(What’s Left of) Our Economy: A Doubly Bad New U.S. Inflation Report

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consumer inflation, consumers, cost of living, election 2024, Federal Reserve, inflation, PCE, personal consumption expenditures index, {What's Left of) Our Economy

Today’s third official report on U.S. inflation in April (contained in this release) was bad in no fewer than two ways. First, it confirmed the results of its two predecessors, which showed that price increases in America have begun to speed up again after months of some evidence (never terribly convincing IMO) of slowing. Second, the numbers presented in this morning’s release were those for the price index for personal consumption expenditures (PCE) – the preferred gauge of the Federal Reserve, which is Washington’s prime inflation-fighting agency.

So these discouraging statistics seem most likely to convince the Fed to continue its policy of raising interest rates high enough to weaken inflation by weakening U.S. economic growth – which risks creating a recession. Previously, the central bank was strongly hinting that it might pause in the hope that it’s already slowed economic activity enough to tame prices without producing an actual economy-wide slump (that is, engineering a “soft landing”).

Now, justifying a pause has become especially difficult because each of the four inflation measures presented in the PCE report got worse.

Headline month-to-month PCE jumped from an unrevised 0.1 percent in March to 0.4 percent and snapped a two-month string of declining sequental increases. Moreover, that April rise was the biggest since January’s 0.6 percent.

The annual headline PCE figures displayed the same trend but revealed additional bad news as well. April’s 4.4 percent result also snapped a two-month easing streak, and was the hottest annual PCE read since January’s 5.4 percent. The extra bad news? Revisions to these numbers have been slightly negative – meaning in this case that for January and February, annual headline PCE is judged to have been a bit worse than originally reported.

April also saw the end of a two-month stretch of improvement for core PCE, which strips out the results for food and energy costs because they’re volatile for reasons having little or nothing to do with the economy’s fundamental vulnerability to inflation.

The April rate of 0.4 percent was also the highest since January’s (0.6 percent), and revisions have been negative, too.

As for annual core PCE, April’s 4.7 percent pace represented an uptick from March’s 4.6 percent. But contrary to the fluctuations in the other PCE measures, annual core PCE has been stuck in the 4.6 percent-4.7 percent range for every month since last November.

By now, the main reason for all this inflation stickiness should be no mystery at all: Consumers keep spending robustly. Indeed, as always the case, today’s PCE results came along with data on personal consumption. And even when price increases are taken into account, it rebounded in April from a 0.2 percent dip in February and a flatline in March to a 0.5 percent advance.

As a result, since businesses aren’t charities, they’ll keep raising prices as long as their customers make clear their willingness to pay.

No one can doubt that the economy and therefore consumers face some important headwinds. The full effects of the Fed’s economy-slowing steps – which include both interest rate hikes and cuts in the money supply – usually take many months to appear. By all indications, the banking system weaknesses first revealed by the collapses of California-based Silicon Valley Bank and New York City’s Signature Bank are beginning to tighten the credit spigots on consumers and businesses alike. And all that money pumped into consumers’ pockets by the various government stimulus measures passed since the CCP Virus struck the nation in force are running out.

But these funds remain considerable by any realistic standard. Employment levels keep rising past their pre-pandemic peaks, so wages and salaries keep providing households with new cash flow. And even if President Biden accepts every single one of the House Republicans’ budget proposals in the current debt ceiling negotiations, federal discretionary spending (let alone outlays for entitlements like Social Security and Medicare) would continue increasing for most of the 10-year period that will be covered by a final deal. With inflation tailwinds like these blowing, too (supplemented by approaching election year pressures to keep consumers – and therefore voters – happy), I still can’t see how worrisomely high prices and price increases don’t start becoming U.S. economic features, not bugs,

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(What’s Left of) Our Economy: Can We Please Stop with the “Greedflation” Nonsense?

