Those Stubborn Facts: Some Banking Crisis Basics

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banking crisis, banks, deposits, FDIC, Federal Deposit Insurance Corporation, Federal Reserve, finance, interest rates, rate hikes, Signature Bank, Silicon Valley Bank, SVB, Those Stubborn Facts

U.S. banks’ unrealized losses as of year-end 2022: $1.7 trillion

U.S. banks’ total equity as of year-end 2022: $2.1 trillion

Share of U.S. banks’ $17 trillion worth of deposits not insured by the federal government: c. 40 percent

 

(Source: “U.S. Banks are sitting on $1.7 trillion in unrealized losses, research says. That’s not a problem—until it is,” by Will Daniel, Fortune, March 23, 2023, U.S. Banks have $1.7 trillion in unrealized losses | Fortune)

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(What’s Left of) Our Economy: U.S. Manufacturing Output Surprises to the Upside Again

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aerospace, aircraft, aircraft parts, automotive, banking crisis, CCP Virus, chemicals, computer and electronics products, coronavirus, COVID 19, Federal Reserve, inflation-adjusted output, interest rates, machinery, manufacturing, manufacturing production, medical equipment, miscellaneous non-durable goods, monetary policy, pharmaceuticals, plastics and rubber products, recession, semiconductors, textiles, wood products, {What's Left of) Our Economy

Remember one of the signature expressions of 1960s sitcom character Gomer Pyle – “Surprise, surprise, surprise!”? That was my reaction to this morning’s Federal Reserve release on U.S. manufacturing production for February, which reported a second straight increase.

The February improvement was pretty marginal to be sure – 0.12 percent in after-inflation terms (the kind of numbers that will be presented here unless otherwise specified). And since its production is down on net since last February, domestic industry is still in recession. But any official gain in the hard data is noteworthy, given the lousy February sentiment-based survey results put out by many of the Federal Reserve’s regional branches (e.g., here), which have continued into March (e.g., here), and by leading private sector groups (e.g., here).

Also unexpected: January’s increase was revised up from one of 0.94 percent to one of 1.35 percent. That’s the best such performance since October, 2021’s 1.70 percent. So maybe that January figure wasn’t a one-off, as I speculated last month?

That’s not clear yet. Both the January and February advances also might still stem from a baseline effect – specifically, catch-up from an absolutely terrible December. That month’s manufacturing output decline has now been revised down a second time. Its 2.06 percent sequential dropoff is the worst such result since the 3.64 percent nose-dive in weather-affected February, 2021. But as that journalistic cliché goes, “It’s too soon to tell.”

Here’s what we do know – so far (keeping in mind that revisions of all statistics going back to 2021 will be issued on March 28).

The February report means that U.S.-based manufacturing output is now up since since just before the CCP Virus pandemic arrived stateside in force in February, 2020 by 1.65 percent – the same figure calculable from last month’s Fed release.

Only seven of the 20 broadest manufacturing sub-sectors tracked by the Fed boosted their production in February. The biggest winners were:

>the very big chemicals industry, which expanded output by 1.24 percent. Better yet, this growth came after a January increase of 3.11 percent (the best such performance since April, 2021’s 3.97 percent). The January pop looks like catch-up from December’s 2.63 slump (the worst such performance since weather-affected February, 2021’s 6.69 percent cratering). But the February follow-on could be a sign of truly regained strength.

Since immediately pre-pandemic-y February, 2020, chemicals production is up 7.52 percent, versus the 6.11 percent calculable last month;

>computer and electronic products, where production advanced for the first time since last September – and by 1.22 percent. But now it’s contracted by 0.62 percent during the CCP Virus era, versus having grown by 2.95 percent as of last month’s release; and

>wood products, whose output rose for the second straight month after having slumped for most of the past year. Not so coincidentally, this losing streak paralleled the housing industry woes prompted by the Federal Reserve’s historically rapid interest rate hikes. The February 1.11 percent gain was the best since the 2.81 percent surge last February.

