Inflation, Wage Increases and the Implications for the American Economy and the Presidential Referendum to the U.S. Department of Labor

When asked how the administration reconciles its view of the US economy with soaring discontent among voters, Janet Yellen said inflation is very high and Americans feel that every day. Efforts to bring it back down will take at least a couple of years, but will be covered by that, according to the Fed chair.

The Fed’s go-to inflation gauge, the Core PCE index (which strips out the often volatile food and energy categories) showed prices rising 0.6% on a monthly basis and 4.7% for the 12 months ending in January.

The August Consumer Price Index, a major inflation gauge, unexpectedly showed a rise in the month of September, instead of a fall as expected.

It’s a tough situation for the Fed. Wage gains for workers fuel inflation pressures. In an environment with a low unemployment rate, employees have been able to get huge increases in pay to keep up with rising prices.

Wages are a real sore point for people. People are paying more but not making more,” said Marta Norton, chief investment officer of the Americas with Morningstar Investment Management. With that in mind, there is a higher chance of another bout of deflation.

Inflation is not just a function of the price of oil and other commodities and production costs like manufacturing and shipping. The amount of money taken home by workers in their paychecks is related to inflation.

When people have more money in their wallets (virtual or good old-fashioned leather ones), they tend to be more willing to spend it. That gives companies additional flexibility to raise prices.

The November PCE Report. An Outlook for a Booming Economy: The Case for the Fourth and Fifth Quarters of the U.S. Economy

According to a report, wage growth has been on a slowing path and we think it will be a trend in the coming years as jobs are plentiful.

The November PCE report provided a snapshot of an economy in transition. The Fed has hiked interest rates many times in the past to curb inflation and make people not want to.

Despite inflation pressures, retail sales have held up. American shoppers would eventually reach their breaking point and just start buying essentials. A slowdown in consumption will inevitably lead to lower prices…but also slower economic growth.

The third quarter is over. It has been a doozy for the market. September in particular was bleak. It was the worst month since the beginning of the epidemic in March 2020.

Despite the fact that we are in a bear market for everything, there are positive signs for the next few months.

The fourth quarter is typically a festive time on Wall Street. Investors tend to buy stocks in anticipation of robust consumer shopping during the holidays. Businesses typically spend more as well to flush out those yearly budgets. And major companies also often give rosy guidance in October about earnings expectations for the coming year.

Hirsch added that a dozen bear markets since World War II have ended in the month of October. Seven market bottoms happened during the election years.

Traders will definitely be keeping close tabs on Washington this fall to see if Republicans gain control of the House. It could lead to more problems in DC, investors like that.

Whether or not Corporate America and investors are going to be so bullish this October is up for debate given the concerns about inflation, interest rates and the global economy. October is known for huge crashes, most recently in 2008 but as far back as 1987 and 1929.

The chief investment officer at First Republic Private Wealth Management said they are close to a bottom. Many quality companies are on sale. It’s a time to be patient and reposition.”

Wall Street Sentiment and Jobless Claims: An Empirical Analysis of the Fed-Government-Expansion Rates, Employment, and Investments in the U.S.

Thursday: US weekly jobless claims; earnings from ConAgra

            (CAG), Constellation Brands

            (STZ), McCormick

            (MKC) and Levi Strauss

            (LEVI)

Prices increased 6.6 percent after stripping out fuel and food — which tend to be volatile and are often removed from inflation readings to allow for a better sense of underlying trends — an uptick in the so-called core index that was also more than economists expected.

Still, Fed officials and Wall Street analysts will be more closely watching the monthly figures, including what happened between August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.

The risks of a recession could be greatly reduced if this trend continues. But if inflation remains well above the Federal Reserve’s 2% target, that would be problematic.

In December, Fed policymakers expected the benchmark interest rate to climb to 5.1% from 4.625% and remain there at least through the end of the year.

The Federal Reserve is going to raise interest rates again on Wednesday. But will it be another half-point hike or just a quarter-point increase? And what about the rest of the year?

