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Breitbart Business Digest: The Case Against Recession Is Building

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Some Constructive Criticism of the Recessionista Thesis

“The house don’t fall when the bones are good,” we are instructed by that sage of Arlington, Texas, and Nashville, Tennessee, Marin Morris.

The bones of the U.S. economy are looking good as we hurtle toward the warming months, which means the house of the U.S. economy is not about to fall.

The U.S. Census Bureau, which is the division of the Commerce Department that is—for obscure reasons—assigned the duty of tracking new home sales and construction, said that construction spending rose 1.2 percent in April compared with March to a seasonally adjusted annual rate of $1.908 trillion. During the first four months of 2023, construction spending is up 6.1 percent compared with the same period last year.

Residential construction rose 0.5 percent to a seasonally adjusted annual rate of $845.4 billion. A 0.8 percent drop in single-family construction spending was partly offset by the 0.6 percent gain in multifamily construction. Rising rates weigh on residential construction, but the “lock in” effect of existing owners with low cost mortgages is driving activity into new construction. Year-to-date, homebuilder stocks are beating the S&P 500. Housing starts have been up in two of the last three months.

This was far better than the forecasts summoned forth in the crystal balls of Wall Street’s wizards. They had projected a paltry 0.2 percent gain and an outright decline in residential construction spending.

It’s hard to have a recession when construction spending is rising. And this wasn’t just a one-month bump. Year-to-date, overall construction spending is up 6.1 percent.

We’re Building Factories, Hotels, and Roads

Nonresidential construction was expected to slow from 0.7 percent in March, continuing the trend in place since January. Instead, it jumped 1.9 percent, with private sector nonresidential construction jumping 2.4 percent.

Percentage-wise, the biggest gain was in manufacturing construction, which rose 8.7 percent compared with the prior month, an impressive feat for a sector everyone agrees is in a slump. Year-to-date, construction spending on manufacturing plants is up 83.8 percent. This is a sign that manufacturers are gearing up for future productions and would appear to be a vote of confidence by manufacturers that an economic downturn will be short-lived.

Manufacturing is the largest category of private sector nonresidential construction spending, coming in at a $189 billion annual rate in April. That’s around 29 percent of total nonresidential construction in the United States. So, when it is expanding, it has broader macroeconomic effects that drive gains in employment, wages, and the markets for materials and equipment.

This is potentially related to the construction of semiconductor plants incentivized by the CHIPS Act, as well as work on transforming traditional auto manufacturing facilities into electric vehicle factories.

President Joe Biden visits a Wolfspeed semiconductor manufacturing facility in Durham, North Carolina on March 28, 2023. (Peter Zay/Anadolu Agency via Getty Images)

Even the much beat-up category of office construction saw a bump in April, rising 0.3 percent to an annual rate of $84 billion. Spending on commercial sector projects rose 0.7 percent to a $125 billion annual rate, making it the second largest category of nonresidential commercial spending.

Government spending also boosted the headline number. Public construction spending rose 1.1 percent, entirely because of rising nonresidential spending. Spending on highways and streets, the biggest category of public spending, jumped 1.3 percent to $124.7 billion. Year-to-date, highway and construction spending is up 19.9 percent, and total public construction spending is up 15.3 percent.

It’s no wonder that construction is boosting the jobs market. The private sector added 64,000 construction jobs in May, according to ADP’s employment report. That accounted for a little more than one-fifth of all the May gains in the ADP report.

We’re Improving Ourselves

The lack of homes for sale was one of the unexpected results of years of low interest rates being followed by last year’s sudden climb. People with very low mortgages do not want to sell their home either to upsize or downsize because that would mean accepting a new mortgage with a much higher rate. As noted above, that seems to be driving new home and apartment construction to feed the appetite for home-buying.

The Associated Press

Construction workers build new homes in Philadelphia, Pennsylvania. (AP Photo/Matt Rourke)

Another unexpected result appears to be increased spending on home improvement. This rose 1.7 percent in May after rising one percent in April. It now rivals single-family home construction in size, with both making up about 40 percent of total private residential construction spending. People who do not want to move because of high mortgage rates are spending a lot to improve their current homes.

