(What’s Left of) Our Economy: U.S. Inflation Still Looks Transitory No Matter How You Look at It

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CCP Virus, consumer price index, coronavirus, COVID 19, CPI, Fed, Federal Reserve, inflation, Jerome Powell, PCE, personal consumption expenditures index, supply chain, transitory, Wuhan virus, {What's Left of) Our Economy

I’m still in the “U.S. inflation is transitory” camp and still not overly worried about recent price increases because they look to be products of the CCP Virus and the sudden stop-start pattern is produced in the economy and not stronger, more lasting changes. But it’s important to note that my arguments have been based on only one of two major groups of official statistics – the consumer price index (CPI) kept by the Labor Department. (See, e.g., here.) 

The continuing growth of inflation worries among economists and the public indicates that this is a good time to look at that other data set – the personal consumption expenditures (PCE) price index tracked by the Commerce Department. Another good reason: This is the inflation measure preferred by the Federal Reserve, one of whose two main missions is preventing hot inflation (the other being maintaining employment), and of course this central bank’s monetary policy decisions are central to the nation’s success at keeping prices under control.

My bottom line: The PCE figures seem to support the transitory viewpoint as well.  The Fed believes this, too. But many other serious students of the economy, as indicated above, have taken exactly the opposite interpretation of the latest PCE results, so let’s try and identify what’s troubling them, and in the process, see how they differ from their CPI counterparts.

A big part of the answer comes from these side-by-side comparisons. The table below shows how both gauges have measured month-to-month price increases this year so far (through August) in percentage terms.

                          CPI                          PCE

Jan.                    0.3                            0.3

Feb.                   0.4                            0.3

March               0.6                             0.6

April                 0.8                             0.6

May                  0.6                             0.5

June                  0.9                             0.5

July                  0.5                              0.4

August             0.3                              0.4

Interestingly, although the PCE changes are steadier, they show that, at least on a monthly basis, inflation’s momentum displays no signs of speed-up – which matters greatly because inflation is a problem that can so easily feed on itself (as expectations of ongoing price increases spur businesses and consumers to increase their purchases more, boosting demand and thus pushing prices yet higher). In fact, the PCE numbers reveal deceleration, too on this basis.

Also worth stipulating: both these inflation measures include food and energy prices, which often have little to do with the economy’s underlying inflation prone-ness (but which certainly do impact price changes overall). And as known by anyone who’s gassed up a vehicle lately, energy prices in particular have been surging recently.

But inflation watchers also look closely – often more closely – at year-on-year price increases, and that makes sense because data over longer timeframes is less susceptible to random or otherswise misleading fluctuations than data over shorter timeframes. So here are those year-on-year results for both inflation indices in percentage terms for the first eight months of this year:

                          CPI                          PCE

Jan.                    1.4                            1.4

Feb.                   1.7                            1.6

March               2.6                             2.5

April                 4.2                             3.6

May                  4.9                             4.0

June                  5.3                             4.0

July                  5.3                              4.2

August             5.6                              4.3

These numbers clearly are the cause of the inflation concerns, as they do show not only strong but accelerating momentum.

But they don’t show it conclusively or, in my view, in any way that undermines the transitory school of thought. And the reason is that inflation was so low in pandemic-dominated 2020 that a combination of mean reversion and virus-induced supply chain disruptions and consequent shortages was bound to generate higher than normal price increases.

This table makes the point, by showing how low the yearly inflation increases in percentage terms were for the bulk of last year, and especially during the early spring, when the economy fell into a deep (but short) recession.

                          CPI                          PCE

Jan.                    2.5                            1.9

Feb.                   2.3                            1.8

March               2.6                             1.3

April                 0.3                             0.5

May                  0.2                             0.5

June                  0.7                             0.9

July                  1.0                             1.1

August             1.5                             1.4

It’s still possible to argue that, however low 2019-2020 inflation became, it quickened to some extent starting in June (according to both measure). And because the 2020-2021 results also show increasing post-June momentum, inflation is still worsening.

My rejoinder – the post-June inflationary momentum this year so far is much slower than last year’s. Between June and August, 2019, for the PCE, the yearly inflation rate increased by 55.56 percent (from 0.9 percent to 1.4 percent). Between this June and August, that increase was just 7.5 percent (from four to 4.3 percent).  For the CPI, you can see that this difference was even bigger.

Moreover, even this year’s modest post-June inflation speed-up has only lasted for two months.

But don’t think for a minute that the inflation news is all good. Principally, even the optimistic Fed now believes that the transitory developments that have pushed inflation higher this year will last longer than it had been expecting. Just last week, Chair Jerome Powell said it was “frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”

In other words, “transitory” may be pretty long-lasting, and the longer it lasts, the more pressure the Fed will face to cool the economy off faster, probably slowing job creation and wage increases, whether it holds to its diagnosis or not.