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Big Oil, business, Coca Cola, consumers, cost of living, Darden Restaurants, demand, economics, gasoline prices, General Mills, Greedflation, inflation, oil prices, Procter & Gamble, productivity, stimulus, Strategic Petroleum Reserve, supply, {What's Left of) Our Economy

More evidence has just come out debunking the seemingly reviving claims (e.g., here and here) that corporate greed is largely responsible for the inflation plaguing the U.S. economy. That matters crucially because if Americans don’t understand the paramount drivers of the cost-of-living crisis, it’s unlikely it’ll ever be resolved satisfactorily, or at least not anytime soon.

To begin at the beginning, charges of “greedflation” by the business sector really took off last year, when politicians almost entirely on the left began blaming U.S. and other big global oil companies (along with Russia’s Ukraine war) for the soaring energy prices that were igniting inflation at the gas pump and throughout the economy.

Once gasoline prices began going down, these claims naturally became harder to justify. Did the oil companies suddenly become less greedy? Of course not. What happened mainly was that demand for energy subsided because the economy was slowing, and both developments in turn stemmed from oil prices increasing enough to become less affordable for a critical mass of consumers and businesses.

Even the role played by the Biden administration’s decision to restrain prices by through unprecedented releases of oil from the Strategic Petroleum Reserve (SPR) ssupports the argument that demand and its flip side, supply, are the predominant drivers of prices over any significant period of time. The SPR release temporarily boosted the supply of oil relative to the demand, and so prices eased as long as that effect held.

At the same time, as I’ve continually pointed out, U.S. inflation rates generally speaking have stayed far too high. I’ve argued (notably here) that the main reason is that U.S. consumer demand has stayed robust, too – that is, businesses have kept raising prices because enough American individuals and households have been able to pay and have kept retail cash registers ringing loudly. I’ve added that these inordinately (indeed, multi-decade) heated price levels have remained affordable because CCP Virus-period government stimulus packages have provided them with inordinate amounts of spending power, which has kept demand inordinately high.

And even though many consumers have already spent most of these extra resources, and consumer spending may be softening, other important supports for consumer demand have emerged, principally very low levels of unemployment and new government spending not explicitly tied to Covid stimulus – like the latest cost-of-living adjustment for Social Security recipients, expanded food stamp eligibility, and more generous veterans’ benefits. (See, e.g., this post.)

Moreover, I’ve contended (in that post linked immediately above and others) that more inflation fuel is likely, as government responds to the approach of a new presidential election cycle by opening the spending spigots wider to keep more likely voters reasonably happy, and because I’m expecting the Federal Reserve to chicken out in its fight against inflation – which has depended on slowing down economic activity (including consumer spending) by making business, individual, and household borrowing more expensive.

So what’s the new evidence that consumer demand remains vigorous and will probably stay strong enough to sustain inflation? Recent earnings reports from some of America’s biggest consumer products companies.

There’s Procter & Gamble, which has raised prices by double digits for two straight quarters, which grew its revenue largely because it not only increased prices, but also sold greater amounts of goods in its biggest market, the United States, and which maintained that the consumer “is holding up well.”

There’s Coca Cola, which – like P&G, beat estimates because of both “price hikes and higher demand,” and which also said that “consumers stayed resilient.”

There’s General Mills, whose “executives said inflation isn’t letting up, but customers are sticking with its products despite higher prices in grocery stores.”

There’s Darden Restaurants (think Olive Garden, Texas Roadhouse, Capitol Grille), which is building new establishments, and whose CEO said that (a paraphrase here) strong recent sales growth stemmed from “its strategy of pricing below inflation” (maybe a low bar nowadays?) but also that “consumers aren’t trading down.”

None of this means that strong U.S. consumer demand will continue indefinitely, or that living costs aren’t harming many Americans’ finances lately. Moreover, the relationship between demand and price isn’t the same for everything we buy. In particular, the prices of some goods and services, like necessities, tend to be what economists call “inelastic.” Their sales levels don’t change much, let alone in lockstep, when prices rise or fall. Even in these cases, however, some of the aforementioned trading down or cutting back is possible, along with some offsetting behavior changes (as with the gasoline example mentioned near the beginning here).