None of this means we’ll avoid a recession. We still think it is likely that inflation will prove sticky enough that the Fed will raise interest rates high enough to throw the economy into a recession. In effect, the Fed will engineer a recession to tamp down inflation. It does mean, however, that the recession is not imminently upon us.

Breitbart Business Digest: The Economy JOLTS Back to Overheating

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Job Openings Top 10 Million for First Time Since January

The labor market is still refusing to cooperate with the narrative that the economy is softening.

After three consecutive months of declining job vacancies, economists had penciled in a fourth month for April. The preliminary March report on the Job Openings and Labor Turnover Survey, or JOLTS, had shown 9.59 million job openings, and economists had expected openings to fall to 9.35 million. Instead, the March report was revised up to 9.745 million, and the April figure came in at 10.103 million.

So there were around 750,000 more job openings at the end of April than economists had expected. Instead of declining from the prior month, the employers added 358,000 open positions to the lists. The job vacancy ratio—the number of openings compared to the number of people unemployed—rose to 1.79 from 1.67, a sign that the labor market is not just overheated but getting even hotter.

Retail Still Booming, Housing Recovering

The retail sector added 209,000 vacancies, defying predictions based on declining consumer sentiment that consumers were losing steam. This confirms the consumer resilience we saw earlier in the personal consumption expenditure figures, where nominal spending rose 0.4 percent for the month. Transportation, warehousing, and utilities added 154,000 openings, likely servicing a lot of that consumer spending.

The recovery in the housing market also was in evidence. Construction vacancies grew by 83,000. That’s a seasonally adjusted figure, so it cannot be written off as merely reflecting warmer weather. Mining vacancies grew by 31,000 despite the recent steep decline in the price of oil. The healthcare sector put out help wanted advertisements for an additional 185,000 positions, bringing the total number of vacancies in healthcare up to 1.9 million.

Openings in food services and hospitality fell to their lowest level since April 2021. One has to wonder, however, if exhaustion is playing a factor here. At 1.14 million vacancies, openings are still far above the prepandemic level of 810,000, and employment remains below the prepandemic level. At some point, employers may give up on trying to find more workers.

A Blow to the ‘Soft Landing’ Theory

The surge in job openings was strong enough to reverse almost all of the softness that had appeared to creep into the labor market after January. It was the steady declines in vacancies that was giving credence to the idea, first voiced by Federal Reserve Chairman Jerome Powell, that the labor market could cool down through a decline in openings without a serious hit to employment. Maybe no one would have to lose their jobs if rate hikes merely tempered openings rather than increased unemployment.

That “soft-landing” is looking increasingly implausible. If the Fed wants to cool down the labor market, this will most likely require an increase in unemployment. The rebalancing will have to come at a cost of jobs people actually hold rather than a softer elimination of potential jobs.

Even before the JOLTS figures were out on Wednesday, Cleveland Fed President Loretta Mester told the Financial Times that she saw “no compelling reason to pause.”

After the JOLTS number, it is probably safe to say the labor market is providing compelling reasons not to pause interest rate hikes.

This Is What It Sounds Like When Doves Cry

Not everyone on the Fed is yet convinced of a hike for the June meeting. In a speech in Washington, DC, on Wednesday, Fed Governor Philip Jefferson appeared to still be in the “pause” camp:

Since late last year, the Federal Open Market Committee has slowed the pace of rate hikes as we have approached a stance of monetary policy that will be sufficiently restrictive to return inflation to 2 percent over time. A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.

It’s notable that even the doves are warning that this is not the end of the hiking cycle.

Federal Reserve Board Governor Philip Jefferson delivers a speech on May 18, 2023, in Washington, DC. (Drew Angerer/Getty Images)

We’ve gone from a Fed trying to talk the market away from the idea of cuts later this year to a Fed trying to prepare the market for hikes.

And the message is getting through.

“The Fed is not finished,” BlackRock chief Larry Fink said Wednesday during a financial services conference hosted by Deutsche Bank AG, Bloomberg reported. “Inflation is still too strong, too sticky.”

On Tuesday afternoon, the fed funds futures were implying a 41 percent chance of a hike at the June meeting and a 68 percent chance of a hike by the July meeting.