(What’s Left of) Our Economy: Why the Fed is Still (Really) Dovish on Economic Stimulus

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CCP Virus, coronavirus, COVID 19, Employment, Federal Reserve, global financial crisis, Great Recession, interest rates, Jerome Powell, lockdowns, monetary policy, moral hazard, QE, quantitative easing, recovery, stimulus, taper, transitory, Wuhan virus, {What's Left of) Our Economy

Yesterday, I tweeted that the Federal Reserve’s just-published statement on its policy plans looked pretty dovish – that is, signaling a continued determination to keep pouring massive amounts of stimulus into the U.S. economy. Most every other student of the economy worth heeding read exactly the opposite into the message and some related materials it issued – including Chair Jerome Powell’s statement at his subsequent press conference that the central bank could start easing off the accelerator as early as November. (One notable exception:  CNBC’s Steve Liesman.)  

Here’s why I’m right – at least in the most important senses – and why the dovishness I see isn’t great news for the American economy at all over any serious length of time.

The folks reading hawkishness into the Fed’s stance pointed to three main reasons for their conclusion, and I’d be the last person to ignore them. First, the policy statement did declare that “moderation” in the central banks’ bond-buying program, known as “quantitative easing” (QE) “may soon be warranted” if the economy’s progress “continues broadly as expected.” That’s a big change even from the July statement’s analysis:

“Last December, the [Fed] indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the [Fed] will continue to assess progress in coming meetings.”

Second, at the press conference, Powell not only hinted at a November start for the so-called “taper” of Fed bond buying.  He added that the process could conclude “around the middle of next year.” So although the change is expected to occur gradually, the Fed is indicating it won’t take forever to accomplish. 

Third, in a regularly issued graphic summary of their (anonymous) future expectations (called the “dot plot”), fully half of these policymakers made clear they anticipated that next year would also see the interest rate they control begin rising. As Powell told the press, taking this step would mean that these Fed officials had seen much more economic progress than that required for the taper of bond purchases they appear ready to begin.

I actually agree that this evidence adds up to more Fed “hawkishness.” But “more” clears only a very low bar for an institution that’s been super-dovish for the better part of the last decade and a half (since it decided to fight the Great Recession following the 2007-08 global financial crisis by opening up the stimulus spigots to an unheard of extent).

In other words, a Fed that for many more months will be continuing to spur growth and employment by purchasing tens of billions of dollars of bonds every month (only less than the current $120 billion) still looks pretty devoted to easy money to me.

At least as important, Powell in particular made clear that the Fed’s expectations for ending what are, after all, measures taken to counter the Covid-induced economic emergency are so fragile that he and his colleagues could change their minds as soon as the current recovery – which has been strong by most measures – veers off track.

It’s true that at the press conference, the Chair stated that all it would take for him to decide that employment was still improving enough to support a prompt beginning of tapering would be a “reasonably good” and “decent” official U.S. jobs report come out next month – not a “knockout, great, super strong” result. (Powell already believes that the nation’s inflation record – the Fed’s other main “taper test” has already been good enough to warrant reducing those bond purchases.)

But aside from questions about how Powell defines “reasonably good,” etc., his remarks show that he (along with his policymaking colleagues, over whom he wields considerable influence) still believes that a single poor jobs report, or similar discouraging development, would suffice to keep the economy on its exact same monumental levels of literal life support even though the patient has long exited the emergency room.

And these exacting standards for merely reducing current stimulus gradually (which, as the Chair himself noted, would still leave its asset holdings “elevated” and “accommodative”) tell me at least that, however well the economy performs, the Fed will be remaining on a super easy-money course pretty much indefinitely.

The one development that could change this picture significantly: a big, sustained takeoff of inflation.

But if Powell’s right (which I believe he is), then the current burst of higher prices results from “transitory” developments peculiar to the dramatic stop-start dynamics created by the pandemic and its policy and behavioral fall-out. Prices, therefore, should start normalizing before too long.

So what’s the problem? First, if the Fed is afraid that the U.S. economy can’t prosper adequately without what are essentially massive government subsidies, that’s a pretty damning indictment of that economy’s ability to generate satisfactory levels of growth and employment and living standards improvements more or less on its own.

Even more important, even if this Fed judgment is wrong, clearly it’s going to keep the stimulus flowing at historically unheard of rates, and historically, anyway, super easy-money has undermined financial stability – and disastrously – by creating what economists call “moral hazard.” That’s the condition in which over-abundant, dirt-cheap resources produce any number of reasons for using these resources foolishly (i.e., unproductively). After all, they drive down the economic penalties for making these mistakes to rock bottom levels by all but eliminating interest costs.

And an economy that uses resources so inefficiently is bound to run into big trouble before too long and suffer punishing and lingering after-effects. If you’re skeptical, think back to that devastating financial crisis and Great Recession – which weren’t so long ago – and to the slowest U.S. recovery in decades that followed. If that’s not persuasive enough, ask yourself why even the easy-money pushers at the Fed are talking about tapering in the first place.