But keep in mind that the above companies couldn’t have become so big and successful if they weren’t good at judging the state of the American consumer and his or prospects – at least in the short and medium term. If they’re sounding confident about their customers’ wherewithal, chances are we should be, too.

And although no one should ever under-estimate corporate greed, no one should ever forget that without demand for a given product or service coming from somewhere, greed alone can’t produce it.

So despite all the efforts to blame companies for ongoing strong inflation, the best way to think of it is that timeless observation from the old “Pogo” comic strip: “We have met the enemy and he is us.” With a huge helping hand from Washington to be sure.

And the real remedy? Boosting the supply of goods and services relative to demand, either by reducing spending (and taking the short-term economic pain), increasing supply  (for example, through targeted initiatives like encouraging domestic energy production, or broader efforts like improving productivity), or some combination of these measures.      

(What’s Left of) Our Economy: The New U.S. GDP Figures Remained a Mixed Bag on Trade

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banking crisis, consumers, consumption, exports, Federal Reserve, GDP, goods trade, gross domestic product, imports, inflation, inflation-adjusted growth, interest rates, monetary policy, real GDP, real trade deficit, services trade, Trade, trade deficit, {What's Left of) Our Economy

The third (and final for now) official read on U.S. economic growth in the fourth quarter of last year and full-year 2022 came in on Thursday, and the trade results strongly resembled those of the first and second reports on the increase in the gross domestic product (GDP): definite progress on reducing the ginormous trade deficit on a quarterly basis, but backsliding on an annual basis.

The one area in which revisions were noteworthy: services trade, which was hit so hard by the CCP Virus and consequent limits on in-person service industries, and which most economists agree is harder to measure than goods trade.

As with my last two posts on the trade highlights of these growth reports, we’ll start with the quarterly figures – and present them in inflation-adjusted annualized terms (those most closely followed by GDP observers) except when otherwise specified.

The new data show that the combined goods and services trade deficit contracted by 2.38 percent sequentially in the fourth quarter – from $1.2688 trillion to $1.2386 trillion. The previous report pegged this shrinkage at 2.40 percent (to $1.2384 trillion). So the latest revision was a slight improvement.

Moreover, these numbers mean that the deficit still fell for the third consecutive quarter – the first such span since the period from the second quarter of 2019 through the second quarter of 2020. And the statistics are still especially heartening since that stretch includes the CCP Virus’ arrival in the United States, which naturally depressed imports and the trade deficit by crushing the entire economy, including of course demand for all goods and services, By contrast, during last year’s third and fourth quarters, the economy expanded.

In fact, that two-quarter stretch of the economy expanding and the trade deficit decreasing was the longest since the span between the second quarter of 2019 and the first quarter of 2020. This combination signals growth relying more on the healthy recipe of investing and producing rather than on the crutch of borrowing and spending.

Moreover, the new fourth quarter level of $1.2386 trillion for the overall trade gap remains the lowest since the $1.2039 trillion recorded in the second quarter of 2021. The only discouraging note: During the second and third quarters of last year, the shortfall declined because exports rose and imports fell – the best of all possible trade flow worlds. During the fourth quarter, however, although both exports and imports retreated.

Also, the combined goods and services deficit is now 48.73 percent larger than in the fourth quarter of 2019 – the last quarter before the pandemic arrived state-side in force and began roiling and distorting economic activity. That’s a bit higher than calculable from last month’s GDP release (47.98 percent) but a sizable improvement over the 52.35 percent growth as of the third quarter.

Because the total trade deficit inched up from the second to the third GDP reports, so did its share of after-inflation GDP – from 6.13 percent to 6.14 percent. But this figure was higher in the third quarter (6.33 percent), and the fourth quarter result is still well below the record 7.47 percent, reached in the first quarter of 2022.