Solid growth is what we are seeing right now. After a very rapid rebound from high unemployment,growth has slowed, according to the data, which was asked about whether the data alleviated recession concerns. We are at a full employment economy. It’s very natural that growth would slow. It has been okay over the first three quarters of the year. There is a very strong labor market. I don’t see signs of a recession in this economy at this point.”

“If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out. We have unemployment at a 50-year low. … Consumer spending and investment spending continued to grow, we saw in the report today. We have solid household finances, business finances, banks that are well capitalized,” she said.

According to initial estimates released by the Bureau of Economic Analysis, gross domestic product rose by an estimated 2.8% in the third quarter. The decline of 1.6% in the first quarter was followed by a negative 0.6% in the second.

The Biden-Yellen Balance Act: Making Progress During the Covid-19 Era in the United States, and the Implications for the Future of the Economy

The complex balancing act that President Joe Biden and his top economic officials have attempted this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices, is underscored by the way in which Yellen views it.

It isn’t a reality that has helped the administration take advantage of what they view as a strong record. Republicans were upset by Biden telling reporters the economy was strong as hell.

As the economy grows over the coming months and years, Yellen promised that those efforts would be felt. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”

Many families in America could have had difficulties, and that is what we could have had. These are problems that we don’t have, because of what the Biden administration has done. One doesn’t get credit for problems that don’t exist.

A key part of an administration push was to highlight major legislative wins and how those policies have led to tens of billions of dollars in private sector investment.

As Covid-19 decimated the world, significant federal investments in infrastructure and shoring up were put into place to address a lot of the vulnerabilities and flaws that were laid bare.

Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.

“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Bridges that have been falling apart are going to be repaired in many communities. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.

Source: https://www.cnn.com/2022/10/27/politics/janet-yellen-gdp-recession-cnntv/index.html

The Battle Lines that Come With The Debt Ceiling: An Update on the Yellen White House View of the Washington Crisis and the Rise of Gas Prices

Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.

The debt limit has been done away with in the past, but now it is backed by legislation. Vice President Biden rejected the idea of a group of House Democrats asking for that action in the final days of the Congress.

She made it clear that she wouldn’t be one of them as the administration moves towards a time period that leads to top officials leaving. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”

“I feel very excited by the program that we talked about,” Yellen said. It strengthens the economy, it addresses climate change, and it strengthens American households. I would like to be a part of that.

Still, considering the Federal Reserve has raised interest rates six times this year, there is a long way to go and inflation is still issue number one for Americans. A recent CNN poll shows that the current cost of living is a near universal worry, with 98% saying that they are at least somewhat concerned, and a further 34% saying they are very concerned.

After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline recently dropped to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to about $3.22 a gallon.

Consumer prices rose by 7.1% in November. It has been high at almost every other point in the past 40 years. But this marked the fifth-straight month of improvement and a significant cooldown from 9.1% in June. It is the lowest annual inflation rate in nearly a year.

Inflationary Trends in the U.S.: The Fed’s Benchmark Rate Increase and Expenditure Ratios

Retailers awash with excess inventory are expected to keep marking down goods into the end of the year, as consumers shift from buying couches and clothes to spending on travel and experiences — where prices are not coming down for now.

In other areas, price increases are moderating, as global supply chains work themselves out and commodity and shipping costs decline. Rent and automobile prices are rising, but at a slower rate. Chicken prices have fallen sharply after hitting a record high this summer. RealPage states that apartment rents have fallen for three consecutive months.

The hike in the Fed’s benchmark rate is the smallest since last March, and signals that policymakers are shifting to a more cautious approach, after spending much of last year playing catch-up and boosting borrowing costs at the fastest pace in decades.

“It’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability,” Fed Chairman Jerome Powell said at a press conference after the board announced its latest, smaller rate increase.