(What’s Left of) Our Economy: Let’s Hope the Lousy New U.S. Trade Figures are Transitory, Too

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Commerce Department, Donald Trump, exports, Federal Reserve, GDP, gross domestic product, imports, Jerome Powell, real GDP, real trade deficit, tariffs, Trade, trade deficit, West Coast ports, {What's Left of) Our Economy

No two ways about it. Until the longer term revisions come in, the first quarter of 2021 was a lousy one for inflation-adjusted U.S. trade flows – and lousy to a record extent. The only possible positive takeaway:  These numbers and the trends underlying them might be just as transitory and CCP Virus-induced as I (and many others)  believe today’s high inflation numbers are   

According to today’s final (for now) Commerce Department read on economic growth for the first three months of this year, the real gross domestic product (GDP – the government’s measure for the economy’s size) increased by 6.21 percent on an annual basis.

That’s an excellent figure although (like virtually all other economic data) it’s a considerably artificial number (because of the sudden reopening of the economy after equally sudden government-mandated shutdowns and resulting consumer caution), and although it’s a bit less than the 6.25 percent estimated last month. Indeed, it’s a big improvement over the 4.26 percent registered in the fourth quarter of last year

But the after-inflation trade deficit figures just keep rising – and reaching all-time highs. The initial read on this constant dollar trade gap for the first quarter was an annualized $1.1755 trillion. Last month, this figure was revised up to $1.1939 trillion. This morning’s result: $1.2123 trillion. Consequently, the price-adjusted first quarter trade deficit turns out to be 8.05 percent worse than the fourth quarter’s $1.1220 trillion.

Optimists can note that this sequential increase was smaller than the 10.12 percent rise between the third and fourth quarters of last year. But this slowdown is pretty modest.

Since the real trade deficit figure is higher than previously reported and grew faster, and the total economy grew slightly more slowly in inflation-adjusted terms, the trade shortfall’s bite into growth was bigger – 1.50 percent out of the 6.21 percent increase as opposed to the previously reported 1.25 percent out of 6.25 percent growth.

This means that, had the real trade deficit simply remain unchanged, the economy would have expanded 24.15 percent more after inflation in the first quarter. The previous GDP read yielded a figure of 20 percent.

In glass-half-full terms, that’s a smaller subtraction from growth than the multi-decade high 35.92 percent suffered in the fourth quarter. But it’s a lot of foregone growth nonetheless.

The constant dollar trade deficit as a share of GDP hit another new record, too – 6.35 percent. Upon recalling that the previous pre-pandemic high of 6.10 percent came in the fourth quarter of 2005, during the bubble whose bursting brought on the global financial crisis and ensuing Great Recession, that could be an ominous development.

And more bad news: The worsening of the real trade deficit came on both the export and import fronts in the first quarter. Today’s GDP report showed that inflation-adjusted U.S. overseas sales of goods and services dropped sequentially by 0.53 percent, while total American purchases from abroad increased by 2.30 percent.

So do these new figures foreshadow the new post-CCP Virus normal for U.S. trade – despite (or because of?) the Trump tariffs? We’ll find out more about the effects of trade policy once the next official monthly U.S. trade figures (for May) come out next Friday. 

For now, though (and probably after those new data), the most responsible answer I can provide is, “It’s too soon to tell.” Indeed, as if the U.S. economy still wasn’t being distorted enough by the rapid transition from pandemic-induced recession to robust expansion, and still facing enough consequent uncertainties, on top of the ongoing congestion at U.S. West Coast ports, a big logjam has emerged at a giant port in export-heavy China.

Last week, Federal Reserve Chair Jerome Powell noted that “This is an extraordinarily unusual time, and we really don’t have a template or any experience in a situation like this. We have to be humble about our ability to understand the data.” As the new U.S. GDP report should be making clear, American trade flows are no exception.

(What’s Left of) Our Economy: More Reopening, Not Endless Money, is Now the Best Jobs Strategy

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African Americans, American Rescue Plan, Biden, CCP Virus, coronavirus, COVID 19, Covid relief, education, Employment, Federal Reserve, Hispanics, hotels, Jerome Powell, Jobs, Latinos, leisure and hospitality, lockdowns, recovery, restaurants, shutdown, stay-at-home, stimulus package, unemployment, wages, Wuhan virus, {What's Left of) Our Economy

There’s no doubt that the American jobs market has suffered an out-and-out disaster since it got hit by the CCP Virus and the follow-on lockdowns and other restrictions. There’s also no doubt that many workers and their families are still suffering greatly, and will need government aid to make it to the Other Side, and the Biden administration’s American Rescue Plan legislation that the President will likely sign into law soon will help fill this gap.

