(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: The Latest Upside Surprise for U.S. Manufacturing

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aircraft, aircraft parts, apparel, automotive, computer and electronics products, Federal Reserve, furniture, inflation, inflation-adjusted output, machinery, manufacturing, medical equipment, miscellaneous durable goods, pharmaceuticals, plastics and rubber products, primary metals, recession, {What's Left of) Our Economy

Sorry for the tardiness of this post on the latest official (April) figures for U.S. manufacturing output. Sometimes life gets in the way. But I hope you agree that they’re still worth reviewing because even without a stupendous performance by the automotive sector, they’d have still been solid.  And the more so with domestic-based industry and the entire economy either supposedly headed for recession or already in one.

These results don’t change the recent big-picture description of U.S.-based manufacturing production essentially flat-lining. But it hasn’t experienced a significant drop-off, either.

In fact, the April sequential growth of 1.02 percent in inflation-adjusted terms (what’s measured by these data tracked by the Federal Reserve and what will be used in this post unless otherwise specified) was the strongest since January’s 1.59 percent. And revisions were slightly positive.

And leaving aside the vehicle and parts sectors, April’s increase would have been a highly respectable 0.38 percent.

The April report shows that American manufacturers have now boosted their output by 1.20 percent since February, 2020, just before the state-side arrival in force of the CCP Virus pandemic As of last month, this figure was 0.93 percent.

The biggest April production winners among the broadest industry-specific manufacturing categories monitored by the Fed were:

>automotive, whose blazing 9.30 percent expansion not only was its best since October, 2021’s 10.44 percent but enabled the industry to achieve a new all-time production record. It topped December, 2018’s previous historic high by 1.89 percent.

Automotive output figures, though, can be volatile. Indeed, the strong April advance followed a downwardly revised March tumble of 1.93 percent that was the sector’s worst monthly performance since February, 2022’s 3.37 percent dive. So it’s still far from clear whether April represents a blip or the start of a lengthy upswing.

What is clear that, pending revisions, the April monthly jump pushed automotive production to 1.57 percent above its immediate pre-pandemic level, versus the 0.97 percent calculable last month;

>computer and electronics products, whose 2.15 percent April gain broke a weak spell of four months and stands as the sector’s best performance since its 2.62 percent advance in May, 2021. These industries have now grown by 1.57 percent since immediately pre-pandemic-y February, 2020, versus the 0.97 percent increase calculable last month. This rate seems modest, but computer and electronics products fell off only modestly during the deep CCP Virus-induced economy-wide downturn;

>plastics and rubber products, where production expanded by 1.16 percent in April for the sector’s second straight improvement after a long spell of weakness. In fact, the April results for plastics and rubber products makers was their strongest since February, 2022’s 2.67 percent. But due to some major downward revisions, these industries’ output sank from 0.37 percent below pre-pandemic levels to 2.01 percent below.;

>primary metals, which boosted production by 0.90 percent. But these industries have still shrunk by 2.71 percent during the pandemic era and it aftermath, versus the 2.90 percent calculable last month.

The biggest losers among these broad sectors were:

>miscellaneous durable goods, where output in April tumbled by 1.32 percent in the worst performance by this diverse group of industries since last December’s 1.79 decrease. Miscellaneous durable goods producers have still increased their production by 9.59 percent since February, 2020, but last month, growth during this period was 11.30 percent;

>apparel and leather goods, where production was cut by 0.80 percent, and post-February, 2020 growth was nearly halved – from the 9.12 percent calculable last month to 5.25 percent. Nonetheless, despite this progress, because of decades of penny-wage foreign competition, these sectors remained mere shadows of themselves:

>machinery, whose output decreased by 0.50 percent and extended a three-month losing streak. These results are discouraging because this diverse grouping is a bellwether for the rest of manufacturing and the economy overall, since its products are so widely used for expansion and modernization. Machinery’s poor recent performance has dragged its CCP Virus-era-and-beyond growth from the 5.85 percent calculable last month to 3.54 percent; and

>furniture and related products, whose -0.43 percent April output slip was its sixth retreat in the last seven months. These industries are now 12.43 percent smaller than in just before the CCP Virus’ arrival, versus the 11.49 percent calculable last month.

Manufacturing sectors of special importance since the pandemic began depressing and distorting the economy followed a solid March with a comparably good April.

The global semiconductor sector shortage that began during the virus period has now eased dramatically for most types of chips, and in that vein, it’s no surprise that U.S.-based producers increased output in April for the third straight month. The 2.08 percent improvement pushed the sector’s production 10.54 percent higher since February, 2020, versus the 8.05 percent calculable last month.