As a contributor to fourth quarter growth, trade decreased in both relative and absolute terms over the results from the second GDP read – from having added 0.46 percentage points (17.36 percent) to a 2.65 percent sequential expansion to accounting for 0.42 percentage points (16.47 percent) of 2.55 percent quarterly growth.

Both sets of figures, though, are way off their third quarter counterparts – when trade fueled nearly all (2.86 percentage points) of 3.20 percent growth. That was the biggest absolute amount in 42 years, though far from a long-term high in relative terms.

Put differently, had the deficit not changed from the second to third GDP releases for the fourth quarter, the economy would have grown not by 2.55 percent but by a considerably slower 2.13 percent. The comparable previous figures for the fourth quarter were growth of 2.19 instead of 2.65 percent.

The new GDP report shows that exports dropped more in the fourth quarter than previously estimated. The second read pegged the quarterly decline at 0.41 percent – from the third quarters’s record $2.6041 trillion to $2.5934 trillion. This slippage was the first since the first quarter of 2022.

Today’s results judged the decrease from the third quarter to be nearly twice as big (0.94 percent) – to $2.5796 trillion. At least it was still the second best total ever.

Nonetheless, the increase in total exports since the last pre-pandemic-y fourth quarter of 2019 is now just 0.30 percent. As of the previous read, it was 0.84 percent, and as of the third quarter, 1.26 percent.

By contrast, at an annualized $3.8317 trillion, the latest total real import figure was fractionally higher than that in last month’s GDP report, but 1.06 lower than the third quarter result – a dropoff steeper than that of exports. Moreover, this second straight quarterly decrease is still the longest since the year between the second quarter of 2019 and the peak pandemic-y second quarter of 2020. And since the last full pre-pandemic fourth quarter of 2019, they’re up just 12.54 percent as opposed to the 12.43 percent calculable last month and the 13.75 percent since the third quarter.

As for total real imports, they’re now pegged at $3.8182 trillion for the fourth quarter – 0.35 percent lower than the previous estimate of $3.8317 trillion, and 1.41 percent from the third quarter result.

But the sequential decrease is still the second straight – the longest such stretch since that CCP Virus-influenced year between the second quarter of 2019 and the second quarter of 2020. And since just before the pandemic’s arrival in force, overall imports are now up just 12.14 percent – versus the 12.43 percent calculable from last month’s report and the 13.75 percent as of the third quarter.

This latest fourth quarter GDP report pegged the trade deficit in goods at $1.4182 trillion – down from the previous read by 0.26 percent and from the third quarter total by 0.99 percent.

The goods trade gap, moreover, still decreased for the third straight quarter – a development that hasn’t been seen since the pandemic-heavy fourth quarter, 2019 to second quarter, 2020 period. And it remained the lowest total since the $1.4647 trillion recorded for the fourth quarter of 2021.

As a result, this trade shortfall is now 32.96 percent during the post-fourth quarter, 2019 period, down from the 33.31 percent calculable from the last GDP release and 34.30 percent as of the third quarter.

America’s trade in services is still in surplus, as has long been the case, but the fourth quarter estimate has now been lowered by fully 2.42 percent from the previous read – from $182.1 billion to $177.7 billion. But it’s still 8.69 percent higher than the third quarter result of 163.5 billion.

The previous GDP report pegged this service trade surplus as 22.77 percent below its immediate pre-pandemic level of $235.8 billion. Now it’s sunk to 24.64 percent below. Through the third quarter, the decrease was 30.66 percent.

The new GDP release shows fourth quarter goods exports to be $1.8648 trillion – which still represents their first sequential shrinkage since the third quarter of 2021. This figure is up fractionally from that in the previous read, and 2.37 percent below the record third quarter total of $1.9010 trillion.

These fourth quarter exports stayed at 4.38 percent above their immediate pre-pandemic level. As of the third quarter, they were 6.92 percent greater.

According to the second fourth quarter GDP release, constant dollar goods imports in the fourth quarter still decreased for the third consecutive time – the longest stretch since the economically weak period between the fourth quarter of 2019 through the second quarter of 2020.