Breitbart Business Digest: Inflation Is Still Stuck on Us

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Sticky Inflation Provides Ammo for Another Fed Hike

It is getting harder and harder to justify not raising rates at the next meeting of the Federal Open Market Committee.

The Bureau of Economic Analysis on Friday released its personal-consumption expenditures (PCE) price index for April. Wall Street had been expecting the price index to climb 0.3 percent after inching up by just 0.1 percent in March. Since this index comes out weeks after the Labor Department’s consumer price and producer price index, it should be fairly predictable based on similar data already received.

Yet we got an upside surprise. PCE inflation rose by four-tenths of a percentage point. Over the past 12 months, PCE inflation is up 4.4 percent, also a tenth of a point higher than expected and up two-tenths from the March reading.

Core PCE inflation, which excludes food and energy prices, were likewise up 0.4 percent from the prior month. From a year ago, core prices are 4.7 percent. Both were higher than the March. numbers and higher than Wall Street expected.

Core PCE inflation has been in a tight range of 4.6 to 4.7 for five months. This suggests that the Fed has not made much progress at all when it comes to inflation.

Watching What the Fed Watches

The Federal Reserve uses PCE inflation for its two percent target as well as in the Summary of Economic Projections (SEP) that gets released every other FOMC meeting. Fed officials also forecast core PCE inflation in the SEP. While Fed Chair Jerome Powell and others have emphasized that they also look at other measures of inflation, PCE inflation is certainly viewed as the Fed’s “favored” metric. So, it gets a lot of attention from anyone trying to figure out where rates are heading.

The last SEP was released at the March meeting. It showed that the median expectation for headline PCE inflation for 2023 was 3.3 percent, up from 3.1 percent in the prior summary from December. The range of projections was for between 2.8 percent and 4.1 percent. Core PCE was expected to come in at 3.6 percent for the year, up from 3.5 percent.

Those projections now look unrealistic. It would take a very severe downturn in inflation in the last eight months of the year to bring headline down to 3.3 percent and core down to 3.6 percent. Getting there would require a large pullback in consumer spending and a big uptick in unemployment. This means it is likely that Fed officials will raise their forecasts for inflation at the next meeting.

One alternative metric that has been singled out by Powell several times is PCE core services inflation excluding housing. This rose 0.42 percent in April, which amounts to a 5.2 percent annualized rate.  Powell would probably look at the last three month annualized rate, which comes out to 4.4 percent. The six month annualized rate is 4.9 percent, and the 12 month is 4.9 percent. As Nick Timiraos of the Wall Street Journal pointed out, this measure has basically gone sideways for several months.

The second point Timiraos makes is also worth highlighting. The disinflation in core goods prices has slowed, offsetting the leveling out of housing inflation. Many economists had been expecting outright deflation—meaning falling prices—in goods after last year’s huge increases. That has not happened.

In his speech earlier this week, Fed Governor Christopher Waller warned about this exact dynamic:

We’re hoping there will be a continued slowdown in goods price increases, but we aren’t seeing deflation in this category like we had pre-pandemic. A second concern is rent increases, which accounts for most of a category called housing services and is a sizable component of inflation. Lower rent increases from lease renewals last year are slowly making their way into the inflation data, but most recently, a rebound in the housing market is raising questions about how sustained those lower rent increases will be. While housing prices actually have less of a short-term effect on rents than one might think, this upturn in the housing market, which comes even with significantly higher mortgage rates, has raised questions about whether the benefit from the slowing in rent increases will last as long as we have been expecting.

The Median Is the Message

That is where inflation has been. Where is it going? For that we return to our old friends, median and trimmed mean inflation.

The Cleveland Fed calculates median PCE inflation each month, and we consider it a reasonably reliable guide to underlying inflationary forces that can allow for predictions about where inflation is likely to be in the months ahead. This was also up 0.4 percent for the month, exactly the same as headline and core. That’s a signal that inflation is no longer being pushed around by outlying factors but is now broad-based.

The only trend detectable in median PCE inflation is sideways. It has been 0.4 percent in five out of the last six months. The exception was in January, when it rose 0.6 percent. The message from this is that PCE inflation probably cannot be expected to move down much. It’s certainly not on a reliable path to two percent.

