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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

>the ongoing growth impact of Fed measures already taken;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: The New Official Data Seem to Portend Still Higher U.S. Trade Deficits

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Advanced Technology Products, ATP, banking crisis, China, election 2024, exports, Federal Reserve, imports, inflation, Made in Washington trade deficit, manufacturing, monetary policy, non-oil goods trade, stimulus, Trade, Trade Deficits, {What's Left of) Our Economy

Yesterday’s official report on U.S. trade flows (for February) almost eerily resembled its January predecessor. Change generally was modest in the broadest categories of trade balances, exports, and imports tracked by the U.S. Census Bureau. But numerous developments in the narrower categories were more dramatic, including a new record (in services trade), and some monthly results that haven’t been seen since the peak of the CCP Virus in early spring, 2020.

And another key way in which the February data resemble January’s:  They appear to support the case that the U.S. trade deficit is on an upward path again – and this despite mounting signs that economic growth is slowing (which all else equal should reduce the shortfall).    

The services best came on the export side, with these overseas sales rising from an upwardly revised $80.31 billion to an all-time high of $81.97 billion. This total surpassed the old mark of $81.32 billion (set in December) by 0.81 percent. And the sequential rate of increase (2.08 percent) was the fastest since last April’s 3.31 percent jump.

More broadly, the total trade deficit rose in February for the third straight month. But the increase – from an upwardly revised $68.66 billion to $70.54 billion – was an unexceptional 2.46 percent. At the same time, the figure was the highest since last October’s $77.16 billion.

The trade gap in goods widened, too, by three percent, from an upwardly revised $90.27 billion to $92.98 billion. This total was also the biggest since October ($98.62 billion).

A much better performance was turned in by services trade. Its longstanding surplus was up 3.86 percent sequentially in February, from a downwardly revised $21.61 billion to $22.44 billion.

Combined goods and services exports retreated from January’s upgraded $258.01 billion (the best such result since September’s $259.14 billion) to $251.15 billion. The decline was the fifth in the last six months and its 2.66 percent pace was the fastest since the 20.20 percent nosedive back in April, 2020 – well into the deep depression triggered by the devastating first wave of the CCP Virus.

Goods exports sank in February, too – also for the fifth time in the last six months, from a downwardly revised $177.70 billion to $169.18 billion. And the 4.80 percent sequential tumble was also the worst since pandemic-dominated April, 2020 – when they plummeted by 25.25 percent.

Total U.S. imports dipped by 1.53 percent on month in February, from an upwardly revised $3.26.67 billion to $321.69 billion. The decrease was the first since last November and the biggest since that month’s 6.34 percent.

The same story held for goods imports, which slipped by 2.17 percent month-to-month in February, from an upwardly revised $267.97 billion to $262.15 billion. This decline was also the first and biggest since last November (when they plunged by 7.38 percent.

Services imports not only grew by 1.42 percent sequentially in February, by $58.70 billion to $59.33 billion. They also were up from a January level that was revised up by a hefty 1.37 percent. The February number was just shy of the record $59.55 billion set last September.

The non-oil goods deficit inched just 0.29 percent in February, from $91.85 billion to $92.13 billion. It’s always worth following both because

>as known by RealityChek regulars, it can be considered the Made in Washington trade deficit, since non-oil goods are the trade flows most heavily influenced by U.S. trade agreements and other trade policy decision; and

>because it’s the closest global proxy for U.S.-China goods trade. As a result, comparing trends in the two can indicate the effectiveness of the Trump-Biden China tariffs, which cover hundreds of billions of dollars worth of Chinese products aimed at the U.S. market.

So in this vein, it’s more than a little interesting that the chronic and enormous American goods shortfall with the People’s Republic plummeted by fully 24.28 percent on month in February, from $25.16 billion to $19.00 billion. This new level is the lowest since pandemic-y March, 2020’s $11.71 billion, and the monthly decrease the fastest since last November’s 26.23 percent.

In February, U.S. goods exports to China fell for the fourth straight month – by 11.26 percent, from $13.09 billion to $11.62 billion. And that total is the worst since last April’s $11.20 billion.

The February fall-off in U.S. goods imports from China was the first in three months. Moreover, the 19.95 percent drop, from $38.25 billion to $30.62 billion, was the biggest since the 31.48 percent recorded in February, 2020, which was the peak of China’s (and the world’s) first covid wave.