At $3.2830 trillion, these purchases from abroad were down 0.11 percent from the previous estimate of $3.2866 trillion, and 1.51 percent from the third quarter’s $3.3334 trillion. And they still remained the lowest such total since the $3.2582 trillion from the fourth quarter of 2021.

Goods imports are now 15.07 percent higher than in the immediately pre-pandemic-y fourth quarter of 2019, versus the 15.19 percent increase calculable in last month’s GDP release. and the 16.83 percent increase as of the third quarter.

Big revisions were made in the fourth quarter services exports figures, however. Previously judged to be $744.1 billion (up 2.99 percent from the third quarter’s $722.5 billion), they’re now estimated at $731.4 billion. That’s fully 17.07 percent lower.

As a result, they’re now up just 1.23 percent from the third quarter, and down 7.04 percent since just before the CCP Virus’ arrival state-side in late, 2019, versus the 5.43 percent calculable from the previous GDP release.

What hasn’t changed: Services exports have still shrunk for an unprecedented ten consecutive quarters.

Revisions were also noteworthy for fourth quarter services imports. Previously reported at $562.0 billion (0.54 percent more than the third quarter’s $559.0 billion) they’re now pegged at $553.7 billion (0.95 percent less). And the downgrade from that previous fourth quarter total is 1.48 percent.

Services imports have still declined on a quarterly basis two straight times – for the first time since the pandemic-dominated year between the second quarter of 2019 through the second quarter of 2020. But since the virus’ arrival in force, services imports have now grown by just 0.49 percent, versus the1.56 percent calculable from the previous fourth quarter GDP release and the 1.47 percent increase as of the third quarter.

As with the first two fourth quarter GDP reports, the annual figures in the new release were worse than the quarterlies, but the differences were smaller because a longer timeframe is involved.

The final (for now) 2022 overall trade deficit of $1.3567 trillion (we’re no longer annualizing numbers) was just fractionally higher than the total in the second read, and represented both the ninth straight yearly increase and the ninth straight yearly record. The gap topped 2021’s total of $1.2334 trillion by ten percent.

This trade shortfall’s share of GDP ticked up, too, from the 6.77 percent calculable from the previous GDP read to 6.78 percent, and set an annual record for the third straight year. The third quarter figure was 6.29 percent.

The deficit’s subtraction from to economic growth last year was scaled down a bit in relative terms, from the 0.40 percentage points of 2.07 percent GDP expansion reported in the previous GDP release to 0.40 percentage points of 2.08 percent growth. In other words, without the rise in the gap, 2022 growth would have been 2.48 percent – or 19.23 percent higher.

But the deficit’s 2022 impact on growth differed dramatically from the results from 2021, when the gap subtracted 1.25 percentage points from that year’s 5.95 percent growth.

The total for the combined goods and services exports deficit`changed only marginally as well – from the $2.5378 trillion reported in the previous GDP release to $2.5344 trillion, a difference of 0.13 percent.

As a result, overall exports swelled from 2021’s $2.3668 trillion by 7.08 percent, not the 7.22 percent increase recorded in the previous GDP release. As of that previous report, this increase was the fastest since 2010’s 12.88 percent – when the economy was recovering from the Great Recession that followed the Global Financial Crisis. Now however, it’s slipped back to the fastest since 2011’s 7.17 percent. But the annual improvement is still the second straight.

Yet the estimate for last year’s combined goods and services imports edged down from that in the previous GDP read – by 0.09 percent, from $3.8944 trillion to $3.8910 trillion. As a result, these foreign purchases are now 8.08 percent above those of 2021’s $3.6002 trillion, not the 8.17 percent calculable from the previous release.

All the same, total imports still rose in 2022 for the second straight year, and set a second straight annual record.

The goods trade deficit was revised down fractionally, too – by 0.06 percent, from $1.5228 trillion to $1.5219 trillion. Consequently, this trade shortfall is now pegged at 7.62 percent greater than 2021’s $1.4141 trillion, not 7.69 percent higher.