April production of pharmaceuticals and medicines – including vaccines – was strong, too, with the 1.06 percent rise representing the best performance since last December’s 1.08 percent. This sector is now 14.57 percent larger than in immediately pre-pandemic-y February, 2020, versus the 13.38 percent calculable last month.

Aircraft and aircraft parts companies boosted their production only fractionally in April, but this marginal gain broke a string of four straight decreases. Even so, a substantial downward March revision helped reduce these firms’ output growth since the pandemic’s arrival state side in force to 7.07 percent, versus the 7.87 percent calculable last month.

The only April loser among this group was the medical equipment and supplies industry. It’s 1.03 percent production drop was the worst since last December’s 1.57 percent, and dragged its virus-era-and-beyond growth from the 14.52 percent calculable last month to 13.02 percent.

With a U.S. recession still a prediction rather than a fact, the economy continuing to show at least decent momentum, and a growing likelihood that the Federal Reserve will pause its campaign of combating inflation with growth-slowing interest rate hikes, it’s difficult to be gloomy about domestic manufacturing’s near-term future. And if the nation’s politicians succumb to their usual election-year temptation to throw more money at businesses and consumers, then industry’s medium-term prospects look pretty good, too.

Of course, if that’s so, it means that inflation will stay high as well. And how long both developments will remain tolerable for businesses, consumers and all the consumers who vote, and the Fed with its inflation-fighting responsibilities, is anyone’s guess.

(What’s Left of) Our Economy: U.S. Wholesale Inflation May Be Rebounding, Too

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baseline effect, consumer price index, CPI, Federal Reserve, inflation, interest rates, monetary policy, PPI, Producer Price Index, quantitative easing, quantitative tightening, wholesale inflation, {What's Left of) Our Economy

It’s not as if yesterday’s official report on U.S. wholesale inflation for April was as troubling as the consumer price figures released the day before. It’s just that it was a marked contrast to the very good previous set of wholesale price figures (the Producer Price Index, or PPI) that came in for March.

At the same time, I keep growing convinced that the PPI results are only secondary for puzzling out the U.S. inflation picture and forecast. Sure, if businesses have to pay higher prices for the goods and services they purchase in order to turn out goods and services for their final customers, they’ll face greater pressures to raise consumer prices.

But as I’ve explained, the extent to which businesses can pass those costs on depends on the spending power of their customers. The fact that inflation at the retail level remains so stubbornly high reveals that they can continue hiking prices for consumers whether their own costs are mounting or not.

As with the latest data on consumer inflation (the Consumer Price Index, or CPI), the worst aspect of the new PPI report has to do with the monthly heat-up of wholesale prices it shows.

Headline wholesale inflation rose sequentially by 0.23 percent in April – the highest monthly increase since January, and the biggest monthly acceleration (0.60 percentage points over March’s worse-than-originally-reported 0.37 percent drop) since January’s 0.72 percentage point change. It’s of some comfort that the revisions for the previous three months were slightly positive.

Core PPI strips out food and energy prices (because they’re volatile for reasons supposedly having little to do with the economy’s vulnerability to inflation) along with a logistics category called “trade services.” And it too quickened sequentially in April, from March’s marginal 0.07 percent increase to one of 0.18 percent.

This result snapped a two-month period of cooling, and revisions were moderately negative.

Meanwhile, baseline analysis makes clear that annual PPI results that look good on the surface still point to significant business confidence that customers retain plenty of purchasing power left, and that therefore they have plenty of pricing power left.

Headline PPI in April rose 2.38 percent on an annual basis – both the weakest rate since the 1.68 percent of January, 2021, and a big decline from March’s 2.75 percent increase (which was revised down from 2.79 percent). Even better, this yearly slowdown was the tenth in a row.

But that January, 2021 annual increase was coming off a PPI rise between January, 2019 and January, 2020 of just 1.97 percent. So during that latter year (ending just before the CCP Virus arrived stateside in force and began distorting the economy), wholesale inflation was increasing at a sluggish and steady pace. In other words, business’ views of its pricing power weren’t changing much, and indeed, that had been the case for decades before this current bout of inflation.

The baseline figure for the new April results, however, was 11.08 percent. The clear implication: After jacking up prices spectacularly between April, 2021 and April, 2022, businesses felt free over the following year to hike them at a rate that had slowed, but was still abnormally fast by pre-pandemic standards.

Ditto on nearly every count for core PPI. This measure of wholesale inflation was up annually in April by 3.37 percent – the best result since the 3.15 percent of March, 2021. The deceleration from March’s 3.70 percent (revised just a bit upward from the initially reported 3.67 percent) was encouraging, too – even though the “win streak” only dates from February.

