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August 14, 2024 - 3:30pm
If the Goldilocks metaphor is used to describe the ideal economy — inflation not too hot and employment that’s not too cold, allowing interest rates to stay low and thus support continued growth — what metaphor do we use for its opposite? Because that’s what seems to prevail now in the United States: an economy that seems to be cooling fast but in which inflation still remains too hot, putting the Federal Reserve in a bit of a pickle.
Today’s Consumer Price Index showed that inflation was getting close to the Fed’s 2% target, but isn’t there yet. Annual inflation has fallen to 2.9%, the lowest since 2021, but recent months have seen growing signs that the US economy is slowing: slower job creation, softer wage growth, rising arrears in credit, greater pessimism among consumers. Add to that the sharp fall from inflation’s peak two years ago and investors are clamouring for the Federal Reserve to start cutting interest rates soon, lest the economy sink into recession. Indeed, some economists are now saying that the US economy has already begun contracting.
But that isn’t yet clear. Although last month’s job figures were soft, they may also have been distorted by the impact of Hurricane Beryl. While employers appear to be scaling back their hiring plans, high-frequency data, like air travel and flight bookings, suggest the economy may still be growing. Although there’s no question it’s growing more slowly, it’s also coming off a period of very hot expansion, so there’s scope for cooling without it actually going into reverse. Overall, the picture we are getting still appears to be of a gradual easing, not an imminent collapse.
That would still be reason enough for the Federal Reserve to start cutting interest rates, easing up on the brakes before the vehicle came to a complete halt, were it not for one thing: the engine still seems too hot. Recent inflation reports have shown a continued decline in the rate of inflation, but the decline is itself too slow for comfort.
Last month’s Producer Price Index reading came in lower than expected, but the core rate over the last year remained above 3%. As of today, that remains largely unchanged. While consumer expectations of inflation appear to have come down to a level at which the Fed could comfortably cut rates, business surveys paint a somewhat different picture: although wage growth is cooling and employment is softening, managers are still worried that inflation will continue to cut their profit margins.
That appears to be the real reason for the anxiety we’re hearing from investors — not that the sky is falling, but that their profits are. In truth, stock and bond markets are looking a bit like a footballer who writhes in agony from a tackle only to miraculously recover as soon as the offender is yellow-carded. Markets, and their talking-heads on the business channels, scream that only immediate and sharp rate cuts will save the economy from implosion; then they rally sharply as soon as soft data suggests rate cuts are coming. As a result the indices are still flirting with record highs, something which would seem not to square with an economy that’s going south.
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SubscribeYes, things are getting worse, standard of living is falling. Dont mind the stats which underestimate real inflation. If stock market ( and asset prices)does go up, its only relative to the ever decling doller.
Everything is wonderful!
the ever decling doller.
eh ! Chances are we will see near parity with the Euro,sub 1.25v GBP,Yen is on life support after the BoJ’s disastrous attempt to hike rates collapsing the Yen carry trade,Renmimbi will be kept depressed as the Chinese economy is tanking and they are desperate to offload their surplus manufacturing capacity on the rest of the world..other than that I guess its on the decline.
Yes , actually what you say is100% true. I stand corrected. The doller is the best of all these currencies and still declines in purchasing power.
I was in a suburb of Sacramento, which is the capital of California, over the last couple of days, and as I was driving back to my hotel after dinner with friends, I noticed, as I tend to do, signs indicating retail space for lease. We drove past several office parks, and in a quarter of a mile we must have seen thirty or more signs advertising unoccupied retail space. I’ve never seen such a high density of “for-lease” signs. At the same time, there were at least a dozen new suburban housing developments going up on the blasted plains around town. I couldn’t decide whether the town was blighted or booming. Finally, on my way to the airport, I think I cracked the key: private businesses were suffering, but the houses were being bought up by government workers.
Or more likely high street shops are failing because of the rise of internet shopping. Along with the increase of working from home there’s no much less demand for retail space in those areas as people are simply employed elsewhere
I’m surrounded by vacant properties that until covid housed thriving restaurants. The small, family run places are dead and gone, and aren’t coming back any time soon. It isn’t because of online shopping, it’s because a) lockdowns during covid kicked these businesses where it hurts and b) inflation continues to bite. Restaurants have been forced to raise prices–of course–while customers are finding their dollar stretched to the breaking point. I’ve enjoyed discovering tasty cheaper and less healthy alternatives, but I feel for those families who put everything into their business and now have nothing.
Government jobs make up a huge portion of the Biden-Harris Administration’s ‘job growth’….every month…even though they insist they are doing an amazing job with the economy…