But these downgrades still left the 2022 goods trade gap as the fourth straight annual record and the thirteenth straight annual increase. The latter is the longest such streak ever in a data series going back to 2002.

Also revised down – the longstanding services trade surplus in services. Reported in the previous GDP read at $162.3 billion, it’s now estimated at a 0.74 percent narrower $161.1 billion.

These new results left the 2022 services surplus 6.72 percent lower than 2021’s $172.7 billion level – instead of the 5.91 percent difference calculable from the previous release. The services surplus has still, however, contracted for the fifth straight year – the longest such period since these data began to be collected in 2002, and the 2022 total is still the lowest since 2010’s $158.6 billion.

Goods exports stayed unrevised in the latest GDP release at $1.8377. So their 2022 level was still 6.29 percent greater than 2021’s $1.7289 trillion, and the absolute total remained the second consecutive yearly increase and a new record – topping 2019’s $1.7915 trillion by 2.61 percent.

The 2022 goods imports estimate dipped by just 0.03 percent – from the previous GDP report’s $3.3605 trillion to $3.3596 trillion. The annual increase went from the 6.92 percent calculable from the previous GDP read to 6.89 percent, but the absolute 2022 figure remained a second straight all-time high.

The 2022 services exports total was also downgraded in the latest GDP report. Previously judged to be $717.3 billion, they’re now recorded at a 0.45 percent lower $714.1 billion. The increase over 2021’s $6.56.9 billion level also fell – from 9.19 percent to 8.71 percent. But it’s still the strongest improvement since 2007’s 13.08 percent spurt, and the annual advance is still the second straight.

Finally, the 2022 services import level was revised down as well, falling by 0.36 percent from the previous GDP report’s $555 billion to $553 billion. But the 14.21 percent annual increase was still the fastest ever, besting even 2021’s rapid 12.27 percent.

In last month’s report on the previous GDP release, I argued that because the latest domestic economic developments pointed to more consumer spending, and greater reluctance by the Federal Reserve to fight it with ever tighter monetary policies, the U.S. trade deficit looked set to resume rising.

Since then, another big reason for more Fed caution in inflation-fighting has of course emerged – the recent outbreak of turmoil in the banking system.  All else equal, the drop in lending that seems likely to take place should generate slower spending by both businesses and consumers.  Therefore, it should aid the anti-inflation fight without the need for a hard-line on interest rates and even shrinking the money supply from its current bloated levels.

Fed Chair Jerome Powell even said in his latest press conference that “you can think of [the lending effect of the banking woes] as being the equivalent of a rate hike or perhaps more than that….”    

But all else isn’t equal.  In particular, U.S. consumers overall are still flush with cash and as the next presidential election draws nearer, politicians will be increasingly tempted to prop up growth, employment, and therefore more consumption with more government stimulus.  So I remain convinced that despite the progess seen in the fourth quarter per se, the trade deficit is likely to start ballooning again.         

(What’s Left of) Our Economy: More Cold Water Just Poured on Cooling-Inflation Claims

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consumers, core PCE, disinflation, Federal Reserve, inflation, Jerome Powell, PCE, prices, {What's Left of) Our Economy

At least for the time being, can the usual suspects stop talking about U.S. inflation even starting to cool down? Especially since this morning we just got the third official report this month (see also here and here) showing that it’s been heating up lately?

By the way, the usual suspects now include not only spin-happy partisans like incumbent U.S. presidents, but Federal Reserve Chair Jerome Powell, the federal government’s chief inflation fighter. Earlier this month, he ventured that disinflation (not an absolute reduction in prices but a slower rate of price increases) is “under way.”

In fact, the new figures – for the price index for Personal Consumption Expenditures (PCE) in January – are those to which the Fed pays most attention.

And it’s critical to point out that it’s not just that these latest inflation numbers were worse than the expectations of investors and economists (which they were). They actually worsened in real world terms.