But the wood products industry is still 2.49 percent smaller than it was just before the pandemic’s arrival in force, versus the 2.56 percent calculable last month.

The biggest February maufacturing output losers were:

>textiles and products, which saw production sag by 2.11 percent, the biggest decrease since last June’s 3.44 percent. The fall-off depressed output in this small sector to 12.96 percent below its February, 2020 level, versus the 8.93 percent calculable last month;

>plastics and rubber products, whose production decrease of 1.82 percent was its seventh straight monthly loss, and dragged its output losses down to 5.62 percent below its immediate pre-pandemic levels versus the 4.33 percent calculable last month; and

>miscellaneous non-durable goods, where output slipped by 1.52 percent, and pushed production down to 14.95 below its pre-pandemic level versus the 13.76 percent calculable last month.

Output also drooped in two sectors of continuing special importance to all of industry and the entire economy.

The story of CCP Virus era U.S.-based manufacturing has been in many respects a story of the automotive sector, and in February, vehicle and parts production dipped by 0.28 percent. This advance helped it draw to within 0.12 percent of its size in February, 2020, from the 1.61 percent shortfall calculable last month.

The diverse machinery industry, meanwhile, is crucial both to the rest of manufacturing and to the entire economy because its products are used so widely for retooling and modernization. So its growth indicates general manufacturing and overall business optimism, and vice versa.

Ordinarily, therefore, a moderately 0.40 percent monthly decline in machinery output would be moderately bearish, but the sector has been too volatile lately to be certain. The February decline followed a 3.42 percent burst that was the strongest since 5.12 percent pop of January, 2021. That’s a sign of a catch-up effect.

But the January results followed a 2.59 percent tumble in December that was the worst since last May’s 3.34 percent. All told, however, machinery output is now 5.54 percent greater than just before the pandemic struck, versus the 4.77 percent calculable last month.

Manufacturing sectors of special importance since the pandemic struck also suffered generally lousy Februarys performances.

The semiconductor shortages that have caused so many headaches for U.S. and foreign manufacturers seem to be easing, but supplies remain inadequate for many customers. And the situation won’t be helped by the 1.65 percent real output decrease U.S.-based chip production suffered in February.

Worse, this decrease was the sector’s eighth in a row – and some of these estimates have been revised down substantially. Due to these poor and worsening results, whereas as of last month’s Fed release, U.S. semiconductor output was 4.47 percent above its immediate pre-CCPVirus levels; now it’s 7.83 percent below.

Medical equipment and supplies, which contains the healthcare products used so widely to combat the pandemic, suffered a 0.73 percent real output contraction – its fifth straight monthly decrease.

Medical equipment and supplies output in February dropped for the fifth time in the last six months. But even with this latest 0.51 percent retreat, production in this sector – which includes so many of the products used to fight the CCP Virus – is now 10.52 percent higher than jut before the pandemic hit, versus the 9.85 percent calculable last month.

Production in pharmaceuticals and medicines was off by 0.54 percent in February, but the decrease was the first since last July, and depressed this big sector’s growth since immediately prepandemic-y February, 2020 to 20.42 percent versus the 21.44 percent calculable last month.

The exceptions to this pattern were aircraft and aircraft parts-makers – possibly because industry giant Boeing’s fortunes seem to be looking up finally. Their output increased by 0.35 percent in February, and is now up 30.19 percent since the advent of a pandemic that long hammered travel of all kinds, versus the 35.81 percent calculable last month.

What lies ahead? The entrails remain difficult to read, especially since the new banking crisis is creating doubt as to whether the Federal Reserve will continue an inflation-fighting effort it’s been making vigorously but that still hasn’t produced the economy slowdown it’s seeking – but that may at some point because these monetary tightening moves typically don’t start working for many months. See what I mean? 