The Dallas Fed calculates 16 percent trimmed mean PCE inflation, which excludes eight percent on both ends of the basket of goods and services that goes into calculation of the PCE price index. This is another measure intended to reveal underlying inflation and provide a ground for forecasts of inflation’s trend. It is reported on an annualized basis for one month, six months, and 12 months. The one-month annualized figure for April was 4.4 percent, up from 3.8 percent in March and tied with February as the second-highest reading over the past six months. The six-month annualized trimmed mean is also 4.4 percent, exactly where it was in March. The 12-month annualized trimmed mean increased to 4.8 percent, up from 4.7 percent.

Like median inflation, trimmed mean is pointing toward inflation not coming down by much at all.

It is still possible that the Fed will decide to keep policy rates unchanged at its June meeting. A strong jobs report next Friday, however, could extinguish that possibility. The market is looking for around 180,000 jobs. Anything above 200,000 will create a lot of pressure for the Fed to hike. And even if the Fed does opt to hold rates unchanged, it is likely to send the message that this is a “skip” until the July meeting rather than the beginning of a long-term pause.

As Cleveland Federal Reserve President Loretta Mester said in an interview on Friday: “The data coming in this morning suggest we have more work to do.”

Breitbart Business Digest: Did We Shrink or Did We Grow? Confusion Reigns After GDP Revisions

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GDP Revised Up But GDI Says We’re Contracting

Did the economy grow or shrink in the first three months of the year?

The revised estimate of first-quarter economic performance from the Bureau of Economic Analysis (BEA) painted a confusing picture on Thursday. Gross Domestic Product (GDP), the most widely followed scorecard for the economy, was revised up to a 1.3 percent annual growth rate. Another measure of the economy, Gross Domestic Income (GDI), however, was reported as falling at a 2.3 percent annual rate.

Conceptually, these two measures are supposed to be equal. GDP measures the country’s economic activity by final expenditures plus changes in inventories. GDI measures the income generated by those expenditures. In practice, however, they frequently differ because they are constructed using different sources of information. Economists refer to the difference as the “statistical discrepancy.”

The discrepancy for the first quarter is unusually large. According to Harvard economist Jason Furman, it is the sixth largest difference since 2003.

One approach to resolving the difference is simply to average them together. This would produce a contraction of 0.5 percent in the first quarter. And, as Furman points out, the average of GDI and GDP has pointed to a contraction in four out of the last five quarters.

This would support the view that the economy has been in a recession for quite some time, a view that a large share of the public shares but is scoffed at by most economists. The reason the idea that we are in a recession seems so implausible is that consumer spending remains very strong and the labor market incredibly tight. We have added something like an average of 220,000 jobs each month this year, which would be highly unusual for an economy in recession. Consumption growth came in at a very strong 3.8 percent in the first quarter, also something that you would not expect to see in a shrinking economy.

Consumer Spending Even Stronger Than Thought

That personal consumption expenditure figure was revised up by a tenth of a point. The increased spending for the quarter was led by durable goods, where spending rose at a 16.4 percent seasonally adjusted annualized rate. This was driven by a huge leap in spending on motor vehicles and parts. After the supply-chain driven shortage of autos, there is still a lot of pent-up demand for cars and trucks.

A two-tenths upward revision to a gain of 2.5 percent in services spending also drove the overall upward revision in personal consumption spending and added two and a half points to GDP.

Much of this strength in consumer spending, however, was due to the unusual January surge. By most accounts, February and March were weaker months for the consumer. Personal consumption expenditures grew two percent in January and then just 0.1 percent in February, according to the BEA. In March, they did not grow at all.

The Chicago Fed National Activity Index Confirms Easter Surge

So, does that mean the economy is running out of steam? As we have been reporting, the doldrums of the end of winter appear to have been transitory. The Chicago Fed National Activity Index was released on Thursday, and it showed a pickup in economic growth in April. All four broad categories of economic activity improved in April, although two remained negative.

Production-related indicators contributed +0.15 to the index in April after being a drag in March. Manufacturing production rose one percent after falling 0.8 percent in March. The employment-related indicators also turned positive after subtracting from the March results.

On the other side of the ledger, the contribution from the personal consumption and housing category was negative but less so than in March. The contribution of sales, orders, and inventories was also less negative than in the previous month. It’s likely that the biggest drag there was from inventories.