Many Americans are facing price increases in almost every area of their lives, but as interest rates go up on credit cards, homes and car loans they are feeling the effects. Currently, used car buyers are charged an average interest rate of 9.34%, compared to 8.12% last year, and they’re making the largest monthly payments on record, according to credit reporting firm Experian.

The central bank stated in a statement on Wednesday that inflation remains elevated as a result of supply and demand factors, and broader price pressures.

The Fed’s Inflationary Warning: Implications for the Real Economy and Consumer Prices in the U.S., and Their Impact on the Housing, Housing and Energy Markets

The stock market fell after the announcement of a rate hike as Wall Street absorbed the Fed’s warning that there were more rate hikes to come. But stocks recovered and the major indices were mostly flat by mid-afternoon.

The worst of shelter inflation may be behind us, according to Fed officials. Increases in market rents have slowed since spring.

The price of haircuts and dry cleaning went up in the last year. Services other than housing and energy account for nearly a quarter of all consumer spending.

“We see goods prices coming down,” Powell said. “We understand what will happen with housing services. There is not much progress there, and the big story will be the rest of it. It’s going to take some time.

Powell has characterized the job market as out of balance, with more job openings than workers that are available. The unemployment rate in the U.S. has dropped, but the share of people working or looking for jobs hasn’t gone back to pre-pandemic levels.

Many older people who retired in the past two years don’t want to return to the job market. To regain balance, the Fed is trying to reduce demand.

Higher borrowing costs make it more expensive to get a car loan, buy a house, or carry a balance on a credit card. That’s already curbing demand in some of the more sensitive parts of the economy, like the housing market.

What’s Going on with the Christmas Season? Price Anomalies, Food Prices, and Interest Rates in the Bank Holiday Catalog, and their Implications for the General Economy

Inflation is not taking a holiday this year. Rising prices have been one of the central stories of 2022. And this season of gift-giving is no exception.

The cost of buying a partridge, a pear tree and all the other items in the 12 Days of Christmas song has jumped 10.5% from a year ago, according to the annual “Christmas Price Index” compiled by PNC Bank.

“True love is really going to have to shell it out this year,” said Amanda Agati, chief investment officer at PNC. “Clearly, our specialty gift basket of goods and services is not well insulated from some of the trends that the broader economy is experiencing.”

Turtle doves and French hens have both seen double-digit price increases, Agati said. The rising cost of bird feed and the growing popularity of backyard farming are to blame.

In November, the Consumer Price index was 7.1% lower than the Christmas Price index.

Costly services are also driving both measures higher. In the case of the Christmas Price Index, that includes dancing ladies, piping pipers, and especially leaping lords. The lords’ price-tag is based on salaries and has increased 25% this year.

“There’s no question services inflation is higher than goods inflation in the PNC Christmas Index,” Agati said. “But that’s what we’re seeing in the broader economy.”

The price of haircuts, restaurant meals, and other services are being watched by the Fed. Those prices are largely driven by labor costs, and are therefore less likely to come down than goods prices.

Interest rates are also climbing this year, as the Fed tries to crack down on inflation. If people use their credit cards for their holiday purchases, they may end up paying more.

The Swan Price Index: Inflation, the Recovery, and the Perturbative Evolution of Consumer Spending and the State of the Economy

There was no changes in the price of seven swans. Swan prices have been treading water for the last three years, possibly a sign of waning consumer demand.

The annual increases for both PCE inflation indexes hit their lowest levels since October 2021 and follows continued declines in other inflation gauges, such as the Consumer Price Index and Producer Price Index.

Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending was up in November as opposed to the previous month. Personal income increased by 0.4% in November, down from 0.7% in October.

She added: “Their outlook for the economy may have improved, but it remains relatively weak. If incomes and labor markets remain strong, robust consumer spending can be sustained.

Inflation in the services sector is still going strong, and it is not going to abate quickly. The services index was unchanged in October but showed a year over year increase of more than 11%, Faucher noted.

The Federal Open Market Committee will continue to increase the fed funds rate until it becomes clear that the job market is cooling and wage growth is slowing to more sustainable levels, according to him.