If the central bank remains on course, domestic manufacturing’s troubles seem certain to return. But as long as the economy keeps defiantly expanding, its power may bring U.S.-based industry securely back into growth mode.

Making News: Podcast On-Line of New National Radio Interview on Banking Turmoil, the Fed, & U.S.-China Ties

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banking system, Federal Reserve, finance, inflation, interest rates, Making News, Market Wrap with Moe Ansari, regulation, Silicon Valley Bank

I neglected to mention it here yesterday, but at least I can post the podcast of my latest interview on the nationally syndicated “Market Wrap with Moe Ansari.” Click here for a timely conversation about the new, continuing turmoil in the U.S. banking system, about the Federal Reserve’s anti-inflation fight, and about how U.S.-China relations and the global economy are evolving. The segment begins at about the twenty-minute mark. (And yes, I was – and am – excited about the Princeton game!)

Moreover, keep on checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Better Wholesale U.S. Inflation but Consumers May Never Notice

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consumer inflation, core PPI, cost of living, CPI, Federal Reserve, inflation, interest rates, monetary policy, PPI, Producer Price Index, producer prices, wholesale inflation, wholesale prices, {What's Left of) Our Economy

Today’s official report on U.S. producer price inflation could teach an important lesson on why prices move up and down in various circumstances.

Because the Producer Price Index (PPI) measures the costs of various inputs businesses sell to other business customers, it can often signal where consumer prices are going – especially when these costs go up. After all, when the goods and services bought by businesses go up, they feel understandable pressure to compensate by raising the prices they charge their customers – including individuals and households.

But as RealityChek regulars know, businesses can’t always pass on higher costs to their final customers. That’s because these customers don’t always feel that they can afford to pay higher prices (except, to a great extent, for essentials). So if demand isn’t strong enough, higher producer, or wholesale, prices don’t always translate into higher consumer prices, and the businesses serving consumers often need to suffer lower revenues and/or profits.

To complicate matters further, when business’ costs go down, there’s no inherent reason for businesses to lower the prices they charge their final customers – especially if demand remains strong enough. Unless they’re chasing market share? Or unless anyone thinks that they regularly, or even ever, like to give their customers price breaks just for the heck of it?

So since consumer demand remains strong – as made clear just yesterday by the official U.S. consumer inflation report for February – my sense is that the new PPI data don’t have much predictive power when it comes to living costs.

That’s a shame, since those wholesale prices results are pretty good in and of themselves. Headline PPI actually fell on month in February, by 0.15 percent – the best such result since last July’s 0.28 percent dip. Moreover, January’s torrid initially reported increase of 0.66 percent (the worst such result since last June’s 0.91 percent jump) has been revised down to a rise of 0.34 percent.

The unusually good monthly number for February could simply reflect some mean reversion from January. (That downward revised figure is still the highest since last June.) Indeed, that terrible June result was followed by the July 0.28 percent decrease. But let’s stay glass-half-full types for now.

Core producer price inflation cooled nicely on month in February, too. This measure (which strips out food, energy, and trade services prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental inflation prone-ness), pegged sequential wholesale price increases at 0.21 percent.

That figure was well off January’s 0.50 percent – the worst since last March’s 0.91 percent. And it in turn was revised down from the initially reported 0.59 percent. Some mean reversion could be at work here, too, but since last June (as has not been the case for headline PPI), core PPI has been pretty range-bound between 0.20 and 0.29 percent.

Not even taking baseline effects into account undermine the February wholesale inflation results fatally. On an annual basis, headline PPI in February climbed by 4.59 percent. That was the best such result since March, 2021’s 4.08 percent, and a big decrease from January’s data (which were revised down from 6.03 percent to 5.71 percent.

In addition, the February figure comes off headline PPI of 10.56 percent between the two previous Februarys. Those back-to-back results still indicate that businesses that sell mainly to other businesses still believe they have plenty of pricing power – especially given that the baseline figure for March, 2021 was a rock bottom 0.34 percent due to the steep CCP Virus-induced economic downturn. But the big difference between the sets of January and February, 2023 numbers also signal that this confidence has been dented.