The pickup was clear from the headline PCE results, which reported that consumer prices by this measure jumped by 0.6 percent sequentially. That was both the biggest monthly number and the fastest sequential acceleration (from December’s 0.2 percent) since the identical figures last May.

And the pickup was clear from the monthly core PCE statistics, which strip out food and energy prices because they’re supposedly volatile for reasons having little to do with the economy’s underlying prone-ness to inflation. In January, this measure of inflation also rose by 0.6 percent, the greatest increase since last August. In December, core monthly PCE worsened by 0.4 percent.

Further, as if this trend wasn’t bad enough, revisions generally showed that monthly PCE inflation was hotter in prior months than first judged. For the headline measure, October’s increase stayed at an already upgraded 0.4 percent, November’s was revised up from 0.1 percent to 0.2 percent after going unrevised in last month’s report, and December’s initially reported 0.1 percent rise is now pegged at that aforementioned 0.2 percent.

For the core measure, October’s initially reported 0.2 percent climb stayed for the third straight month at an upgraded 0.3 percent. After going unrevised last month, November’s original 0.2 percent is now seen as one of 0.3 percent, and December’s initially reported 0.3 percent rise was upgraded to 0.4 percent.

These monthly revisions, moreover, were telegraphed in advance yesterday by the U.S. Commerce Department. In yesterday’s report on fourth quarter economic growth, the headline PCE inflation figure for that three-month stretch was upgraded from 3.2 percent to 3.7 percent at annual rates, and core PCE inflation was upgraded from an annualized 3.9 percent to 4.3 percent. (Most of these results and those below will be revised again next month.)

PCE inflation looks hotter on an annual basis, too. For the headline figure, yearly price increases worsened from 5.3 percent in December to 5.4 percent in January. That’s a good deal lower than the recent peak seven percent figure of last June. But revisions cast a pall over thesr results, too.

October’s annual increase stayed at an upgraded 6.1 percent for the third consecutive time, but after remaining unchanged, November’s originally reported 5.5 percent increase is now pegged at 5.6 percent, and December’s results have been upgraded from a five percent rise te aforementioned 5.3 percent.

The 4.7 percent annual in January core PCE was well off the recent peak of 5.3 percent, recorded last February. But it was up from December’s 4.6 percent, and revisions were troubling, too. After staying unrevised from its original five percent figure, October’s result stayed at an upgraded 5.1 percent. November’s initially reported 4.7 percent first went unrevised and was then increased to 4.8 percent. And December’s increase is nowjudged to be that 4.6 percent rather than 4.4 percent.

Nor did these annual numbers look any better when baseline effects are examined. For example, when annual headline PCE inflation peaked last June at seven percent, that followed an increase between the previous Junes of four percent. The new January read of 5.4 percent follows an increase between the previous Januarys of a much higher six percent. That unmistakably demonstrates that businesses believe they still have plenty of pricing power.

Similarly, when annual core PCE recently peaked at 5.3 percent last February, the increase between the previous Februarys was a mere 1.5 percent – making clear that that 2021-22 increase reflected a great deal of catching up (or more technically, reverting to the mean) from an abnormally weak result between 2020 and 2021 (when economic recovery from CCP Virus-induced slumps was still tentative).

The January annual core increase of 4.7 percent follows a much higher 5.2 percent rise between January,,2021 and January, 2022 – again surely revealing great pricing confidence in business ranks.

As known by RealityChek regulars, results for a single month prove little (even if they’ve been replicated in three different inflation reports).  But single-month results that are multi-month highs are more revealing, especially when supported by baseline analysis.  The more so when they’re accompanied by upward revisions and data (from the same release containing the PCE figures) that consumer spending shot up on month in January. 

That spending is bound to convince businesses that they still enjoy lots of pricing power, and as long as they keep getting that kind of evidence, expect inflation to remain way too high as well.         

(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.   

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

Tags

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

Tags

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

Tags

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

Tags

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

Tags

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.