The Decline of New Orders for Manufacturing in the Light of the November 12th Retail Sales Re-Opening and the Conference Board’s Consumer Confidence Index

A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.

Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. New orders do not increase if transportation is not included.

Diane Swonk, chief economist for KPMG, said after the report was released that core durable goods orders slowed but did not contract. The prelim reading for December indicates that manufacturing will contract further towards the end of the year. A cold winter expected for the manufacturing sector.

The final consumer sentiment index for February was 67.0, higher than preliminary estimates released earlier in the month and January’s 64.9.

Still, even through most of February, consumers are feeling more upbeat about the current and future direction of the economy, according to a closely watched survey released Friday by the University of Michigan

Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.

The US Economy Hasn’t During the 2008-2009 Wall Street Era. The Case for a Recession Revisited

The stock market had a rough period, with the S&P500 losing 20% of its value and the Nasdaq losing more than 30%. Since 2008, the three major US markets have had their worst years.

The US economy is not in danger of a recession just yet, according to several other job market indicators. The number of people filing for weekly jobless claims dipped last week to 186,000, a nine-month low. The latest weekly initial claims numbers will be given to investors on Thursday.

The number of first-time applications for unemployment benefits rose to 225,000. That is close to where it was a year ago and still historically low.

Mark Zandi, chief economist with Moody’s Analytics, told CNN that the economy could skirt a recession because of this. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”

Wage gains have also eased in recent months, despite the tight job market. That helps to allay concerns that rapid wage gains might put more upward pressure on prices — as happened in the 1970s.

What Can Investors Learn About Inflation and the Tech Economy: A Tale of Two Jobs and One Baby: The Good, the Bad and the Ugly

The fear is that the Fed will eventually overdo it, raising rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done that.

Powell made it clear the Fed was not about to cut rates in order to jump start the economy. It would be a positive if it removed its foot from the brake.

The Fed’s actions after this week’s meeting are dependent on whether inflation is actually slowing. When the January jobs report is released, investors will get a clue.

The market will also be closely watching reports about private-sector job growth from payroll processor ADP and the Job Openings and Labor Turnover Survey (JOLTS) from the Department of Labor this week. The last JOLTS report showed that more jobs were available than expected in November.

According to a report, workers will be unwilling to give up the bargaining power they have gained in the past year.

And even though the pace of jobs gains may be slowing, it’s not as if economists are starting to predict monthly job losses like the US has had in previous recessions.

If you combine a strong labor market with a large reserve of excess savings, you have everything you need to keep the Fed up at night.

“This is what the path for a soft landing looks like,” said an economist at the Upjohn Institute for Employment Research. “Inflation has come down, but there’s not a recession.”

Wall Street thinks that it is possible to land in a soft landing. Even though a series of high-profile layoff announcements from top Silicon Valley companies have happened, tech stocks have done very well this year.

Some think more tech layoffs won’t be a problem. Some people think that cutting costs is a good idea for profits and that revenue might not be impacted in a bad way because consumers are still spending.

The theme this month is how traders rewarding firms for cutting jobs. The consumer might think that they are strained because of corporate layoffs. Maybe not so much. It turns out that demand is decent,” said Frank Newman, portfolio manager at Ally Invest, in a report.

So far, tech earnings season is not off to an inspiring start, with Microsoft

            (MSFT), Intel

            (INTC) and IBM

            (IBM) all reporting weak results. But it’s important to note that that trio is part of the “old tech” guard while Apple, Amazon, Alphabet and Meta all have more rapidly growing businesses.

“A set of much weaker-than-expected reports from these firms could dent the market’s strong start to 2023,” said Daniel Berkowitz, senior investment officer for investment manager Prudent Management Associates, in a report.

Tesla

            (TSLA) reported strong results last week, which could be a sign of good things to come from other more dynamic tech companies.