Even better, January’s 5.71 percent headline wholesale price inflation followed a 10.18 percent increase during the previous Januarys. A decrease in the 2023 figures considerably bigger than the increase in the 2022 figures also points to wholesale inflation losing not trivial steam.

The annual core PPI story isn’t quite so good, but contains some encouraging news. The February advance of 4.44 percent was only a bit down from January’s 4.45 percent. But it was the lowest such rate since March, 2021’s 3.15 percent, and the January figure was revised down from 4.53 percent.

Baseline analysis, however, shows that pricing power in the economy’s core sectors remains ample. The January and February annual core PPI results followed previous annual increases of 6.89 percent and 6.75 percent, respectively. So they didn’t duplicate the heartening headline PPI pattern of 2023 annual PPI falling faster than its 2022 counterparts.

Moreover, back in March, 2021, when annual core PPI was running at 3.15 percent, the baseline figure for the previous March’s was just 0.10 percent. That is, there was almost no core PPI inflation – because of the sharp CCP Virus-induced slump. So it’s obviously too soon to declare victory over this kind of price increase.

But although this fairly good PPI report may tell us little or even nothing about future inflation, it will affect the nation’s cost of living in one significant if indirect way:  Like yesterday’s consumer price report, it was probably good enough to enable the Federal Reserve to slow or pause its anti-inflation interest rate hikes and other monetary policy moves in order to contain the new banking crisis while claiming that such chickening out won’t send price increases spiraling still higher.  At least not yet right away.   

(What’s Left of) Our Economy: Banking Crisis or Not, More U.S. Inflation’s Ahead

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American Rescue Plan, banking system, banks, baseline effect, Biden administration, CCP Virus, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, election 2024, Federal Reserve, finance, gasoline prices, inflation, interest rates, monetary policy, oil prices, stimulus, {What's Left of) Our Economy

Soon Jews the world over will celebrate the Passover holiday by asking at the ceremonial dinner (seder) “Why is this night different from all other nights?” (The answer is easily Google-able.)

Today, those the world over who follow the economy should ask “Why is this morning’s U.S. consumer inflation report different from all other recent U.S. inflation reports?”

The answer? Because this morning’s report (which takes the story through February) won’t be the biggest development looked at by the Federal Reserve in its upcoming meeting when it decides where it will set the interest rates it controls.

Instead, the biggest development it considers will be the turmoil that’s been breaking out these last few days in the U.S. banking system, whose proximate cause has been the blazing pace with which the Fed has been raising the federal funds rate over the past year.

Not that the new figures for the Consumer Price Index (CPI) will be ignored. In fact, they were probably unspectacular enough (either in a good or bad way), to convince the central bank to either slow down the pace of rate hikes or to pause them altogether, for fear of igniting a devastating financial chaos. But were they really so so-so? Not the way I see it.

Indeed, the data made clear that U.S. prices remain way too high, and are rising way too fast, to please any reasonable person. And that’s true either when it comes to the headline inflation results, or to their “core” counterparts – which strip out food and energy prices supposedly because they’re volatile for reasons having almost nothing to do with the economy’s underlying vulnerability to inflation.

The monthly February headline figure came in at 0.37 percent – below the 0.52 percent recorded in February (and the worst sequential result since last June’s 1.19 percent), but still bad enough to push prices up by nearly 4.50 percent at an annual rate if it continues for a year. And price increases that strong would be more than twice the Fed’s yearly target of two percent – creating a situation that no consumers will enjoy.

Speaking of annual headline CPI, its actual rate as of February was 5.98 percent – a good deal lower January’s 6.35 percent and the best such figure since September, 2021’s 5.38 percent.

