And I’m DEAD WRONG on all of it (if all that you read is true)… but so is the Fed!
I’ve had, one might say, a great run for all of my predictions this year. Every step along the way, I was able to show where they came true. The economy slowed to a crawl in the first quarter, inflation returned to rising when few thought it would. Employment numbers put in head-fakes that made employment the unreliable gauge I said it was, and inflation along with a reportedly “strong and resilient” labor market, kept the Fed from making any rate cuts at all this year as I said would be the case up to this point when nearly everyone else thought otherwise. I held my ground.
HOWEVER, if today’s big economic reports are true, all of that just turned on its head and threw me out the window! Unemployment went back to falling just when I said it was finally turning. GDP rose above its decade average! And, most significantly, inflation practically disappeared entirely, coming pretty close to touching the Fed’s 2% target! Of course, if this suddenly thriving economy is really the accurate picture, the Fed is not under the pressure it believed it was to cut rates in September. It could still cut rates because inflation is practically over, but not because of rising unemployment and a softening economy, which were the reasons Powell gave for thinking about a September cut.
The Fed clearly believed recession and rising unemployment were a growing concern and had started leaning toward rate cuts this September as a precaution right after all Fed heads had, just a month before, indicated we’d be lucky to get one rate cut at the end of the year (at best), and most had said they didn’t see any rate cut coming until next year. So, this economic news is bouncing the Fed around, too.
So, what gives? What we see right now is the Fed’s perfect soft landing scenario, where the inflation fight is nearly over, the economy is “strong and resilient” still and recession has been avoided entirely as the Fed glides its 747 in for an inflation landing where it will soon be able to cut rates because “mission accomplished.”
The truth is, I don’t know! If I’m wrong I’ll say so. That’s why I bring it up as I did in the subhead for this article. For certain I’ll be digging through the numbers tomorrow as I start putting together my Deeper Dive (composed on Fridays now in lieu of headlines and a shorter editorial) because, if this report is true, I should stop writing The Daily Doom and pro-rate a refund of people’s remaining annual subscriptions because suddenly I have gone from being right on just about everything to wrong on everything I thought I was right on! The whole first half of the year was a head fake in terms of where the economy has been headed. At first look, the numbers under the hood of this report look pretty solid, too.
In my defense
I will note that I had not really expected inflation to take its next turn back up, after its recent pause, until the end of August/start of September because of the lags in the two main drivers that I said in an earlier Deeper Dive would be pricing through soon.
One of those lagging causes for a rise in reported inflation was housing, which has a well-known lag of a year or longer before actual market price changes show up in the CPI report. Since real-market housing prices have been rising for about year now (quite a lot!), it was time for the lag to end and the upward repricing to start to show near the end of August.
The other is oil, which prices through right away under energy, but which also prices into everything else measured in CPI over time because it is used at multiple points in various ways in nearly all manufacturing and services. So, eventually, everyone has to start adjusting their prices higher if oil prices remain up long enough.
While I didn’t expect to see much rise in inflation in this report, I certainly did not expect to see it plunge almost out of existence! I didn’t expect to see new unemployment claims fall by 10,000 per week either because it looked like labor really had finally started to put in that turn that I rightly predicted would be VERY long in coming, leaving the Fed no room or legal reason (based on its mandates) to cut interest rates until the turn finally came in; but, at last, I thought the turn was here.
Here were the basic numbers that all flipped on me:
- Real US GDP grew at 2.8% in the second quarter! That’s not a huge number but it is robustly above its longterm average and solidly above economists’ expectations that it would rise from the first quarter’s 1.4% to 2.1%.
- The Personal Consumption Expenditures Index (PCE) of inflation dropped all the way from 3.4% in the first quarter to 2.6% in today’s report, and core inflation dropped from 3.7% to 2.9%!
- Under the hood, the main categories looked good. The rise was largely due to consumer spending and businesses building up inventory. Consumer spending rose from 1.5% growth in the first quarter to 2.3%. Those rich consumers are forking it over!
- Both services and goods saw solid increases in growth, making the mini boom broad-based.
- In a separate report, initial jobless claims all fell by 10K this week, causing continuing claims to slip back down, too.
And the kudos poured in:
“The composition of growth was one of the better mixes that we have observed in some time,” said Joseph Brusuelas, chief economist at RSM. The report “tends to support the idea that the American economy is in the midst of a productivity boom which over the medium term will lift living standards across the country via lower inflation, low employment and rising real wages….”