Another big – and encouraging – move was made by U.S. manufacturing. It’s also chronic and huge trade gap narrowed for the third time in the last four months, from $116.83 billion to $100.05 billion. The 14.36 percent sequential fall-off was the biggest since the 23.09 percent in that peak-China covid February, 2020, and the monthly total the smallest since February, 2021’s $89.29 billion.

Manufacturing exports were down by 4.36 percent, from $105.71 billion to $102.52 billion. That figure is the weakest since last February’s $94.55 billion.

The February manufacturing imports decrease was nearly twice as fast – 9.69 percent, from $219.36 billion to a $198.10 billion level that’s the lowest since April, 2021’s $198.06 billion.

Consistent with the China and especially manufacturing results, the trade deficit in advanced technology products (ATP) saw its fourth straight contraction in February, too – specifically by 0.73 percent, from $16.35 billion to $16.23 billion. That total is the lowest since last February’s $13.42 billion.

ATP exports retreated for the second straight month – by 9.20 percent, from $32.07 billion to $29.12 billion. The decrease was the biggest since November’s ten percent, and brought these foreign sales to their lowest level since last February’s $29.02 billion.

Another four-month decline streak was registered by ATP imports, which dropped from $48.42 billion to $45.35 billion. This total was also the lowest since last February’s $42.44 billion, indicating that ATP trade is partly shaped by seasonal influences.

The February bilateral trade figures for some major U.S. trade partners reminded again of how volatile these flows can be (partly because of small absolute numbers of course).

America’s goods trade surplus with the United Kingdom (UK), for example, cratered by 68.40 percent on month, from $2.74 billion to $870 million. This total was the worst (for the United States) since the UK ran a $140 million surplus last June. The percentage change was the biggest since then, too.

But this nosedive followed the U.S. surplus’ 80.47 percent increase to that January $2.74 billion total that was a new all-time best, eclipsing the old mark of $1.87 billion from immediately pre-pandemic-y February, 2020 by 47.40 percent.

The U.S. goods deficit with France, however, fell by 57.86 percent on month in February, from $1.17 billion to $490 million. This shortfall was the smallest since last September’s $470 million, and the decrease was the bigest since last May’s 66.09 percent.

The U.S. surplus with the Netherlands sank by 42.46 percent, from $3.20 billion to $1.84 billion. This figure was the lowest since January, 2022’s $1.79 billion and the biggest decrease since last November’s 42.86 percent.

The trade gap with Thailand was down 35.68 percent sequentially, from $3.74 billion to $2.40 billion. This February number is the lowest monthly level since February, 2021’s $2.23 billion, and the fall-off the greatest since the 40.60 percent in November, 2006 – when bilateral trade was much more meager.

Finally, the longstanding U.S. goods gap with India narrowed by 33.61 percent, from $4.99 to $3.31 billion. This total was the lowest only since December’s $2.41 billion. But the decline was the biggest since February, 2021’s 34.09 percent. And it followed a more than doubling (106.51 percent) of the shortfall in January that was the biggest since January, 2019’s 224.17 percent.

Just as the overall February U.S. trade results closely tracked those of January, the deficit outlook does, too. That’s largely because the developments pointing to more American import-attracting spending (like politicans’ temptation to stimulate the economy as a new presidential election approaches and what I’m increasingly convinced is a determination by the Federal Reserve to back off its recession-threatening inflation fight) look stronger than those signaling less of that spending (like an economic weakening that looks likelier principally because of the lagged effect of the monetary tightening already begun by the Fed, and because a credit crunch will likely emerge due to the recent banking jitters).

Add in ongoing and possibly greater weakening of the global economy – which will undermine U.S. exports – and it’s easy to see why higher U.S. trade deficits seem in the offing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Why the New Figures Show That U.S. Inflation’s Still Strong

Tags

{What's Left of) Our Economy, inflation, recession, Federal Reserve, interest rates, monetary policy, PCE, personal consumption expenditures index, core inflation, cost of living, banking system

I know everyone is supposed to be pleased or at least relieved by today’s official report on the inflation gauge watched most closely by the Federal Reserve – the price index for personal consumption expenditures (PCE). Why am I not? It has to do with the baseline analysis that should by now be familiar to RealityChek regulars. This method, which is most useful for evaluating the annual inflation results, continues showing that American businesses generally believe they have plenty of pricing power – and are acting like it.