But as known by RealityChek regulars, here’s where some baseline analysis is needed. That is, it’s crucial to see whether these annual figures are following those for the previous year that were unusually low or unusually high. If the former, then a yearly inflation rate that may look lofty at first glance might just represent one-time catch up – a reversion to a long-term average from a weak anomalous read.

In fact, in my view (and that of the Fed and the Biden administration), it was catch up that generated the rapid price hikes of the early part of this current high inflation period. The main reason was a rebound from price stagnation attributable mainly to the arrival of the CCP Virus and all the havoc it wreaked on the economy generally and especially on the service sector that makes up most of it by far. So I agreed with then conventional wisdom that at that point, worrisome inflation was “transitory.” (See, e.g., here.)

After early 2021, however, circumstances changed dramatically. Of course the Russian invasion of Ukraine last February drove up gasoline prices – though they’d been rising strongly since the recovery from the devastating first coronavirus-induced economic slump and took another big leg up in late 2020. (See this chart.)

More important was the Biden administration’s continuation of emergency-type stimulus spending well after the pandemic emergency had peaked and a strong economic recovery was underway. The American Rescue Plan Act and other boosts in government spending ensured that consumers at all income levels would long be abnormally cash- and income-rich, and that their resulting spending would give businesses generally a new jolt of pricing power.

And for many months, the changes in the baselines for annual headline and core inflation have strongly supported that case that inflation has become more entrenched.

In this vein, the allegedly encouraging annual 5.98 percent inflation rate for February shouldn’t be seen in isolation. What also matters is that it followed a 2021-22 baseline figure of a scorching 7.95 percent. That’s a clear sign of business’ continued confidence in its pricing power. The baseline figure for that September, 2021 5.38 percent inflation rate was just 1.63 percent – well below the Fed target and a number that points to an economy that was still being held back largely because of a seasonal CCP Virus rebound.

Core CPI paints a bleaker picture even without examining the baseline effect. On a monthly basis, it rose for the third straight time, and the new figure of 0.45 percent was the highest since last September’s 0.57 percent.

As for the annual increase, that registered 5.53 percent. That was a tad lower than January’s 5.55 percent and the best such result since December, 2021’s 5.52 percent. But the baseline for the new February figure is 6.43 percent – considerably higher than the 6.43 percent for Januay. So that’s a powerful argument for a worsening, not improving, core CPI performance. And the case seems to be clinched that the baseline figure for that December, 2021 core inflation rate was a feeble 1.63 percent – well below the Fed headline CPI target.

Even before the February CPI report, I believed that inflation would keep heating up because most consumers still have plenty of cash (and therefore, don’t forget, credit), and because a combination of slowing growth (which, to be fair, we haven’t seen yet), and an approaching election cycle would keep politicians tempted to keep spending levels high in order to prop up the economy and keep voters happy. Moreover, I’ve never bought the argument that the Fed would keep fighting inflation vigorously enough to tighten monetary policy enough to cut growth rates dramatically – much less risk a recession – going into the high political season.

Now with banking system troubles added to the mix, the idea that continued strong interest rate hikes seems completely fanciful – along with any realistic hopes that inflation will soon fall back to acceptable levels.

(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: Too Much Irrational Exuberance Today on U.S. Inflation

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consumer price index, core CPI, CPI, Federal Reserve, inflation, interest rates, monetary policy, personal consumption expenditures index, Producer Price Index, {What's Left of) Our Economy

Wall Street is ecstatic about today’s official report on two measures of consumer inflation, and President Biden is pretty pleased, too. Both see improvement in the October results for both overall (headline) inflation, and for core inflation (which strips out food and energy prices supposedly for reasons that have nothing to do with the economy’s underlying inflation prone-ness).

And both evidently believe that this improvement means that the Federal Reserve will start easing off on the interest rate hikes it’s both approved so far and promised in order to bring price increases down from their recent multi-decade-worsts. In other words, if inflation is moderating, the Fed might not have to slow down economic growth and job creation as much as feared in order to restore price stability.