Again, however, the March, 2021 baseline figure was just one percent – because wholesale prices began falling in absolute terms in March, 2020 – as the pandemic began hammering economic activity and thus the demand for goods and services. In early 2021, therefore, businesses were displaying some renewed optimism in their wholesale pricing power for core goods and services, but their enthusiasm was decidedly curbed.

The new April baseline? A robust 6.74 percent. To be sure, that’s a sizable improvement over the March, 2023 results – when the baseline for the 3.70 percent yearly worsening of the PPI followed a previous year’s jump of an even higher 7.06 percent. But I’m still more impressed by how strong business pricing power confidence remains.

As usual, one month’s worth of data does not a trend make – whether we’re talking monthly or annual changes. But over the last year, we’ve seen a stretch of historically steep Federal Reserve rate hikes and a roughly simultaneous reversal of the Fed’s stimulative bond-buying program (in which the unprecedented “quantitative easing,” or QE, pursued since Global Financial Crisis days has turned into “quantitative tightening,” or QT).

If both wholesale and consumer inflation still remain as stubborn as they have, those are signs that they’ll persist until the economy slows dramatically going forward, and even until these central bank policies actually do manage to trigger a recession.

(What’s Left of) Our Economy: Signs That Inflation Might Have Stopped Cooling

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banking crisis, banking system, baseline effect, consumer price index, cost of living, CPI, election 2024, Federal Reserve, green manufacturing, inflation, infrastructure, monetary policy, PPI, Producer Price Index, semiconductors, stimulus, {What's Left of) Our Economy

This morning the Labor Department reported U.S. consumer inflation figures that investors, after an initial burst of enthusiasm, now (as of mid-day trading) seem to recognize as pretty disappointing.

For when it comes to the new April results for the Consumer Price Index (CPI), there isn’t even any need to use baseline analysis – which adds crucial context to the annual numbers – to identify significant reasons for pessimism. That’s because both measures showed monthly acceleration.

Headline CPI rose in April sequentially by 0.37 percent. The rate of increase quickened for the first time in three months, and the difference between it as March’s 0.05 percent (the best such figure since last July’s 0.03 percent dip) was the greatest in absolTute terms since the 0.52 percentage point jump between last April and May.

Core CPI strips out food and energy prices because they’re volatile supposedly for reasons having little to do with the economy’s overall prone-ness to inflation. In April, it didn’t speed up over March’s pace as much as headline inflation, but it still resumed climbing faster after slowing down for the first time in four months. Plus, the 0.41 percent sequential rise was one of the higher rates lately.

The story for April’s annual CPI increases was better, but just marginally so. And using baseline analysis (which entails comparing back-to-back annual increases in order to determine whether inflation is genuinely gaining or losing momentum over these longer periods) barely brightens the picture.

April’s slowing annual headline CPI was the tenth straight, and brought the rate to 4.96 percent – it’s lowest since May, 2021’s 4.92 percent. The sequential improvement over March’s 4.99 percent annual increase was pretty skimpy, though.

And now for the baseline analyis. Both the March and April, 2021-22 annual CPI increases were well north of a torrid eight percent. So businesses feeling free to raise prices another nearly five percent on top of that indicates continued real confidence in their pricing power.

That’s especially apparent upon realizing that the baseline figure for May, 2021’s 4.92 percent annual inflation was just 0.23 percent – because it stemmed from early in during the devastating first wave of the CCP Virus pandemic, when the economy was still such deep trouble and consumer demand so weak that businesses on average had almost no pricing power.

It’s also discouraging that between this March and April, annual CPI fell less (0.03 percentage points) than it fell between last March and April (0.28 percentage points). If businesses were losing significant pricing power between last spring and this spring, we’d have been the opposite results.

No baseline analysis is needed to show how unexciting the new annual core inflation figure is. At 5.60 percent in April, it was (a bit) lower than March’s 5.60 percent. But with January and February having come in at 5.55 percent and 5.53 percent, it’s plainly stayed in the same neighborhood so far all of 2023.

As has been the case in recent months, the future of U.S. consumer inflation is still going to be determined by a free-for-all among:

>the Federal Reserve’s determination to force inflation down further, and even risk of recession, by growth-slowing monetary policy moves;

>the ongoing growth impact of Fed measures already taken;

>the countervailing effect of more cautious bank lending resulting from the turmoil in the ranks of small and mid-sized institutions;  

>the economic strength that can be expected from the amount of fuel available for consumer spending (despite higher borrowing costs) that’s coming from very high employment levels, and from remaining CCP Virus stimulus funds in households’ bank accounts; 

>major, stimulative government spending that’s starting to flow in to the economy from the impressive legislative victories won by President Biden on infrastructure, green manufacturing, and semiconductors; and

>the powerful temptation politicians facing reelection tend to feel to keep voters happy with yet more spending, or tax cuts, or some combination of both.