Breitbart Business Digest: The Hunt for the Missing Recession

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The Economy Is Still Accelerating in May

The most heralded recession in U.S. history still is not showing up.

It was nearly a month ago that we pointed out that the economy appeared to be resurgent after turning sluggish in February and March. This garnered us quite a few skeptically cocked-eye brows. The inverted yield curve, the year-long slump in Leading Economic Indicators, and the Bloomberg consensus of economists all say the economy is headed for a recession. How can we say growth is surging?

To be sure, growth is not surging everywhere in the U.S. economy. U.S. trucking volumes, which have been falling for months, are down to prepandemic levels, according to a recent episode of the Odd Lots podcast. The manufacturing surveys from the regional Fed banks have been mostly in contraction territory since sometime last year, with the Richmond Fed reporting on Tuesday that its index had tumbled even further in May. After edging above the 50 point threshold dividing expansion from contraction in April, the S&P Global manufacturing purchasing managers index sank back down to the bog of contraction.

Manufacturing Is Slumping But Employment Still Strong

But we knew this was going to be a tough year for manufacturing. Consumer spending is finally shifting from goods to services as people travel more, dine out more, and return to something closer to a normal balance of household expenditures. The Federal Reserve has pretty much stopped reading the goods side of the inflation reports and is now very much focused on the services side.

Perhaps more extraordinarily, employment in the goods-producing sectors of the economy is proving to be remarkably strong. The Richmond Fed’s index for employment rose from minus five in March to zero in April to five in May. The gauge of expectations for employment also strengthened. In the April employment report, the goods side of the economy added 33,000 jobs, up from the 17,000 job contraction in March.

It’s not all good news for manufacturing jobs. The Philly Fed’s employment gauge was negative for the third straight month, suggesting shrinking payrolls. But even here, it was just 15 percent of firms who said they shrank payrolls, while seven percent said their payrolls grew. Over three out of four manufacturers reported payrolls unchanged. Again: not great but not really the picture of an economy that is on the verge of a recession.

Housing Rebounding and Services Surging

Meanwhile, the housing market continues to show strength. New home sales for April came in higher than expected. The weight of 6.4 percent interest rates on mortgages appears to be less of a drag than it was. This is probably not unrelated to the strength of the labor market. We’re at full employment, and there are still very few layoffs, which gives people the confidence to buy a home even at the higher prevailing rates.

The spending that is coming out of the goods sector is clearly flowing into the services sector. The S&P Global “flash” purchasing managers index (PMI) showed the fastest rate of expansion in a year. Job growth is accelerating in services thanks to surging demand, adding to inflationary pressures.

“The inflation picture is also changing. Whereas manufacturing prices spiked higher during the pandemic due to strong demand and deteriorating supply, it is now the service sector’s turn to be hiking prices amid resurgent demand and an inability to cope with order inflows due to a lack of capacity,” Chris Williamson, chief economist at S&P Global Market Intelligence, pointed out in his commentary. “Jobs growth has accelerated as service providers companies seek to meet demand, but this tightening labour market amid strong demand will be a concern as a fuel of further inflationary pressures.”

Some Unfashionable Monetarism

There is almost nothing as unfashionable in economics these days as watching the money supply. As we have pointed out, however, keeping an eye on the money supply has turned out to be a good economic guide when so many other indicators appear to have gone haywire.

The chart below shows the year-over-year percentage change in the money supply, as measured by M2. Growth in M2 peaked in early 2021, and you can see the steep decline in the rate of growth after the peak. But it is only when the blue line falls below the black line that the money supply actually starts shrinking. In other words, we were still growing the money supply until Thanksgiving of last year.

We think this goes a long way to explaining why inflation has remained stubbornly high and growth more robust than expected.

It also contains a warning. Take a look at the far right of the chart. The money supply is still shrinking, but the contraction is no longer accelerating. In fact, the decline of M2 has been steady since the beginning of April—which is when the economy began to rebound.

The economy is still most likely headed for a recession. Our reason for expecting this is quite simple: a mild recession is likely the minimum it will take to squeeze inflation back down to two percent. But we increasingly think the recession is likely to show up quite late, probably not until sometime next year.