Plenty of doubt remains, however, about whether all, or close to all, of the massive funds approved in this measure are actually needed to cure the economy’s remaining employment woes, and one of the main reasons is the nature of the jobs blow that’s been delivered. Because it’s been so heavily concentrated in the country’s leisure and hospitality industries (encompassing eateries and drinking places of all kinds, plus hotels and motels, and entertainment and cultural venues), it’s entirely possible that nowadays, the most effective way to fix the jobs market fastest would be to lift the lockdowns and other mandated curbs that have fallen so hard on sectors that depend on serving in-person customers.

The case for relying on a virus-relief/stimulus package this big, at this stage of the economy’s recovery from its pandemic-induced recession, has been eloquently stated by President Biden and by Federal Reserve Chair Jerome Powell. The former warned just before the legislation passed that the U.S. economy “still has 9.5 million fewer jobs than it had this time last year. And at that rate, it would take two years to get us back on track.”

The latter has stated that he won’t be satisfied that full employment has returned until he sees what one reporter has called “broad-based gains in employment, and not just in the aggregate or at the median.” As a result, the Fed Chair is paying particular attention to (the reporter’s words again) “Black unemployment, wage growth for low-wage workers and labor force participation for those without college degrees, categories that historically have taken longer to recover from downturns than broader metrics.”

But it’s precisely these less fortunate portions of the workforce that would be helped disproportionately – and then some – by focusing on reopening steps that would surely affect the leisure and hospitality industries just as disproportionately.

If you doubt the importance of leisure and hospitality job loss over the last year in terms of overall U.S. jobs loss, here’s what you need to know. Of the 8.068 million positions shed by the country’s private sector between last Februrary (the final month of pre-CCP Virus normality for the American economy), fully 3.451 million have come in the leisure and hospitality industries. That’s nearly 43 percent.

Put differently, during that final normal economic month, leisure and hospitality workers represented just 13.04 percent of all private sector workers. Yet their employment plunge was more than three times as great relatively speaking.

Moreover, leisure and hospitality’s progress in getting back to pre-pandemic square one has been slower than that of the private sector overall. Since the April employment trough, leisure and hospitality has regained 4.955 million of the 8.224 million jobs lost during the worst of the pandemic, or 60.25 percent. For the private sector in toto, 13.267 million of the 21.353 million jobs lost in March and April have come back since – 62.13 percent.

It’s also clear that many of the kinds of workers about which Fed Chair Powell has been most concerned are concentrated in leisure and hospitality. For example, in 2019, (America’s last pre-CCP Virus full year), 13.1 percent of these sectors’ workers were African American versus 12.3 percent for the entire U.S. economy (including government workers at all levels), and 24 percent were Hispanic or Latino versus 17.6 percent for the entire economy.

Leisure and hospitality companies tend to employ Americans with low levels of formal education, too. According to the Labor Department, in 2019, 79.9 percent of the nation’s “first-line supervisors of house-keeping and janitorial workers” 25 years and older lack even an associate’s degree, and 76 percent of their food preparation and service counterparts fall into this category. The shares are even higher for the workers they supervise. Meanwhile, only 51.5 percent of all U.S. workers haven’t taken their education beyond high school.

Not surprisingly, therefore, leisure and hositality jobs pay poorly. In February, 2020, just before the arrivals of the pandemic and the lockdowns, their average hourly wages were only 59.28 percent those of all private sector workers. Last month, this figure had fallen to 57.58 percent. (See Table B-3 here.) 

For most of the pandemic period, the U.S. government at all levels pursued a mitigation strategy that aimed mainly at curbing economic and other forms of human activity across-the-board. Now, even with vaccinations and growing population-wide immunity showing strong signs of bringing the pandemic under control, the Biden administration and the Democratic Congress are just as determined to stimulate the economy that’s still significantly shut down by with an American Rescue Plan that seems just as indiscriminate.

As I’ve been writing (see, e.g., here), it should have been clear since late last spring that the anti-virus fight would have much more effective (and less harmful to the economy and other dimensions of public health) had it targeted protecting especially vulnerable populations. I strongly suspect that, with the fullness of time, it will become just as clear that a stimulus and jobs strategy emphasizing accelerating reopening, and thus aiding sectors and workers hardest hit by the remaining shutdowns, will prove a much more effective employment cure than the indiscriminate spending approach on which Washington has just doubled down.

(What’s Left of) Our Economy: A Respectable Case for Optimism?

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CCP Virus, China, consumer confidence, consumers, coronavirus, COVID 19, Federal Reserve, Jerome Powell, lockdown, recovery, reopening, restart, restaurants, retail, second wave, shutdown, social distancing, Sweden, testing, vaccines, Wuhan virus, {What's Left of) Our Economy

At the risk of being (undeservedly) tarred as a CCP Virus pollyanna, I can’t help but being struck by the some new evidence that the U.S. economy’s recovery from its pandemic-induced swoon will be faster than widely feared. In fact, I still share these fears to some degree. But I can’t ignore increasing signs to the contrary.