I’m still betting that the inflation-boosting forces win out, and that we’ll get some more evidence tomorrow when the Labor Department releases data on the prices businesses charge each other to supply their customers (the Producer Price Index or PPI). And that’s even though those monthly numbers are telling us that consumer inflation may not even be cooling anymore.   

(What’s Left of) Our Economy: The U.S. Labor Productivity Picture Has Gotten Historically Bad

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inflation, Labor Department, labor productivity, non-farm business, productivity, total factor productivity, {What's Left of) Our Economy

I hope you didn’t blink (figuratively) during America’s latest stretch of improvement in labor productivity. Because it’s over after only two quarters, at least according to the new Labor Department report containing the preliminary results for the first quarter of this year. Indeed, this barometer of efficiency has never been worse for an extended period. 

That’s really bad news because strong productivity growth of both kinds tracked by the U.S. government (labor, which measures the output of one hour’s worth of work by a single worker; and total factor, which measures how much output is being generated a wide variety of inputs ,including labor) is the economy’s best hope for creating sustainable prosperity and for keeping inflation under control.

But after improving at an annualized rate of 1.18 percent in the third quarter of last year and 3.16 percent by the same measure in the fourth quarter, labor productivity in non-farm businesses (the Labor Department’s headline category) dropped by an annualized 2.78 percent in the first quarter of this year. And as bad as that sounds, it’s the worst such result only since the second quarter of 2022, when it sank by an annualized 3.77 percent.

The latest actual year-on-year changes are even more discouraging. Let’s let the Labor Department release speak for itself:

“From the same quarter a year ago, nonfarm business sector labor productivity decreased 0.9 percent….The 0.9-percent productivity decline is the first time the four-quarter change series has remained negative for five consecutive quarters; this series begins in the first quarter of 1948.”

And in historical context, the economy’s labor productivity performance since the beginning of the recovery from the CCP Virus’ devastating first wave, in the third quarter of 2020, is more awful still. For since the 1990s, the United States has transitioned from a country whose labor productivity had been growing respectably to one in which it’s decreasing in absolute terms.

Here are the total numbers for the economic expansions since the 1990s. (As known by RealityChek regulars, comparing similar stages in economic cycles sheds the most light on the actual trends and developments.)

1990s expansion (2Q 1991-1Q 2001): +25.02 percent

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

pre-CCP Virus expansion: (3Q 2009-4Q 2019): 11.92 percent

post-CCP Virus expansion: (3Q 2020-1Q 2023): -1.99 percent

So clearly, even though the economy is still being roiled by the pandemic’s aftermath, and its effects will keep fading at least until the next pandemic, there’s plenty to worry about on the labor productivity front. The more so since there’s no evidence that many U.S. leaders or even economists are proposing plausible ways to get labor productivity out of its literally historic doldrums – or even talking about the problem.

(What’s Left of) Our Economy: U.S. Inflation Stays in a (High) Holding Pattern

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{What's Left of) Our Economy, inflation, recession, Federal Reserve, PCE, personal consumption expenditures index, baseline effect, core PCE

Today’s official U.S. inflation figures (for March) added up to another “more of the same” report. And since they’re the data taken most seriously by the Federal Reserve (the federal government’s main fighter against the multi-decade high prices and price increases the nation has experienced lately) that probably means that it will stay on what seems to be its current current inflation-fighting course. That is, expect it to keep credit much tighter than it had been in many years – at least until it becomes clear that this growth-slowing effort drags the economy into a recession.

The best news contained in this release on the Personal Consumption Expenditures Prices Indices (PCE – which are measures of consumer, not wholesale, inflation) was the monthly drop-off in the headline number. It fell from 0.3 percent in February to 0.1 percent, its weakest advance since last July.

The core PCE result (which strips out food and energy prices supposedly because they’re volatile for reasons largely unrelated to the economy’s fundamental vulnerability to inflation) wasn’t quite so encouraging. March’s 0.3 percent sequential increase matched the February rise, and was unexceptional by recent standards.

The annual results paint a similar picture – but also make possible the baseline analysis needed to make clear the essential context. And it continues to support inflation-success pessimism unless the economy really tanks. The New York Times just provided a good explanation of how such analysis illuminates why today’s superficially easing price increases are at least as troubling as earlier, stronger hikes.