The optimism (e.g., here) generated by the new PCE data (for February) stems from the new monthly figures. According to today’s report, headline PCE slowed sequentially, from 0.6 percent in January (which was really bad) to 0.3 percent. Core PCE – which strips out energy and food prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental vulnerability to worrisome price hikes – decelerated from January’s downwardly revised 0.5 percent to 0.3 percent.

To me, neither result is anything special, because both February figures are in line with both measures’ recent average monthly inflation rates. But reasonable people can disagree over that proposition.

What’s less reasonable is drawing encouragement from the annual statistics.

The optimists have observed that for headline PCE, February’s yearly rise of five percent was the lowest since the 4.4 percent recorded in September, 2021, and that the core PCE increase of 4.6 percent was the best such read since October, 2021’s 4.2 percent.

But the headline strong PCE five percent advance between February 2022 and 2023 followed a counterpart rate for February 2021-22 of an even stronger 6.3 percent. September, 2021’s yearly headline PCE inflation of 4.4 percent followed a September 2019-20 increase of just 1.5 percent.

The baseline framework reveals that in September, 2021, business pricing practices on a year-to-year bass were catching up from their unusually weak pricing power during the previous year – which stemmed from the economy’s still-incomplete recovery from CCP Virus-induced lockdowns and voluntary behavior curbs.

That’s why during this period, I agreed with the Federal Reserve and the Biden administration that inflation was a temporary phenomenon, and would subside greatly as the economy returned to normal.

More recently, however – and including February, businesses believed that after charging customers 6.3 percent more for their goods and services between February, 2021 and 2022, price hikes nearly as big (five percent) were eminently feasible.

That’s largely why more recently I changed my mind, and became convinced that robust inflation would last a lot longer.

For core PCE, the story is almost identical. This February’s annual inflation rate of 4.6 percent came on the heels of price increases between the previous Februarys of 5.3 percent – making clear that pricing power confidence remained high. Back in October, 2021, however, the 4.2 percent yearly inflation rate followed price increases between the previous October of just 1.4 percent. So catch-up mode was apparent here, too.

As I wrote two weeks ago in examining the latest Consumer Price Index data, the recent outbreak of banking turmoil is likely to keep inflation worrisomely high by persuading the Federal Reserve at least to ease off the interest rate hikes meant to slow price increases by weakening economic activity. For staying determinedly on the tightening monetary policy path plus the lending pullback that banking system fixes will almost surely bring on would turn the economic “soft landing” that the central bank still hopes to engineer into significant downturn.

As I’ve also written, the approach of the next presidential election will increasingly tempt politicians to keep throwing government money at voters to prop up incomes and keep them happy. 

So maybe the new PCE inflation figures justify some relief after all – because they could well be among the best we’ll be getting for a long time.  

(What’s Left of) Our Economy: Neglected Issues Surrounding the Banking Turmoil

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banking system, banks, Elizabeth Warren, executive compensation, Federal Reserve, finance, financial reform, inflation, interest rates, Michael S. Barr, monetary policy, regulation, risk management, Silicon Valley Bank, stress tests, SVB, {What's Left of) Our Economy

So much analysis and commentary has been prompted by the recent outbreak of turmoil in the U.S. banking system (including Congressional hearings with testimony from system supervisors themselves) that it’s hard to believe that any major points have been badly neglected. Except they have been – at least according to my own efforts to follow the situation. Here are three of the biggest:

First, there’s been a flood of claims from progressive American legislators – led by Massachusetts Democratic Senator Elizabeth Warren – that the banking woes have stemmed largely from a Trump-era rollback of the regulatory reforms that were put in place after the 2007-08 global financial crisis to prevent the crackpot schemes that were the immediate cause of that near-meltdown.

In particular, Warren argued, the 2018 law that eased some of those early regulations exempted all but the nation’s biggest “systemically important” banks from mandatory, independent stress tests that aim to gauge their vulnerability to sudden economic shocks.