To be clear, this evidence has little to do with the subject of yesterday’s post. Just because data can be cited showing significant national progress in beating back the virus threat doesn’t necessarily mean that a more so-called “V-shaped” economic rebound is on the way. The same goes for the impact of this progress on the economy reopening decisions of individual U.S. states – even though the more decline seen in numbers of new cases (despite gains in testing that should be revealing much more infection), numbers of deaths, and numbers of virus-related hospitalizations, the more reopening obviously will be seen.

Nor are my views being shaped by the strong rebound seen in U.S. stock markets so far (including today so far), or by the newly bullish recovery views voiced last night on “Sixty Minutes” by Federal Reserve Chair Jerome Powell. And this post isn’t even driven by the latest news about vaccine progress (though such reports will clearly help as long as the results continue being validated).

The reason: I’ve been convinced that the key to the recovery’s strength will be Americans’ willingness to start patronizing businesses in an economy where most activity – and most income earning opportunities – depend on consumer spending. So I’ve put considerable stock in predictions that, even though all the objective conditions can show that a return to normality will be safe, too many Americans will remain too fearful to boost the economy significantly.

I also take seriously the idea that all the restrictions on visiting retail stores (including restaurants) and personal service businesses will limit their customer flow either simply by forcing them to operate substantially below capacity, or by dissuading many customers from visiting in the first place, and thereby sharply reducing impulse consuming. Further, I’m well aware that the much more modest shock administered to Americans by the Great Recession triggered by the 2007-08 financial crisis was painfully slow to wear off. (See here and here where I write about reasons for recovery pessimism.)

In addition, the experiences of other countries that started reopening earlier has reenforced consumer caution concerns. Sweden, for example, has imposed fewer economic restrictions than any other major country. But this survey by the consulting firm McKinsey & Co. reports that consumer spending has dropped significantly anyway, and may not recover for months. China claims that it’s beaten the virus and its regime has been easing factory lockdowns since February. But as of late April, retail sales were still way down.

Finally, there’s the second wave threat, which could kneecap the economy as temperatures start dropping in the fall even if summer does witness a decent bounce back toward pre-virus consuming.

So the case against a relatively quick recovery with real legs is still awfully strong.

But don’t overlook reasons for more optimism. One that’s nothing less than amazing: The piece in this morning’s Washington Post reporting that even though virus testing is now much more widely available in the United States than previously, Americans are far from rushing to capitalize on these opportunities. Even accepting the various reasons offered in this article (e.g., not enough Americans know that the situation has changed; there’s too much mistrust of medical providers in some U.S. communities, particularly African-Americans), it’s difficult at least for me to conclude anything else but that many in the United States simply aren’t concerned enough about the pandemic to take this precaution. After all, if they were panic-stricken, wouldn’t they be following every bit of news about the supply of tests with baited breath?

Perhaps more important, the more news that emerges that the CCP Virus is much less lethal than early reports suggested, the (understandably) less concerned about infection more and more Americans seem to be.    

Then there are all the reports of Americans, whether in states that have eased lockdowns more vigorously and those that haven’t, violating social distance guidelines, either by not wearing masks where they’re supposed to, or seemingly ignoring social distancing rules in public place – and indeed returning to restaurants and bars and beaches in pretty impressive numbers. These reports are anecdotal, and therefore should be viewed with lots of caution. Also, please don’t assume that I’m endorsing this behavior! But there sure seems to be a lot of it, these reports also seem related to growing evidence of the virus’ relatively modest death rates, and and as an old adage goes, when enough anecdotes appear, they become data. 

Finally are several indicators pointing to an actual, non-trivial comeback in economic activity, and for a variety of sectors. This account mentions encouraging signs from the tech sector to the automotive industry. This article presents evidence of bottoming even in hard-hit bricks and mortars retail stores and restaurants. And click here for information on the housing industry.

Of course, the references above to “bottoming” could still be entirely consistent with pessimistic predictions of a painfully slow climb back to pre-virus prosperity. But I still find myself wondering if, having seen the overpoweringly depressive effect of various official edicts literally to halt and outlaw much economic activity, Americans might experience a reasonably powerful growth effect from their withdrawal – not to mention declining fears that infection is a death sentence.

(What’s Left of) Our Economy: Is the Fed Taking Us to Economics Infinity – & Beyond?

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big govenment, CCP Virus, coronavirus, COVID 19, credit, economics, Fed, Federal Reserve, finance, fiscal conservatism, Franklin D. Roosevelt, Great Depression, Great Recession, Jerome Powell, moral hazard, New Deal, stimulus package, Wuhan virus, {What's Left of) Our Economy

Since I’ve never liked recycling my own material, I’ve rarely written here on specific arguments I make on Twitter. (And I make a lot of them!) But since these times are so exceptional, and have just generated such an exceptional response from the Federal Reserve, an exception here seems more than justified. So here are three longer-than-a-tweet expressions of concern about the broadest impacts of the massive support for the everyday economy (as opposed to the financial system) just announced by the central bank in response to the CCP Virus.