In the first months of the current inflationary surge, the data “were being measured against pandemic-depressed numbers from the year before, which made the new figures look elevated. But by the end of summer 2021, it was clear that something more fundamental was happening with prices.”

That’s because the year-before comparison numbers (the baseline) had gotten considerably higher. And since inflation rates stayed lofty, the obvious conclusion has been that robust price increases were no longer something of a statistical illusion that would turn out to be “transitory” (as the Fed, among many, predicted) once the economy returned to a quasi-normal post-CCP Virus condition. Instead, other drivers of heated inflation had emerged, and unless they were addressed, prices would keep displaying dangerous momentum.

So we can still hold the applause upon learning, as we did in this morning’s PCE report, that yearly headline inflation had tumbled from 5.1 percent in February (revised up from five percent) to 4.2 percent.

Yes, that’s the best such figure since August, 2021’s matching figure. But that August, 2021 baseline figure was 1.4 percent between August, 2019 and August, 2020. This latest March baseline figure? A 6.6 inflation rate that’s more than four times higher. So obviously businesses believe they still have plenty of pricing power, and will continue to raise prices till they’re proven wrong.

The core annual PCE result was even more discouraging. Between February and March, it stayed at 4.6 percent. (To be sure, the February number has been revised down from a,n initially reported 4.7 percent.)

So although that’s still the slowest annual core PCE increase since October, 2021’s 4.2 percent, the baseline figure for the latter was just 1.4 percent, whereas for last month’s figure, it was 5.2 percent. Again, it looks like businesses have been confident that they can keep charging their customers much more.

Interestingly, the same government release containing the PCE inflation figures also indicated that consumers might finally be balking at high prices (supporting the adage that a sure cure for high prices is high prices). Their spending has slowed notably since January. But I’m still betting that a Fed reluctant to create a downturn and politicians determined to keep voters’ finances buoyant as another presidential election approaches will ride to their rescue, and keep inflation higher than virtually anyone wants.          

(What’s Left of) Our Economy: The Real Trade Deficit at a Crossroads

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exports, Federal Reserve, GDP, goods trade, gross domestic product, imports, inflation, inflation-adjusted growth, real GDP, real trade deficit, recession, services trade, Trade, trade deficit, {What's Left of) Our Economy

Today’s first official estimate of U.S. economic growth in the first quarter of this year was one of the most peculiar reports in this series I can remember.

On the one hand, this read (which will be revised twice in the next two months) showed a 1.06 percent improvement after inflation at annual rates in America’s gross domestic product (GDP – the standard measure of an economy’s size). That’s a marked slowdown from the fourth quarter’s 2.55 percent real annualized growth. So not great economic news.

On the other hand, price-adjusted GDP still grew, and the price-adjusted total trade deficit slipped. In fact, it shrank for the third straight time while the economy expanded. That kind of streak hasn’t been seen since the period between the first and fourth quarters of 2007 – just before the arrival of the Great Recession spurred by the Global Financial Crisis.

Despite that reference, that’s encouraging economic news, since it indicates that the growth, however measly per se, remained healthy quality-wise. In other words, it stemmed more from producing than from spending – the opposite result from the typical consumption-led growth pattern usually signaled by a widening rising trade gap.

Specifically, in the first quarter, the constant dollar goods and services trade deficit dipped by 0.23 percent, from the fourth quarter’s inflation-adjusted $1.2386 trillion to $1.2358 trillion. (After-inflation figures at annual rates will be the measure used in this post unless otherwise specified.) The drop was also the fourth straight sequential decrease of any kind – which hadn’t happened since the year between the second quarters of 2019 and 2020.  The end of that period, of course, is when the economy began suffering the effects of the CCP Virus. And the new level is the lowest since the $1.2309 trillion recorded in the second quarter of 2021.

The first quarter deficit represented 6.08 percent of the after-inflation GDP – down from the fourth quarter’s 6.14 percent and also the lowest such figure since the second quarter of 2021 (6.06 percent). All these numbers are way below the record of 7.47 percent in the first quarter of 2022.

Not surprisingly, though, the slight contraction in the overall trade deficit contributed little to first quarter growth either in absolute or relative terms – fueling just 0.11 percentage points of the 1.06 percent advance. In the fourth quarter, the reduction in the goods and services deficit accounted for 0.42 percentage points of the 2.55 percent growth.

The first quarter data left the total trade shortfall 48.39 percent greater than the amount in the fourth quarter of 2019 – the final full data quarter before the pandemic arrived stateside in force. As of the fourth quarter, it had been 48.73 percent higher.