Inflationary New Physics: Implications for the Economy and the Core Economy of the Large-Scale Structure in the Early 2021s

Monday is the day the International Monetary Fund releases their world outlook.

Wednesday: Fed meeting; US ADP private sector jobs; US JOLTS; China Caixin PMI; Europe inflation; earnings from AmerisourceBergen

            (ABC), Humana

            (HUM), T-Mobile

            (TMUS), Novartis

            (NVS), Altria

            (MO), Peloton

            (PTON), Meta Platforms, McKesson

            (MCK), MetLife

            (MET) and AllState

            (ALL)

“We do not want to be head-faked like we were in 2021,” Fed governor Chris Waller said two weeks ago. “Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it exploded in our face.”

Financial markets are skeptical of a forecast. Many investors are betting that the central bank will soon start cutting interest rates, despite repeated warnings to the contrary from Fed officials. The stock and bond markets have rallied in recent weeks because of the expectation of lower borrowing costs.

“The market has a very optimistic view that inflation is just going to melt away,” Waller said. “We have a different view, that inflation is not just going to miraculously melt away. It’s going to be more difficult to get inflation down. We need to keep rates higher for longer.

“We’ve got something really nice going on right now,” says JoAnner, who was an economist for the Council of Economic Advisers in the Obama and Trump administrations. “If the we get to the place where the Fed over-corrects, then we start to see jobs destroyed. Hopefully we can avoid that.

Federal Reserve officials and economists were taken to task for dismissing inflation as temporary earlier in the pandemic, so now they’re slicing and dicing inflation data in different ways. The new favorite: supercore inflation.

Core services that exclude housing “may be the most important category for understanding the future evolution of core inflation,” Fed Chair Jerome Powell said recently.

Over the past year, an alphabet soup of otherwise wonky economic statistics have become household names as American families suffered through the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index), PCE (Personal Consumption Expenditures and ECI (Employment Cost Index).

Wages fail to keep up with soaring costs as food prices continue to rise at an alarming rate. In the United States, groceries have gone up by 11.3% over the past year while in the United Kingdom, prices of food and non-alcoholic beverages went up at a faster rate in January.

The Fed and Consumer Prices: Consequences for Inflation and for Automotive and Home-Energy Trends in the United States and Europe

“The Fed focuses on supercore because it includes those prices that are more likely to be driven by the cost of labor, which the Fed can more directly impact through changes in interest rates,” he said.

It is useful for economists to drill down on the drivers of inflation, but stripping out volatile categories like housing, food, and energy is impractical for most households.

There is a chance that January’s price index could not live up to expectations. Some of December’s rosy headlines came from falling gas prices, which have since reversed.

The Labor Department said consumer prices were up by 6.4% last month. Since October 2020, the annual inflation reading has been the lowest.

“There’s been an expectation that it will go away quickly and painlessly, and I don’t think that’s at all guaranteed,” Federal Reserve chairman Jerome Powell said last week. “The base case for me is that it will take some time and we’ll have to do more rate increases and then have to look around and see if we’ve done enough.”

The price of gas has fallen in the first two weeks of February, but is it enough to keep inflation in check?

“We are entering the higher-priced spring and summer driving season and so drivers should prepare for that.” said Devin Gladden ofAAA It will likely be a difficult year, given the uncertainty around the economy.

The used car prices have fallen since last year and the inflation has also been held down by it. But signals from the wholesale market suggest used car prices could jump again in the coming months.

Annual inflation in the United States slowed to 6.4% in January, easing for the seventh consecutive month. In Europe, inflation is running at 8.5% after peaking at 10.6% in October. The rate of price increases is going down in the United Kingdom, where the economy is more weak than in other countries. In January, annual inflation dipped to 10.1% from a recent high of 11.1% this past fall.

“Sticky-Price CPI” for January held at 6.7% year-over-year, its highest level since 1982, even as “Flexible-Price CPI,” which tracks items including food and gas, has pulled back sharply.