Here’s why I think both are wrong – or at the very least prematurely optimistic. They’re ignoring that baseline effect. If you look at the data in context, you see that the annual increases in both the headline and core readings for the Consumer Price Index (CPI) are both coming off prices rises that were highs for the previous year, and that heated up considerably between September and October.

Specifically, although the year-on-year rise of headline CPI did slow to its weakest rate (7.76 percent) since January, the previous year’s annual October overall consumer price increase was that year’s fastest (6.24 percent). The new yearly annual CPI increase was indeed cooler than September’s (8.22 percent). But that figure was coming off a 2020-2021 rise of just 5.39 percent.

Core inflation displayed a similar pattern. In October, prices of goods and services excluding food and energy rose by 6.31 percent at an annual rate – down from a September increase of 6.66 percent that was the worst such figure since August, 1982 (7.06 percent). But the previous September, core annual inflation was 4.04 percent. The previous October, it was a considerably higher 4.59 percent.

The best interpretation, as I see it? Businesses still have plenty of pricing power, which will keep inflation dangerously high, because consumers still have plenty of spending power.

Such inflation pessimism (especially if the Fed does ease off its tightening policy) is also supported by the monthly headline CPI numbers. Overall prices climbed sequentially by 0.44 percent in October. That was way off the high for this year (March’s 1.24 percent). But it represented the third straight speed up.

The news was much better for core monthly CPI. The October rise of 0.27 percent was the year’s slowest, and down greatly from September’s 0.58 percent.

But that core performance bears careful watching, too, because energy prices in particular tend to influence consumer prices eventually, since energy is a key cost for virtually every good and service produced in America. In fact, month-to-month, energy prices were up 1.8 percent in October after falling 2.1 percent in September.

In that vein, another clue about future inflation rates is coming next Tuesday, with the release of the new producer price report. That measures what companies charge each other for the purchases needed to turn out whatever they provide to consumers and to each other (if businesses are their final market). And don’t forget: The CPI isn’t the Fed’s favorite gauge of inflation. It looks more closely at the price indices for “Personal Consumption Expenditures,” and these October results come out December 1.

These clues, however, even if taken all together, won’t be all that big for inflation-watchers, as they’ll cover just a single month.  As Fed Chair Jerome Powell stated earlier this month, the central bank is going to need to see “a series of down monthly readings,” and much other evidence, before concluding that inflation is “coming down decisively.”  Although he really was behind the curve is foreseeing how prices would shoot up, waiting for the trends over time to start appearing seems like by far the best inflation-fighting approach now.  And why the markets’ reaction to today’s data seems like what one of Powell’s predecessors called  “irrational exuberance.” 

Making News: Back on National Radio Talking Midterms and Trade…& a New Podcast!

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agriculture, Biden, CBS Eye on the World with John Batchelor, Congress, Democrats, election 2022, environment, fast track, Federal Reserve, friend-shoring, interest rates, Kevin Brady, labor rights, MAGA Republicans, Making News, manufacturing, midterms 2022, monetary policy, recession, regulation, Republicans, reshoring, taxes, Trade Promotion Authority, U.S. content, U.S.-Mexico-Canada Agreement, unions, USMCA

I’m pleased to announce that I’m scheduled to return tonight to the nationally syndicated “CBS Eye on the World with John Batchelor.”  Our subjects: yesterday’s midterm election and how it might affect Washington’s approach to international trade.

I don’t know yet when the pre-recorded segment will be broadcast but John’s show is on between 9 PM and midnight EST, the entire program is always compelling, and you can listen live at links like this. As always, moreover, I’ll post a link to the podcast as soon as one’s available.

In that podcast vein, the recording is now on-line of yesterday’s interview on the also-nationally syndicated “Market Wrap with Moe Ansari.” The segment, which dealt with what the midterm results (which aren’t all in yet!) will mean for the U.S. economy – and the manufacturing sector in particular. It begins about 22 minutes into the program, and you can listen at this link.