But what these critics either don’t know, or don’t want you to know, is that the stress tests that were designed for those biggest banks never included the kind of steep – indeed historic – rise in interest rates pushed through by the Federal Reserve to fight multi-decade high inflation. So even had the mandated stress tests been conducted for banks like the now-collapsed Silicon Valley Bank (SVB), they would have missed the very danger that touched off the current banking jitters.

Second, even though the above criticisms of the rollback are offbase in the above key respect, regulatory failures clearly occurred. And based on what’s known, the most puzzling has to do with the Federal Reserve. Here’s a description of the Fed’s performance in regulating SVB provided to Congress this week by the central bank’s Vice Chair for Supervision Michael S. Barr – who is heading the Fed’s deeper investigation of its procedures and practices. It’s worth quoting in full (footnotes have been removed):

“Near the end of 2021, supervisors found deficiencies in the bank’s liquidity risk management, resulting in six supervisory findings related to the bank’s liquidity stress testing, contingency funding, and liquidity risk management.In May, 2022, supervisors issued three findings related ineffective board oversight, risk management weaknesses, and the bank’s internal audit function. In the summer of 2022, supervisors lowered the bank’s management rating to ‘fair’ and rated the bank’s enterprise-wide governance and controls as ‘deficient.’ These ratings mean that the bank was not ‘well managed’ and was subject to growth restrictions under section 4(m) of the Bank Holding Company Act. In October 2022, supervisors met with the bank’s senior management to express concerns with the bank’s interest rate risk profile and in November 2022, supervisors delivered a supervisory finding on interest rate risk management to the bank.

“In mid-February 2023, staff presented to the Federal Reserve’s Board of Governors on the impact of rising interest rates on some banks’ financial condition and staff’s approach to address issues at banks. Staff discussed the issues broadly, and highlighted SVB’s interest rate and liquidity risk in particular. Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9.”

What’s astonishing about this testimony – and what’s been largely overlooked in banking crisis commentary so far – is that it states that between “the end of 2021” and last November, supervisors from the Fed and from its San Francisco branch told Silicon Valley Bank repeatedly of major actual and potential problems in its management practices no fewer than five times, The bank did…apparently nothing. And Fed officials at more than one level responded by…wringing their hands?

The big question: If banks are so free to ignore these warnings and ratings downgrades for so long, why bother with them in the first place? And a question almost as big: Once it’s clear that a bank is acting so negligently and arguably illegally, why doesn’t the Fed start making this information public in some way? Don’t depositors have the right to know that they’re likely doing business with a scofflaw?

(This report by the non-profit financial reform advocacy group Better Markets blames the Trump-era rollback for this seemingly gaping hole in supervisory and regulatory policy, in particular by in most cases preventing supervisers from communicating their findings to bank boards of directors, meaning that the senior managers who presumably had something to do with a bank’s problems could keep this information to themselves. The subject definitely needs further investigation – and correction if this account is accurate.)

Third, the torrents of easy money with which the Fed has flooded the economy for so long played a role in SVB’s failure that’s only been fleetingly mentioned. For not only, as widely noted, did this ocean of resources encourage overly risky lending (by greatly reducing the cost of guessing wrong). Not only did it give investors and businesses enormous, skyrocketing amounts of cash to deposit in banks like SVB. Not only did the rock-bottom interest rates generated by super-easy money lead the flush banks to park more and more of it in longer-term instruments – which offered higher yields and therefore more revenue.

But these revenues, and the higher stock prices they usually produced, were central to the compensation paid to senior executives – the more so since new lending opportunities weren’t remotely great enough to keep up with the hugely increased supply of assets. So bank management had at best modest incentives to manage better the risks of such extensive long borrowing – because salaries and bonuses would suffer. And because even (or especially?) the cleverest among us too often get addicted to hopium, it’s easy to understand how reckless risk management persisted even after it became obvious that interest rates were going up and depressing the face value of these long-dated assets. 

This dynamic (described more completely in these Financial Times and Wall Street Journal pieces) seems to have been particularly prominent at SVB and the few other institutions that have either failed or are on the ropes. But it’s likely unnervingly widespread at lots of other less-than-systemically important banks that have been operating in the same abnormally low interest rate environment.

Of course, these three issues don’t exhaust the list of banking turmoil subjects that need much more examining. But deeper dives into them seem like a more than good enough place to start.  

(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.

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

Tags

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

Tags

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.