The first has to do with the perils of super-easy money. Fed Chair Jerome Powell has just again made clear in remarks this morning that there’s “no limit” to the amount of credit the central bank can pump into the economy to create a “bridge” over which imperiled businesses large and small, and now state and local governments, can cross in order to return intact to “the other side” of the pandemic.

Yes there are conditions – mainly, the borrowers need to be creditworthy (though the definition of “creditworthy” has been expanded). So at least in principle, previous individual or business “bad behavior” won’t be rewarded and thereby enabled going forward – a practice economists call incurring “moral hazard.” That’s (again, in principle) different from the previous financial crisis-related bailouts, when lots of bad or incompetent behavior, especially by Wall Street and the automobile industry, was generously rewarded.

(More encouragingly, other, impressive conditions have been placed on beneficiaries of previously announced fiscal economic aid – the type provided with taxpayer money by the Executive Branch and Congress – including temporary bans on stock buybacks.)

But moral hazard doesn’t necessarily result from the behavior of apples that are already bad. The concept is so powerful (and has long been so convincing) in part because it holds that showering borrowers with easy (and now free money) tends to turn good apples bad. That’s because a credit glut greatly reduces the penalties created for poor decisions by the normal relative scarcity of capital and the price (interest rates) that lenders normally demand in order to impose some degree of discipline.

The lack of adequate discipline on borrowers is surely one big reason why the post-financial crisis economic recovery had been so historically sluggish: Capital wasn’t being used very efficiently, and therefore wasn’t creating as much output and employment as usual. Maybe, therefore, all these new stimulus programs, whether desperately needed now or not, are also setting the stage for a dreary repeat performance?

Which brings up the second issue raised by the latest Fed and other federal rescue operations: Their sheer scale, and the Powell’s “no limits” declaration strongly undercuts the most basic assumption behind the very discipline of economics: that resources will be relatively scarce. That is, there will never be enough wealth in particular to satisfy everyone’s needs, much less wants.

Think about it. If all the wealth needed or wanted could somehow be automatically summoned into existence, why would anyone have to think seriously about economic subjects at all? What would be the point of trying to figure out how to use resources most productively, or even how to distribute them most equitably?

I remain deeply skeptical about the idea that money literally “grows on trees” (as most of our ancestors would have put it). But Powell’s statement sure seems to lend it credence. Moreover, I’m among the many who have been astonished that the United States hasn’t so far had to pay the proverbial piper for all the debt that’s been created especially since financial crisis hit. So it’s entirely possible that I – and others who have fretted about the spending and lending spree the economy had already been on before the pandemic struck – have had it completely wrong.

It would still, however, seem important for economists and national leaders to make this point at least more explicitly going forward. For if it’s true, why even lend out money? Why have banks and financial markets themselves? Why shouldn’t the government just print money and distribute it – including to government agencies? Why for that matter tax anyone, rich or poor?

Just as important, if “on trees” thinking remains wrong – and possibly dangerous – folks who know what they’re talking about had better make the possible costs clear, too. Because if enough Americans become persuaded that there is indeed this kind of massive free lunch, what would stop them from demanding it? Why wouldn’t it be crazy not to? And how could elected leaders resist?

In fact, I’m also concerned about the emergence of a shorter term, more humdrum version of this situation. (This is my third worry for today.) Specifically, Powell clearly views the new Fed programs as emergency measures, which will be dialed back once the emergency is over. Similarly, at least some of the nation’s supposed fiscal conservatives are claiming that they’ve supported the sweeping anti-CCP Virus because it amounts “restitution” for all those individuals and businesses whose “property and economic rights” have been taken from them by the government decision to shut down the economy.

Nonetheless, let’s keep in mind that as former President Franklin D. Roosevelt was rolling out his New Deal programs to fight the Great Depression of the 1930s, he continually justified them as emergency measures. The President himself tried returning to his previous backing for budget balancing once some signs of recovery appeared.

His optimism, as it turned out, was premature, and helped bring on a second slump. Nonetheless, even had this about-face not failed, is it remotely likely that many other New Deal programs, ranging from Social Security to the Tennessee Valley Authority to the Federal Deposit Insurance Corporation to federal mortgage support agencies wouldn’t be alive and kicking, to put it mildly. Obviously that’s because however much most Americans may talk a small government game, they understandably like big government when it delivers tangible benefits.