Note: My forecast of significant Republican gains in the House and Senate seems to have been on the over-optimistic side, but of course, many key races remain undecided.

And keep on checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: An End to a U.S. Trade Winning Streak?

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Advanced Technology Products, China, consumption-led growth, dollar, economic growth, exchange rate, exports, Federal Reserve, goods trade, imports, inflation, interest rates, Jerome Powell, manufacturing, monetary policy, non-oil goods, services trade, Trade, trade deficit, yuan, zero covid policy, {What's Left of) Our Economy

Today’s official U.S. monthly trade data (for September) signal an end to an encouraging stretch during which the national economy both exported more and imported less – and engineered some growth at the same time. (See, e.g., here and here.)

That’s been encouraging because it means expansion that’s powered more by production than by consumption – a recipe for much more solid, sustainable growth and prosperity than the reverse.

But the new trade figures show not only that the total trade gap widened for the first time since March (to $73.28 billion), and reached its highest level since June’s $80.88 billion. They also revealed that the deficit increased because of lower exports and higher imports for the first time since January.

The discouraging September pattern also indicates that American trade flows are finally starting to feel the effect of the surging U.S. dollar, which hurts the price competitiveness of all domestic goods and services in markets at home and abroad.

Some (smallish) silver linings in the new trade statistics? A bunch of (biggish) revisions showing that the August improvement in America’s was considerably better than first reported.

At the same time, two new U.S. trade records of the bad kind were set – all-time highs in services imports and in imports of and the deficit for Advanced Technology Products (ATP). But services exports reached an all-time high as well.

The impact of the revisions can be seen right away in that combined goods and services trade deficit figure. The September total was 11.58 percent higher than its August counterpart. And it did break the longest stretch of monthly drop-offs since the May-November, 2019 period. But that new August figure is now reported at $65.28 billion, not $67.40 billion. That’s fully 2.55 percent lower.

The August total exports figures saw a noteworthy upward revision, too – by 0.72 percent, from $258.92 billion to $260.79 billion. In September, however, these overseas sales decreased for the first time since January, with the 1.07 percent slippage bringing them down to $258.00 billion. That’s the lowest level since May’s $254.53 billion..

As for overall imports, they were up in September for the first time since May. The increase from $326.47 billion to $331.29 billion amounted to 1.47 percent.

As with the total trade deficit, the August figure for the goods trade gap was revised down by a sharp 1.67 percent, from $87.64 billion to $86.17 billion. And also as with the total trade shortfall, its goods component in September rose for the first time since March. The 7.63 percent worsening, to $92.75 billion, brought the gap to its highest since June’s $99.26 billion.

Goods exports for August were upgraded significantly, too – by 0.75 percent, from $182.50 billion to $183.86 billion. But in September, they shrank on month by 2.01 percent, with the $180.17 billion level the lowest since May’s $179.76 billion.

Goods imports for their part climbed for the first time since May. Their 1.09 percent increase pushed these purchases up from $270.04 billion in August to $272.92 billion in September.

The revisions worked the opposite way for the longstanding service trade surplus. August’s total is now judged to be $20.49 billion – 1.24 percent higher than the originally reported $20.24 billion. And in September it sank for the second straight month, with the 5.01 percent decrease representing the biggest monthly drop since May’s 9.69 percent, and the resulting in a $19.47 billion number the weakest since June’s $18.38 billion.

Services exports for August were upgraded by 0.67 percent, from $76.42 billion to $76.93 billion. They climbed increased further in September – by 1.18 percent to a fourth straight record of $77.83 billion.

The August services import totals were also revised up, with the new $56.44 billion level 0.46 percent higher than the original $56.18 billion. Their ascent continued in September, with the 3.42 percent surge – to a record $58.37 billion – standing as the biggest monthly increase since February’s 5.13 percent.