Total exports climbed in the first quarter by 1.18 percent, from $2.5796 trillion to a new record $2.6101 trillion. The first quarter result topped the previous all-time high of $2.6041 trillion (in the third quarter of last year) by 0.23 percent. These overseas sales have now increased by 1.49 percent since that immediately pre-pandemic-y fourth quarter of 2019. As of last year’s fourth quarter, they were a bare 0.30 percent higher.

Total imports in the first quarter rose for the first time in three quarters – by 0.73 percent, from $3.2830 trillion to $3.8460 trillion. These purchases now top the fourth quarter, 2019 total by 12.96 percent. As of the fourth quarter of last year, they were up by 12.14 percent.

The trade shortfall in goods dipped by 1.09 percent sequentially, from $1.4182 trillion to $1.4028 trillion. This fourth straight decrease matched that of the span between the second quarters of 2019 and pandemic-ridden 2020, and the level was the lowest since the $1.3965 trillion from the second quarter of 2021. This deficit is now 31.52 percent greater than just before the CCP Virus began roiling the economy, versus 32.96 percent growth as of the fourth quarter of 2022.

Goods exports reached an all-time high as well, increasing from the fourth quarter’s $1.8468 trillion to $1.9098 trillion. The old record of $1.9010 trillion in the third quarter of 2022 was 0.46 percent lower. These exports have now risen by 6.90 percent since the last pre-pandemic fourth quarter of 2019, versus the 4.38 percent growth as of last year’s fourth quarter.

As with total imports, goods imports rose for the first time in three quarters, too. The advance was 0.73 percent, from $3.8182 trillion to $3.8460 trillion, and it brought the post-fourth quarter, 2019 increase to 12.96 percent. As of last year’s fourth quarter, the increase was 12.14 percent.

The surplus in services trade, a major CCP Virus-era victim, sank in the first quarter sequentially from $177.7 billion to $167.7 billion. The 5.63 percent pull-back was the biggest since the 20.94 percent nosedive in the second quarter of 2021. Yet it also followed big third and fourth quarter jumps of 9.44 percent and 8.69 percent, respectively.

Still, the services surplus is down 28.88 percent since the fourth quarter of 2019, versus the 24.64 percent fall-off as of fourth quarter, 2022.

Services exports fell 1.41 percent in the first quarter, from $731.4 billion to $721.1 billion. This decrease was the first since the second quarter of 2020 – the first quarter heavily affected by the virus. Consequently, these sales are off by 8.35 percent since the last pre-pandemic quarter, versus the 7.04 percent calculable as of last year’s fourth quarter.

Services imports contracted only from $553.7 billion to $553.4 billion, but the decrease was the third straight. These purchases have now risen by 0.44 percent since the arrival of the CCP Virus in force, versus the 0.49 percent calculable as of the previous quarter.

With the new feeble first quarter growth figure seeming to indicate surging odds of an imminent recession, the real trade gap presumably will keep narrowing, too. But the economy is still being distorted by the virus and Washington’s roller-coaster responses.

As I’ve written, the current slowdown – due to the Federal Reserve’s inflation-fighting efforts – could well stabilize and even reverse itself if the central bank pauses or ends its credit tightening for fear of bringing on a hard landing, and if politicians succumb to election-year temptations to keep voters happy with added government spending. In that case (the one I consider likeliest), the real trade deficit could well be headed higher once again, too.    

 

(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: Why Even the New Great U.S. Wholesale Price Results Don’t Warrant Inflation Optimism

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consumer inflation, core PPI, cost of living, CPI, energy prices, food prices, inflation, PPI, Producer Price Index, recession, wholesale inflation, {What's Left of) Our Economy

No doubt about it – the excellent official U.S. wholesale inflation numbers that came in this morning set up a fascinating and important test of what the main drivers of consumer price increases really are. This Producer Price Index (PPI) of course measures the rises and falls in how much businesses charge each other for the goods and services they pay to supply the demand of their final customers (be they other businesses or households and individuals).

If such encouraging numbers keep getting released, will they make clear that the costs companies pay for their inputs play the predominant role? Or will they demonstrate that the crown goes to levels of consumer demand itself? RealityChek regulars know that I’ve backed the second proposition, still do, and believe that inflation will revive even if major business costs keep falling. So I’ve got some reputational skin in this game, too.

If you doubt that today’s results (for March) were excellent, check them out. Headline PPI improved for the consecutive time month-to-month and decreased in absolute terms by 0.50 percent. That’s not disinflation (prices still rising, but more slowly). That’s deflation (prices actually falling). And this sequential drop was the biggest since April, 2020’s tumble of 1.19 percent.

Negative revisions were something of a fly in the ointment. But they weren’t big enough to change the bigger positive picture.