Two data points that arrived Wednesday and Thursday heightened investor anxiety about inflation. Retail sales jumped by 3% in January compared with the previous month, the largest increase in almost two years. That’s a problem, given that getting Americans to spend less is crucial to the Fed’s anti-inflation campaign.

In the European Union and the United Kingdom, the recent slump in global energy costs is expected to lead to a substantial drop in inflation later this year. Thanks to aggressive stockpiling, a pullback in demand and relatively mild weather this winter, the region has dodged nightmare scenarios of energy shortages, which could have propped up prices.

Part of the challenge, economists and Fed officials say, has been some of the unique factors playing into this recent stretch of high inflation, including the global pandemic and its drastic effect on the US economy, labor market, supply chains and spending patterns; the influence of stimulus efforts to keep the economy afloat; and geopolitical shocks.

That’s a fair share hotter than what economists were expecting. Consensus estimates on Refinitiv projected the annual core index to land at 4.3% and extend what was a three-month stretch of cooling.

President Joe Biden said the higher-than-expected reading shows that the country has “more work to do” but lauded the progress the economy has made during his administration.

“Annual inflation in January is down from the summer, while the unemployment rate has remained at or near a 50-year low and take-home pay has gone up,” Biden said in a statement issued Friday. “As I’ve long said, there may be setbacks along the way, but we face global economic challenges from a position of strength.”

The PCE Inflationary Index: Where are We Going? An Economist’s View of Consumer Behavior in the First Three Months

The PCE index is part of a report by the BEA. The report shows the latest estimates on how much consumers bring in and spend.

In an interview with CNN Business, Gregory Daco, chief economist of EY Parthenon, said that consumers were happy in January. “They spent more freely across the board, really on all items, despite inflation being higher.”

Stocks plunged on Friday morning as the PCE report’s numbers supported recent data that shows inflation isn’t falling at the pace investors had been hoping. It also adds pressure on the Fed to continue with its rate-hiking campaign for longer than markets anticipated just a few weeks ago.

All major indexes lost ground last week. The S&P 500 was down 2.5% last week and is down 2.5% for the year. The blue chips lost their fourth week in a row, falling by nearly 3%. The tech-dominated stock index ended the week on a lower note.

The Fed has tried to control inflation by raising interest rates, and has done so in a heavyhanded manner for the past year.

“We are likely to experience surprises in this disinflationary process, it’s not just going to be a smooth ride back down to the low levels,” Daco said. “And so we’ll have to see whether the Fed panics in light of this recent report.”

Additionally, while monetary policy does act on a lag, the rapid increase in interest rates have filtered down to some areas of the economy, notably housing and financing.

Source: https://www.cnn.com/2023/02/24/economy/pce-inflation-january/index.html

Why Did January’s Retail Sales Increase in January Surprise Consumer Confidence? A Commentary on the Factors Responsible for Consumer Decline and Spatiotemporal Dynamics

The spending increase was to be expected — the Commerce Department’s stronger-than-expected retail sales report for January gave an early indication that Americans’ loosened the purse strings after a reined-in holiday shopping season — but the pace in Friday’s report surprised on the upside as well and exceeded economists’ forecasts of a 1.3% gain.

Vehicles, clothing, gas, groceries and services all increased last month, as well as spending on durable goods like cars, TVs, and appliances that last three or more years.

A warm winter, a rebound of holiday spending,seasonal data adjustments and a strong and tight labor market are listed as reasons why January’s spending surge may be related.

The consumer is more resilient than initially thought and households are still spending freely as of January, so I think we don’t have to make excuses for them.

However, given the high inflationary environment, rising interest rates, and the latest household debt data that showed some deterioration in Americans’ finances, the spending gains seen in January may not be lasting, he added.

In June 1982, the all-time low for the sentiment index, it was 17 points. According to a University of Michigan survey, the sentiment has risen for three straight months.

The Federal Reserve uses inflation expectations as part of their data. If consumers believe prices will remain high, that could factor in to increased wage demands, which could cause businesses to raise prices.