As a result, when Powell, and others, promise that “When the economy is well on its way back to recovery…we will put these emergency tools away,” you’re free to smirk. The first clause in this sentence alone is grounds for caution, stating that the aid won’t be withdrawn once the worst is over, or when a rebound starts, but when normality is a certainty. If the national experience following the last financial crisis is any guide, when the Fed, for example, even pre-CCP Virus kept interest rates super low for many years after some growth had returned, “the other side” is going to be a place whose location will keep receding for the foreseeable future.

So the specter of the economy remaining hooked on massive government stimulus both for economic and these political reasons could be another reason for bearishness about a robust near-term rebound. (And no, I’m not trying to give out any investment advice here.)  

I’m not necessarily being critical here of the stimulus packages. Just trying to spotlight the safest bets to make, and the need to examine the future with eyes wide open. Is there any viable alternative?

(What’s Left of) Our Economy: So Much Manufacturing Data…So Few Trade War Answers

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Census Bureau, core capex, Federal Reserve, Jerome Powell, manufacturing, Markit.com, Philadelphia Fed, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

What a day for U.S. manufacturing data! It no doubt raises major questions over whether President Trump’s tariff-centric trade policies are finally showing signs of damaging American domestic manufacturing (as has been widely claimed for months, despite an almost total lack of statistical evidence). Unfortunately, it’s a mixed and pretty muddy verdict that’s delivered by the separate reports from the Census Bureau (on national spending on the kinds of “core” capital goods made by U.S. manufacturers), the Philadelphia Federal Reserve Bank (on manufacturing in the mid-Atlantic states), and private sector consultancy Markit.com (on the overall state of domestic industry).

To be sure, the headline figures collectively were worrisome. The Census reading was both worse than expected, and strengthens the case that there’s been a softening on business expenditures on machinery and equipment not meant to build defense-related products (which, after all, reflect government decisions, not economic fundamentals) or aircraft (where demand is thought to be unusually volatile, and therefore likely to produce results that distort the figures for industries as a whole).

The Philadelphia Fed reading was the first such monthly reading since May, 2016 showing regional industry to be contracting rather than expanding. And the Markit report – something of a national version of the Philadelphia survey – signaled “the slowest improvement in business conditions since September, 2017.”

But the obstacles to drawing any broad conclusions, much less trade- and tariff-related conclusions – are formidable to say the least.

In the first place, it’s always dangerous to place major emphasis on a single month’s worth of results. In addition, the three surveys cover different time periods. The Philly Fed and Markit results purport to show conditions for February. The Census capital spending release only brings the story up to December. Not to mention that it came 35 days late due to the partial federal government shutdown.

Moreover, the Markit and Census results are preliminary. Revisions are rarely game-changers, but can sometimes turn contractionary readings expansionary – and vice versa.

It’s also crucial to distinguish between absolute drops in activity and relative drops. The Philly Fed report – which provides the most recent data – and the Census results describe absolute contractions in their indicators. But the Markit headline figure remains in expansion territory – it’s just not quite so expansionary.

As RealityChek regulars are used to reading, “Don’t ignore the internals.” And all three releases were filled with intriguing details. On the positive side, for example, the February Philly Fed report found that hiring by regional manufacturers not only kept increasing – it increased at a faster pace. That’s unusual for a manufacturing sector that’s supposedly contracting. And in fact, respondents professed to be slightly more optimistic about their future prospects in February than they were in January. Markit also reported strong February manufacturing employment along with other signs that “manufacturers remain firmly in expansion mode.” 

On the negative side, the Philly Fed reported big drops (both into absolute contraction) in both new orders and shipments. The former in particular seems like bad news for future business. And the Census capital spending results also are viewed as a forward-looking indicator – although they’re two months old.

Most challenging of all is figuring out what role the Trump tariffs have been playing, since they’re hardly the only development influencing manufacturing’s health. The economist who writes the Markit reports sums up the situation aptly, in my opinion:

“Businesses that experienced a soft patch for production cited a range of factors holding back growth, including adverse weather, worries about the global economic outlook and ongoing international supply chain uncertainty.” That last phrase refers to trade conflicts and their possible impacts. But of course, even assuming that such uncertainty was indeed a major cause of the soft patch, let’s not forget that soft patches often firm up quickly.

And don’t forget the Federal Reserve! Last October, Chairman Jerome Powell spooked investors by suggesting that the central bank would keep raising interest rates well into this year. Such “tightening” usually slows down growth by increasing the cost of borrowing for consumers and businesses. But in mid-November, Powell indicated he was having second thoughts and, after financial markets suffered through a terrible December, in early January convinced investors that he was serious about continuing easy money with an early January statement.

So as I see it, there’s still no significant evidence that the Trump tariffs themselves have already been hurting American manufacturing, and no compelling evidence yet that they will. But since no one has a whizbang crystal ball, and the stakes are so big, the intellectually honest course to take is to keep monitoring the data and report on them as accurately and as dispassionately as possible.

