WILL FOOD FOR THOUGHT FEED THE FED WHILE PEOPLE TRY TO FEED THEIR FAMILIES?

Much attention is being paid to the upcoming meeting of the FOMC.  Estimates, statements and forecasts including (1) the latest gross domestic product (GDP) and real personal consumption expenditures estimates from the US Bureau of Economic Analysis (BEA), (2) retail sales estimates from the Census Bureau, (3) second quarter employment estimates from the US Bureau of Labor Statistics (BLS), (4) increased withdrawals from 401(k) savings plans, (5) increases in credit card debt, and (6) insights from a professor offer food for thought for the Fed (the Federal Reserve Bank).  The Federal Open Market Committee (FOMC) of the Fed will decide on its target for the federal funds rate, a short-term bank-to-bank lending rate, this week.  The post COVID-19-shutdown economic expansion in the United States may be rapidly running out of steam, if it has not already.  Although inflation needed to be contained, overly tight monetary policy could exacerbate the economic struggles of millions of people in the US, as job losses and falling real GDP could ensue.

A look at Table 1 in the January 26, 2023 GDP advance estimate report from the BEA reveals that personal consumption spending grew in the fourth quarter of 2022 but at a slower rate than in the third quarter of 2022.  The same is also true for state and local government purchases, both state and local ‘consumption’ and ‘investment’ by the state and local government sectors.

Constant-dollar private investment in physical capital, meaning the production of new buildings, new machines, and new unsold inventories; rose for the first time since the first quarter after relatively large decreases in the second and third quarters of 2022, but by a relatively small amount.  Table 2 shows that the level of real private investment in the fourth quarter of 2022 on a seasonally adjusted annualized basis was below its level from the first quarter of last year and the fourth quarter of 2021.

Fourth quarter US real GDP may have gotten a boost from international trade.  Although exports fell indicating that the US produced fewer goods for distribution to other countries, the US imported fewer goods from other countries.  Despite the fact that US net exports overall reduced the estimated value of US GDP in the fourth quarter, they reduced the value by less than in the third quarter of 2022.  (As an aside, both imports and exports of services increased somewhat between the third and fourth quarters of 2022.)

Real federal government purchases accelerated somewhat between the third quarter and the fourth quarter of last year.  Of the relatively large aggregated categories of GDP goods in the January 26 BEA report, real federal government purchases was one of relatively few exhibiting such an acceleration, given that the deceleration is somewhat broad-based.

The January 26 report from the BEA will be followed by possible revisions in the future.  The BEA may not have had all of the information from its January 27 personal consumption expenditures report when it released its GDP report the day before.  Information in its Personal Income and Outlays report shows that US personal consumption expenditures fell both in November and December of 2022.  If I recall correctly, then information on CNBC on January 27 stated that the December 2022 decrease was larger than expected.  The January 27 BEA report estimates imply that in real terms, the November and December decreases were larger than in current dollar terms or nominal terms.  Will this apparent softness in consumption spending impact subsequent estimates of real GDP?

Seasonally adjusted US retail sales estimates from the Census Bureau have also been disappointing lately.  It looks like both November 2022 and December 2022 may have been down compared with the previous month by at least one percentage point, and that the estimates have fallen in four out of the last six months.  Will retail sales estimates impact estimates of personal consumption spending and GDP?

Large technology companies have been announcing layoffs.  Although the U3 unemployment rate in the US remains relatively very low, will job separations unfortunately begin to increase?  Recall that unemployment is frequently, if not usually, considered a lagging indicator. 

Further, I don’t think that people paid much attention to the Business Employment Dynamics Summary release on January 25, 2023 from the US Bureau of Labor Statistics (BLS) showing gross employment increases due to the expansion and/or opening of establishments and gross employment reductions due to shrinking/or and closing establishments.  Is my reading and understanding of the BLS release correct that looking back at the second quarter of 2022, net private sector employment in the US fell by roughly 287,000 jobs?  Is there at least one other category of private sector employment not covered in this release, or does this mean that we can automatically conclude that total private sector employment in the US decreased in the second quarter of 2022?  Does that also mean that barring a sufficiently large increase in public sector employment during that period, total US employment fell during 2022q2?  Readers may want to note that not all information regarding establishments going out of business may have been available for the second quarter of 2022.  For more, readers can consult the BLS website listed in the References section below.  Given that US real GDP is estimated to have fallen in the first quarter and the second quarter of 2022, will the National Bureau of Economic Analysis later determine that the United States economy was in a recession during at least part of this period?

The US yield curve has been largely downward sloping for months.  Michael D. Bauer and Thomas M. Mertens (2018) found that at the time of their study, a downward sloping yield curve or an inverted yield curve comprised of the one-year interest rate and the ten-year interest rate (both for US Treasury debt and probably using monthly data) preceded each US recession in recent decades.  Further, the inverted yield gap gave only one false positive in their study where a US recession did not ensue within two years.