Domestic manufacturing had a mildly encouraging September, with its yawning, chronic trade gap narrowing by 1.74 percent, from $131.71 billion to $129.41 billion.

Manufacturing exports slumped from $113.34 billion in August (the second best ever after June’s $114.78 billion) to $110.688, for a 2.34 percent retreat.

Manufacturing imports tumbled by 2.02 percent, from August’s $245.05 billion (the second highest all-time amount behind March’s $256.18 billion) to $240.10 billion.

Due to these figures, manufacturing’s year-to-date trade deficit is running 18.17 percent ahead of 2021’s record level (which ultimately came in at $1.32977 trillion). In fact, at its current $1.13974 trillion, it’s already the second highest yearly manufacturing deficit in U.S. history.

Since manufacturing trade dominates America’s goods trade with China, it wasn’t surprising to see the also gigantic and longstanding merchandise trade deficit with the People’s Republic declining in September for the first time in five months.

The small 0.39 percent monthly decrease, from $37.44 billion in August (this year’s top total so far) to $37.29 billion no doubt reflected the effects of Beijing’s continuing and economically damaging Zero Covid lockdowns.

Indeed, however modest, this decrease is noteworthy given that China allowed its currency, the yuan, to depreciate by 11.29 percent versus the dollar this year through September.

U.S. goods exports to the People’s Republic were down in September for the first time since June, with the 7.39 percent fall-off pulling the total from $12.91 billion (a 2022 high so far) to $11.95 billion. The monthly decrease was the biggest since April’s Zero Covid-related 16.25 percent, and the level the lowest since June’s $11.68 billion.

America’s goods imports from China were off on month in September as well – and also for the first time in June. The contraction from August’s $50.35 billion (the second highest all-time total) to September’s $49.25 billion was 2.24 percent.

On a year-to-date basis, the China deficit has now risen by 21.98 percent. That’s important because it continues the trend this year of growing faster than its closest global proxy, the non-oil goods trade deficit (which has widened during this period by just 17.21 percent).

Moreover, this gap has widened overwhelmingly because of China’s feeble importing. Year-to-date, the People’s Republic’s goods purchases from the United States are up just 3.05 percent. The non-oil goods counterpart figure is 15.88 percent.

Finally, the U.S. trade deficit in Advanced Technology Products (the U.S. government’s official name for these goods, hence the capitalization) surged by 18.79 percent sequentially in September, from $20.47 billion to a new monthly record of $24.32 billion. That level topped March’s previous high of $23.31 billion by 4.35 percent.

ATP exports rose a nice 5.39 percent on month in September, from $32.60 billion to $34.33 billion. But imports popped by 10.50 percent, from August’s $53.08 billion to a record $58.65 billion – which surpassed the old record (also set in March) of $56.71 billion by 3.41 percent.

Moreover, year-to-date the ATP deficit is up 29.65 percent, from $137.31 billion to !$178.01 billion. That’s already equal to the third highest total annual total ever, behind last year’s $195.45 billion and 2020’s $188.13 billion. So look for another yearly worst t be hit in these trade flows.

At this point, the trade deficit’s future is especially hard to predict. On the one hand, if the chances of a U.S. recession before too long seem to have increased due to the Federal Reserve Chair Jerome Powell’s hawkish remarks yesterday on inflation and interest rates. Normally, that would force the deficit down as tighter monetary policy depressed consumption – and imports.

On the other hand, higher interest rates could well keep strengthening the dollar and keep the deficit on the upswing. So could the still enormous levels of savings (and spending power) that Americans have amassed since the CCP Virus pandemic struck.

The only thing that seems certain, unfortunately, is that the sweet spot that American trade flows have found themselves in recently looks like it’s gone for the time being.

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

Tags

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

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

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

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

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

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

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

Source: Federal Reserve Board and Wells Fargo Economics

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

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

Source: Federal Reserve Board and Wells Fargo Economics

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

Source: Federal Reserve Board and Wells Fargo Economic

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

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

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

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