Treasury Secretary Janet Yellen saw the GDP report as “affirming the path we’re on to steady growth and declining inflation,” in remarks she delivered Thursday morning in Rio de Janeiro.
Even the Fed’s Dovish Dudley had said just a month ago, “I changed my mind. The Fed needs to cut rates now [to make sure things don’t get even worse in the labor market].” Well, so much for his need to change his mind or say he was wrong. He would never have said that if he had any idea today’s report would be coming out as rosy as it did.
Says the former St. Louis Fed President Jim Bullard today,
I think we’ve got normalization in the labor market. We’ve got inflation just 50-60 basis points away from target. You’ve got the economy growing at potential. This is a soft landing, and the last piece of a soft landing is to get the policy rate back to normal.
So, major score for J. Powell! The only reason to cut rates will be to ease the plane up to the loading ramp.
Here are some of the problems with it all
I will note this is exactly the kind of everything-is-sunshine report an incumbent administration would long for during the middle of a presidential election year. Makes one wonder … electioneering? We know that none of the people in the Biden administration would lie about the condition of the economy any more than they would lie about the condition of the president, himself. (Watch the excellent and humorous takedown on that posted by Elon Musk in the humor section for paying subscribers below.)
Today’s government reports don’t square with anything else we are seeing. (Maybe I’m just seeing double due to heat stroke.) It doesn’t square with the big drop just reported for manufacturing yesterday. It also rises above the improvement reported for services yesterday. It doesn’t square with the Fed’s reserve-bank reports on industry conditions in their regions that have been recessionary in almost every region for almost every month for more than a year. It certainly doesn’t square with the declining earnings in recent corporate reports that have been peeling layers off the stock-market onion and making investors cry lately. Those earnings have been saying revenue is down and so are profit margins. How do you manage that kind of fail in a strong and rising economy?
The idea that the rise in real GDP was driven by a rise in consumer spending is a bit difficult to swallow because the same report shows the personal savings rate is falling while credit-card delinquencies have risen to an all-time high (in data that only goes back to 2012). Revolving debt balances have reached a new high even as banks are reporting they are tightening credit standards and turning down more new credit applications. So, how are consumers doing this?
The rise in retail sales seems a bit at odds with the rapid closure of retail locations all over the country, spread among many major retailers as well as with the rise in retail bankruptcies. In particular, sales of durable goods (big-ticket items, ranging from stoves, cars, and refrigerators to airline jumbo jets) tumbled 6.6% in the latest report. Almost all of that, however, was in transportation so probably Boeing’s fault. It wasn’t just planes, though. Automaker stocks, particularly Ford, took a big hit today as they missed low expectations. Doesn’t sound like a strong economy.
Stocks overall took a big swing today with the early headline pointing to a 400-point rise in the Dow as it attempted to claw back most of yesterday’s losses, but that all fell apart after today’s reports (in spite of or because of?). In the end, the Dow was up a mere 0.2% (81 points), and the other two major indices went from going up to ending down.
I’ll point out the numbers were, as always, adjusted for seasonality and inflation, and that the amount taken out for inflation was far from real … but, then, it always is. So, comparatively speaking, it was still a report of rising economic strength; but when elections get extremely rough for the incumbent, as they have been, there may be an inclination to adjust the adjustments.
I’ll dig through the details and lay out anything questionable if there is anything to report in this week’s Deeper Dive. I’ll also hold off on judging myself until we get to the end of summer because I have indicated the resumption of inflation would take until then and because this could all be a one-off—just one more head fake in a stream of them during the Year of Chaos. So, let’s see where the dust settles.
I’ll note there have been many times along the way where I have felt like I stood against the entire media, including many in the alternative press, only to find the predictions I had made coming true, albeit a month or two delayed. So, this is another time where I’ll stand my ground on where I’ve said we’re going, though everything appears to be against me.
That is not to be stubborn or to delay accepting the truth but on the basis that the picture presented today looks badly skewed compared to so many things we are seeing in other reports that’s it’s too early to trust today’s reports and to not trust myself. (That, and the entire administration has actually been known to lie just a little about important things like the mental health of the “leader of the free world.”) So, in an election year, I have to cut myself a little slack on the possibility of government-fabricated numbers.