Additionally, Professor Jeremy Siegel on CNBC on January 27 and others have been noting that the US money supply has been falling relatively rapidly (or at least growing at the slowest rate in decades). While this appears to be helping to reduce inflation, will the Fed’s tightening by raising interest rates like the federal funds rate and by removing money from circulation wind up causing a recession?  Professor Siegel also pointed out that by some measures, US inflation is already below zero, meaning deflation or prices on average falling.  I think that on an earlier CNBC appearance, Professor Siegel made a point to the effect that growth in wages and salaries in the current economy may not be harmful because employees’ wages and salaries failed to keep pace with inflation.

Moreover, an NPR story by Scott Horsley (2023) informs that according to Bankrate, about 46 per cent of all credit card holders do not pay off their balance in full each month, an increase of roughly 7 per cent since last year.  The article also states that cardholders now place regular daily expenses on their cards, and 37 per cent of those earning at least $100,000 annually are still carrying a balance from month to month.  Similarly, Alexandria White (2022) of CNBC reports that according to the New York Fed, credit card debt in the United States reached an all-time peak in the fourth quarter of 2019 and that falling into delinquency was persistently increasing since 2016.  (Complete data later than 2019 may not be presently available.)

Even further, according to a CBS News report by Aimee Picchi (2022), Vanguard announced that 2022 was the year with the most hardship withdrawals from 401(k) savings accounts.  Although the percentage is relatively small, this helps to show how households have had difficulty keeping up with inflation, which at least some believe was partly caused by the Fed’s expansionary monetary policy before its relatively recent tightening. 

The FOMC of the Fed is in an unenviable position.  With its dual mandate, the Fed must try to achieve low inflation and maximum employment.  Based on signs of (1) possible economic weakness and (2) inflation perhaps coming under control, I would probably prefer to see the FOMC announce no change in the federal funds rate and take a ‘wait and see’ approach.  If inflation picks up again, the FOMC could resume tightening to control inflation.  However, further economic weakness and inflation seemingly under control could be followed by rate reductions as appropriate to stimulate employment and GDP growth.  In fact, according to a Bloomberg (2023) piece that appeared in the Atlanta Journal-Constitution, people are predicting that US real GDP will shrink in both the second and third quarters of this year, 2023, and that the unemployment rate will rise by approximately 1.5 percentage points.  If these predictions are accurate, then the FOMC may face pressure to cut its target for the federal funds rate.

Will the Fed be fed by the food for thought from recent economic data releases and insights from Professor Siegel and others?  Families will try to put food on the table and cope with other expenses while we wait for the Fed’s decision.

 

 

Please realize that subsequent data revisions may change the analysis in this blog entry.  Constructive comments are welcome at my Twitter account (@HarrisonCHartm1).  Please accept my apology for any misstatements, misunderstandings, and/or confusion.

 

REFERENCES AND FURTHER READING

Bauer, M. D. and Mertens, T. M.  (2018)  “Economic Forecasts with the Yield Curve.”  FRBSF Economic Letter, March 5, 2018, available online at https://www.frbsf.org/economic-research/publications/economic-letter/2018/march/economic-forecasts-with-yield-curve/

https://www.bea.gov/news/2023/gross-domestic-product-fourth-quarter-and-year-2022-advance-estimate

https://www.bea.gov/news/2023/personal-income-and-outlays-december-2022

Bloomberg.  (2023)  “In Survey, Economists Predict U.S. Downturn During Next 2 Quarters.”  Atlanta Journal-Constitution, January 29, 2023, p. B8.

https://www.bls.gov/news.release/cewbd.nr0.htm

https://www.census.gov/retail/sales.html

https://www.cnbc.com/video/2023/01/27/fed-needs-to-do-25-basis-point-hikes-50-would-be-a-disaster-says-whartons-jeremy-siegel.html

Horsley, S.  (2023)  “Americans Are Piling Up Credit Card Debt – and It Could Prove Very Costly.” NPR, January 11, 2023, available online at https://www.npr.org/2023/01/11/1148122555/credit-card-debt-inflation-interest-rate-payments-federal-reserve

Picchi, A.  (2022)  “Hardship Withdrawals from 401(k) Plans Hit Record High.”  CBS News, December 13, 2022, available online at https://www.cbsnews.com/news/401k-hardship-withdrawals-retirement/

White, A.  (2022)  “Credit Card Debt in the U.S. Hits All-Time High of $930 Billion – Here’s How to Tackle Yours with a Balance Transfer.”  Last revised December 20, 2022, available online at https://www.cnbc.com/select/us-credit-card-debt-hits-all-time-high/