, and you know what happened to those activities during the worst of the pandemic. So in part, their employment bounced back so quickly because they had plummeted so dramatically as the CCP Virus’ first wave spread.

Moreover, many of these states are big retirement destinations, too, and as their overall population increase makes clear, this trend has intensified since the pandemic arrived. Of course, the workers in any given state don’t only sell goods and services to that state’s population, and a given state’s residents don’t only buy goods and services from providers in that state. Yet it’s certainly noteworthy that the number of the Sun Belt states’ consumers rose faster relative to the national average than the number of Sun Belt workers.

And in this vein, Sun Belt inflation probably is also particularly hot partly because so many of the newcomers are wealthy. Indeed, one recent study found that, early in the pandemic, “Of the 10 states with the largest influx of high-earning households, nine are located in the Sun Belt, including the six-highest ranked states, starting with Florida.”

Because they bring so much spending power to their new home states, these wealthier Americans naturally tend to drive prices up unusually fast.

As the Times article notes, some prominent reasons for scorching Sun Belt inflation are unrelated to population-driven demand growth – notably much lower population densities that generate more gasoline-using driving.  But the impact of population movement and all the disproportionately high inflation it’s clearly creating is hard to ignore.  And if a consumption shock has spurred so much inflation in the Sun Belt, why wouldn’t it be affecting prices this way in the rest of the nation, too?          

 

(What’s Left of) Our Economy: Another Dreadful U.S. Consumer Inflation Report

Tags

Commerce Department, consumer price index, consumers, core inflation, cost of living, CPI, demand, energy, Federal Reserve, food, inflation, Labor Department, monetary policy, PCE, personal consumption expenditures index, prices, supply chains, Ukraine War, Zero Covid, {What's Left of) Our Economy

Optimism about U.S. inflation took another blow yesterday morning – though it shouldn’t have been unexpected – with the release of the latest data on the Federal Reserve’s favorite measure of price changes. I said “shouldn’t have been unexpected” because, as Fed Chair Jerome Powell and others have noted, this gauge and the higher profile Consumer Price Index (CPI) put out by the Labor Department normally track each other pretty closely over the long run, and those CPI results were deeply discouraging.

Nonetheless, latest results from the Price Indexes for Personal Consumption Expenditures (PCE) monitored by the Commerce Department matter because they strongly confirmed the latest CPI figures – which were pretty awful – starting with the month-to-month changes for the entire economy.

In June, headline PCE inflation shot up sequentially by a full one percent – much faster than May’s 0.6 percent and indeed the fastest rate not only throughout this latest high-inflation period, but the fastest since it increased by one percent in September, 2005.

But another observation should make even clearer how unusual that monthly headline increase was. The Commerce Department has been keeping these data since February, 1959. That’s 749 months worth of results through last month. How many times has monthly headline PCE inflation been one percent or higher? Twelve. And the all-time record is just 1.2 percent, hit in March, 1980, and February and March, 1974.

The annual figures were no better, and RealityChek regulars know that they’re more reliable than the monthlies because they measure changes over a longer time period, and therefore smooth out short-term fluctations.

June’s 6.8 percent rise was the strongest of the current high inflation era, and a significant pickup from May’s 6.3 percent. And it looks even worse when the fading baseline effect is taken into account. The June yearly jump in headline PCE came off a June, 2020-21 increase of four percent. So that year’s June PCE rate was already twice the Federal Reserve’s two percent annual inflation target.

By comparison, headline PCE this March was only a little lower than the June result – 6.6 percent. But the baseline figure for the previous March was only 2.5 percent. That rate was still higher than the Fed target, but not by much. So arguably unlike the price advances of June, this March’s inflation reflected some catching up from price increases that were still somewhat subdued due to the economy’s stop-go recovery from earlier during the pandemic.

Core PCE was lower by both measures, because it strips out the food and particularly energy prices that have spearheaded much headline inflation, and that are excluded supposedly because they’re volatile for reasons having little to do with the economy’s fundamental vulnerability to inflation. But here the monthly figures revealed new momentum, with the June seqential increase of 0.6 percent twice that of May’s 0.3 percent, and the highest such number since May and June of 2021.

Before then, however, core inflation hadn’t seen a monthly handle in the 0.6 percent neighborhood since September and October of 2001, which registered gains of 0.6 and 0.7percent, respectively.

On an annual basis, June’s core PCE increase of 4.8 percent was slightly higher than May’s 4.7 percent, but well below the recent peak of 5.3 percent in February. But the baseline effect should dispel any notions of progess being made. For June-to-June inflation for the previous year was 3.5 percent – meaningfully above the Fed’s two percent target. Core annual PCE inflation for the previous Februarys was just 1.5 percent – meaningfully below the Fed target.

As with most measures of U.S. economic perfomance, an unprecedented number of wild cards that can affect both PCE and CPI inflation has rendered most crystal balls (including mine) pretty unreliable. To cite just a few examples: Will China’s Zero Covid policy keep upending global supply chains and thus the prices of Chinese exports? Will the ongoing Ukraine War have similar impacts on many raw materials, especially energy? Will the Federal Reserve’s tightening of U.S. credit conditions per se bring inflation down significantly in the foreseeable future by dramatically slowing the nation’s growth? Will high and still soaring prices, coupled with vanishing savings rates, achieve the same objective if the Fed’s inflation-fighting zeal wanes? Or will the still huge amounts of money in most consumers’ bank accounts along with continuing robust job creation keep the demand for goods and services elevated for the time being whatever the Fed does?

Here’s what seems pretty certain to me: As long as that consumer demand remains strong, and as long as producer prices keep jumping, businesses will pass these rising costs on to their customers and keep consumer inflation worrisomely high. That seemed to be precisely the case in the last two months, with a torrid May read on producer prices being followed by the equally torrid June consumer inflation reports. So unless this wholesale inflation cooled a great deal this month, I’d expect at least another month of red hot consumer inflation. That producer price report is due out August 11.