(What’s Left of) Our Economy: Manufacturing Labor Productivity Growth is Looking Like an Endangered Species

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Bureau of Labor Statistics, Federal Reserve, Jerome Powell, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, recovery, {What's Left of) Our Economy

Federal Reserve Chair Jerome Powell stated yesterday that the U.S. economy is doing “very well.” Judging by the metrics that the central bank is supposed to focus on as a matter of law – inflation and the headline unemployment rate – that’s an eminently respectable claim. Based on another key measure of economic performance – labor productivity – it looks like whistling in the dark.

As known by RealityChek regulars, strong productivity growth is widely seen by economists as the best guarantor of sustainable future prosperity and rising living standards. And as also known, labor productivity is the narrower of the two such measures of economic activity tracked by the federal government.

But it’s the gauge that’s updated on the most timely basis, and the latest numbers – which came out last week – should be spurring alarm, not complacency.

These final (for now) results for the first quarter of this year both confirmed that output per person hour worked for the non-farm business sector (the broadest definition of the U.S. economy used in these studies) remains stuck in an historically slow-growth phase, and showed that labor productivity in manufacturing may be shifting into contraction.

The labor productivity performance of both these major sectors was revised down in the latest release from the Bureau of Labor Statistics (BLS). Rather than having grown by 0.70 percent on an annualized basis sequentially in the first quarter, labor productivity for non-farm businesses is now estimated to have advanced by only 0.40 percent. And in manufacturing, a 0.50 percent annualized increase is now judged to have been a 1.20 percent decrease. That’s its third such drop in the last five quarters.

A glass-half-full analysis would point out that the new non-farm business figure was better than that for the fourth quarter of last year (0.30 percent), and that the manufacturing fall-off followed a 4.20 percent fourth quarter jump.

But the new BLS report also presented manufacturing revisions going back to 2008, and they make clear that its labor productivity performance during this period has been far worse than even previously thought. (And it was already really bad.)

Let’s concentrate on how the new statistics have changed the picture for manufacturing labor productivity during the current recovery, and compare those results with those for previous recoveries – since such analyses yield the best, apples-to-apples, results.

Before the new data came out, manufacturing labor productivity during this expansion was reported to have grown by a total of 9.69 percent. That was less than a third of the rate achieved during the recovery of the early 2000s – which was also known as the Bubble Recovery that helped trigger the financial crisis and ensuing recession, and which last only six years versus. The current recovery is approaching its ninth anniversary.

And during the nearly ten-year long expansion that began in the early 1990s, manufacturing labor productivity surged even more strongly – by 45.86 percent.

The new manufacturing labor productivity growth number for the current expansion? Only 8.28 percent! That’s a downgrade of more than 14.50 percent!

Moreover, although the non-farm business labor productivity growth rate for the current recovery wasn’t revised down nearly as much – from 9.70 percent to 9.62 percent. But this figure, too, pales next to those of previous recoveries. During the bubble expansion, non-farm business labor productivity rose by a total of 16.03 percent. During the 1990s expansion, the rate was 23.25 percent.

By the way, don’t put too many hopes in the broader productivity measure – multi-factor productivity – to come to the rescue. Those numbers haven’t been much better.

Some productivity students have been arguing that it’s only a matter of time, and that recent technological advances will soon start super-charging productivity growth after a slow start just as they did in an earlier era of transformative technological change – the 1920s.

These optimists had better be right. Because if not, the only way to return American growth and living standards gains to their historic rates of improvements will be to flood the economy with credit in order to crank up spending. Feel free to scream if the date “2008” means anything to you.

Making News: On National (Laura Ingraham) Radio This Morning – & More!

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Asia, Associated Press, Chris Rugaber, Facebook, Jerome Powell, Laura Ingraham, Lifezette.com, Making News, North Korea, Princeton University, The Laura Ingraham Show, Trump

I’m pleased to announce that I am scheduled to appear this morning on Laura Ingraham’s nationally syndicated radio show to talk about President Trump’s trip to Asia.  Listen live at 10:35 AM EST at this link. And of course if you can’t tune in, I’ll post the podcast as soon as it’s available.

The segment will deal with many of the issues raised in my new column for Laura’s Lifezette.com news site. Click here to read this call for a thorough (and Trump-ian) overhaul of America’s strategy toward the Asia-Pacific region in general and the North Korea crisis in particular.

And this November 3 Associated Press profile of Jerome Powell, Mr. Trump’s new appointee to chair the Federal Reserve, contains a funny anecdote from the days when “Jay” and I were Princeton University undergraduates.

Just FYI, AP reporter Chris Rugaber figured out the connection (which is pretty casual) through a fine bit of journalistic sleuthing. As soon as he heard about the Powell appointment, he scoured his Facebook page and discovered we had friended each other. So he called me on Halloween afternoon to see if I had any insights to offer.

And keep checking back with RealityChek for news of media appearances and other developments.