Headline PPI slowed on an annual basis in March, too, and for the ninth straight time. Further, the 2.79 percent yearly growth was the slowest since January, 2021’s 1.68 percent, and the difference with February’s downwardly revised 4.54 percent (1.75 percentage points) was the greatest of the current high inflation period. In fact, the only figure that comes close is the 1.49 percentage point drop between the January and February annual numbers. So that has to indicate powerful downward momentum for wholesale inflation.

So does baseline analysis. The new annual March headline PPI rate of 2.79 percent followed an increase between the previous Marchs of 11.59 percent. That means that between February and March this year, PPI fell considerably faster than the baseline figures for those results rose – which signals that businesses believe they have much less pricing power.

Moreover, the aforementioned 1.68 percent January, 2021 annual wholesale inflation rate followed PPI from January, 2019 to January, 2020 of 1.97 percent. So there was nothing unusual in baseline terms about the latter figure. Rather than indicate great momentum or a catch-up effect, it was a sign of wholesale inflation stability.

The core PPI results strip out prices in energy, food, and a category called transportation services – supposedly because they’re volatile for reasons having little or nothing to do with the economy’s fundamental vulnerability to major price increases (or decreases). And they were outstanding as well.

On a monthly basis, core PPI weakened in March for the second consecutive time, too, and the sequential increase of 0.07 percent was the best such result since these prices sank by 0.81 percent in April, 2020.

In annual terms, core wholesale inflation also cooled for the second straight month, and the March rise of 3.67 percent was the best such result since March, 2021’s 3.15 percent. Moreover, the 0.87 percentage point retreat between the February and March yearly results was also by far the most during the current high inflation period.

A glowing assessment of these annual core PPI figures also holds up well under the baseline analysis microscope. As with annual headline PPI, between February and March, this number’s 0.87 percentage point fall was considerably bigger than the worsening of their 2021-2022 baseline figures (0.31 percentage points, from 6.75 percent to 7.06 percent).

And as with annual headline PPI, in my view, this very rapid core PPI progress outweighs in importance the fact that the baseline figure for that March, 2021 3.15 percent wholesale inflation rate was a measly 0.10 percent. Why? Because by that baseline date of March, 2020, the economy was obviously being engulfed by the CCP Virus pandemic and lockdowns and voluntary behavioral curbs. So the year after, some catch-up was clealy taking place.

In other words, the situation was much different than that for the January, 2021 annual headline PPI result mentioned above – because that baseline figure was pre-pandemic.

Yet bringing the virus into these equations points to the big potential (and IMO, likely) downside of this PPI progress – and indeed of the less impressive consumer inflation data that came out yesterday. It also supports the case that overall levels of economic demand are the main determinants of inflation, and especially consumer inflation.

For it’s no coincidence that so many of the good PPI results spotlighted in this post date are the best since April, 2020. That month was the nadir of the deep (but thankfully brief) depression into which the pandemic threw the nation. Consumers dramatically reduced overall spending.  Therefore, companies’ orders for inputs needed to supply that consumption plummeted as well, all of which sharply reduced all business pricing power. 

Although no such scary downturn is on the horizon now, the signs keep multiplying that some kind of slump will begin before too long. (See, e.g., here.) And as long as this scenario unfolds, producer and consumer prices will surely keep easing – because of weakening demand. 

But here’s where the test I’m anticipating comes in. As explained most recently in yesterday’s consumer inflation update, I don’t expect prices to disinflating or even stabilizing for much longer because a presidential (and Congressional) election is approaching. Consequently, politicians seeking to keep voters happy will soon start working overtime to make sure that consumers will have a decent amount of money to spend – thereby propping demand back up again.

This buoyed demand is likely to restore whatever business pricing power confidence may have been ebbing recently.  Consequently, I predict that companies will start raising prices vigorously again even as their own cost pressures (especially on the labor and supply chain fronts) continue easing. Therefore, prices will gain new momentum simply because companies can increase them, not because of any changes in what they’re paying for goods and services.

Skeptics should think of it this way: If consumers keep on paying higher prices, why would businesses not keep charging them?   

As just indicated, this re-inflationary process will take some time to play out.  But I promise to vigilantly monitor how well my predictions hold up. And you should feel free to hold my feet to the fire, too.          

(What’s Left of) Our Economy: A Welcome, but Probably Temporary, Inflation Respite

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baseline effect, consumer price index, core inflation, CPI, election 2024, energy prices, Federal Reserve, food prices, gas prices, inflation, interest rates, monetary policy, OPEC, Organization of Petroleum Exporting Countries, stimulus, Strategic Petroleum Reserve, {What's Left of) Our Economy

The titanic and therefore often unpredictable U.S. economy served up its second straight month’s worth of ambiguous inflation figures in March, according to today’s official figures. Encouragingly, though, the latest ambiguity in the new Consumer Price Index (CPI) report was more genuinely ambiguous than last month’s, which I wrote tilted toward the downbeat. And that’s the case even if you take into account baseline effects, which put monthly and annual developments into a necessary broader context.

At the same time, the outsized role played by falling energy prices in March, along with political considerations I’ve been citing recently, raise major questions as to how sustainable positive developments might be.

The good news came in headline inflation. The sequential change in March was just 0.05 percent – the best such performance since last July’s 0.03 headline CPI price dip. The rate of decrease compared with February’s 0.37 percent monthly rise was the biggest sequential drop since last July, too.

On an annual basis, headline consumer inflation was up 4.99 percent in March. On top of being the slowest yearly increase since the 4.92 percent recorded in May, 2021, this number was the ninth consecutive decrease. Further, the difference between it and February’s 5.98 percent yearly decline was the greatest in absolute and percentage terms since the peak of the devastating first wave of the CCP Virus pandemic. Between March and April, 2020, annual CPI plummeted from 1.54 percent to 0.35 percent.

Baseline analysis reveals that in May, 2021, when annual consumer inflation was running at the aforementioned rate of 4.92 percent, the figure for the previous Mays was just 0.23 percent. So the fact that the baseline figure for last month’s 4.99 percent year-on-year CPI climb was a red hot 8.52 percent looks  discouraging. Ordinarily, I’d view that development as a clear sign that businesses still believe they’re flush with pricing power, and that the inflation outlook going forward is gloomy.

But the first baseline comparison dates from that peak pandemic period when the economy was literally in free fall. The nation may not be back to normal yet, but it’s sure a lot closer. So I’m much more impressed with the facts that the yearly inflation between this February and March improved much faster (from 5.98 percent to 4.99 percent) than their baseline figures worsened (from 7.95 percent to 8.52 percent).

Since the peak of the pandemic, these two numbers have moved like this only once – last December, when annual headline CPI fell by 0.70 percentage points while its baseline figure increased by just 0.33 percentage points.

A very different picture unfortunately emerges from the core CPI results, which strip out food and energy prices because they’re supposedly volatile for reasons having essentially nothing to do with the economy’s fundamental inflation prone-ness.

Monthly core consumer inflation came down from February’s 0.45 percent to 0.38 percent in March. The sequential fall-off was the first since November, but the rate of price increases remained on the high side.

The annual figures were considerably worse. March’s yearly core CPI of 5.60 percent represented the first increase since last September, and the hottest such result since December’s 5.68 percent.

And baseline analysis offers no consolation. February’s 5.53 percent yearly core inflation increase followed a robust 6.43 percent rise between the previous Februarys, and March’s higher 5.60 percent increase followed an also higher 6.45 percent baseline rate since the previous March. Clearly businesses in general outside the food and energy sectors think they retain plenty of pricing power, too.

Moreover, as indicated above, there’s little reason to expect continued cooling of headline inflation in particular. After all, energy prices led the improvements, tumbling by 3.5 percent between February and March, and by 6.4 percent between March, 2022 and last month.

But gasoline prices have been rising for at least a month, according to the AAA because the OPEC (Organization of Petroleum Exporting Countries) cartel decided earlier this month to cut production. And don’t expect the Biden administration to resume releasing oil supplies from the nation’s Strategic Petroleum Reserve to compensate. At this point, its plans call for replenishing these supplies – which would tighten the oil market all else equal. Morever, even though the end of cold weather will ease pressures on heating oil prices, this year’s mild winter was restraining them to begin with. And the approach of summer driving season should buoy pump prices further.

In addition, and perhaps most important, although they’ve spent down more than half the excess savings they accumulated from pandemic stimulus and their own voluntary spending cuts, Americans’ spending is still holding up reasonably. So businesses are likely to take advantage and keep charging them more.

Can headwinds be detected? You bet. Consumers are showing signs of more caution (see, e.g., here) precisely because living costs are up so much, because the job market has been softening (see, in particular, the revisions mentioned here) , and because the economy may be (finally) slowing. Further, credit already appears to be tightening due both to the Federal Reserve’s anti-inflation interest rate hikes and to the recent outbreak of banking jitters and the advent of tighter lending restrictions on many lending institutions.

But I’m still convinced that these headwinds will abate – and even turn into tailwinds – because politicians will want to prop up the economy as a president election approaches, and because the Federal Reserve may chicken out of risking creating a recession with its tight monetary policies. So enjoy this latest minimally acceptable official consumer inflation report while you can.