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Here are six charts that are worth a few minutes of your time, along with come quick commentary:
Chart #1
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Chart #1 comes from the Co-Star Group, where they keep track of the many thousands of sales of commercial property from across the country. Their repeat-sale index (the best kind) of commercial property prices weighted according to their value (bigger, more expensive properties get more weight than smaller properties) shows an impressive decline of 15.8% from a July '22 high. It's almost as if the big runup in prices in the early part of the Covid period has been reversed. This lends weight to the view that higher interest rates have had a significant (i.e., disinflationary) impact on important segments of the economy, and further suggests some of the inflation that was created may actually reverse once the dust settles.
Chart #2
Chart #2 updates the level of bank reserves through mid-January. Bank reserves are an important measure of the liquidity in the banking system, since they are functionally equivalent to 3-mo. T-bills and they count as bank capital. The message: banks are still flush with liquidity. The Fed is not starving the system for liquidity as it did in prior tightening episodes. This is a big reason why the Fed has been able to lower inflation without producing recessionary conditions.
Chart #3
Chart #3 shows the 6-mo. annualized growth rate of the Personal Consumption Deflators, which are generally considered to be a better measure of inflation than the CPI (because the weights of the components are adjusted dynamically as consumer spending patterns change). The Fed's favorite indicator is the PCE Core deflator, shown here in red. Both measures are at or below the Fed's 2% target (the core measure is 1.9%). Mission accomplished!
Chart #4
Chart #4 shows the 3 major components of the PCE deflator. Note that the only component still reflecting rising prices is the service sector, which is dominated by wages. Durable and non-durable goods prices have been flat to down for the past 18 months! Bonus point: if you assume that service sector prices are a proxy for average wages, then 1 hour of work today buys 3.2 times more durable goods than it did in 1995. Did I mention that flat-screen TVs are super-cheap these days?
Chart #5
Chart #5 shows the level of capital goods orders in both nominal and inflation-adjusted terms. Capital goods are the seed corn of future productivity, since they consist of new plant and equipment, machinery, computers, etc.—all the stuff which helps people make more and better things. In other words, capital goods represent business investment in the future. This is not a pretty picture, unfortunately. In real terms, capital goods spending has been declining for the past quarter century. This is one reason why economic growth has been sub-par since 2007.
Chart #6
I grabbed Chart #6 from Steve Moore's Hotline (you can subscribe to it for free here, and I strongly recommend you read it every weekday). What it shows is that one reason the economy registered strong growth last year is because government spending (green bars) increased much more than personal consumption. I would much prefer seeing all that spending coming from the private sector (in the form of capital goods, for example), as that would give me a reason to expect a strong and growing economy in the years to come.
13 comments:
If Joey B were sentient he'd love it!
I wonder if the decline in capital goods orders is because R&D gets expensed rather than capitalized. There has been an enormous increase in software in the economy over the past generation. Software has relatively little capex (workstations and data centers), but a lot of R&D (salaries).
I take issue with the comment "Mission Accomplished" after the Deflator chart. As Powell himself said, it's an average 2% over a time period. Having an instantaneous reading of 2% is misleading. Of course, this is intellectually slippery as one gets to define the time period with which to average, but the point is inflation was so high for so long that people need relief. Are rents going down? Food down? Wages up enough to cover their increased expenses? No.
Mission accomplished will occur when the M2 supply reaches the 6% trendline....IMHO.
The two items that concern me are 1. Durable goods/capital expenditures (charts 4 and 5) and 2. Debt.
They say "services are doing great" and "GDP is doing great" to offset these concerns. I am still concerned.
I wonder if something has to "break" in order to get past this entire business cycle.
Thanks for the post.
Yeah, the public sector is crowding out the private sector. Raising taxes to accomplish a reduction in the deficit would be counter-productive. A lot of this debt is short-term. Combine this with the factor with the constant roll-over of some of the long-term debt and it becomes obvious that the burden of higher interest rates will be compounded. The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.
Chart #4 would seem to indicate that while the actual prices of goods are flat-to-slightly-negative, any deflation in price is being more than offset by continually increasing service sector costs. Put another way - while prices are separated out in that graph, very few goods are independent of a service sector cost and so overall, the consumer continues to see prices rise. This is the truth that matches reality and so while the Biden administration (and Fed for that matter) may be touting a 'soft landing', the consumer is continuing to see prices rise...and it's starting to hurt most consumers (flat-screen TVs not withstanding).
@Adam Krueger do you really expect to see a decrease in service costs? With the exception of 2008, it's been over 30 years since that has happened (I don't know, but I assume many more years than that).
Improvements in technology, amongst other things, allow for cheaper widget production pretty directly. What would be your catalyst or justification for lower service costs?
@Downtown Adam Brown, absolutely no, I do not expect that, and for the reasons you cited. I'm not arguing that service costs should go down. I'm arguing that the costs of goods/widgets is not independent of service costs and so while the cost of the actual goods has been relatively flat of late, there is no hope that prices remain flat, if the service costs associated with the goods continue to rise at an aggressive pace.
Personally what I'd like to see is the service costs rising less aggressively, but there is no hope for them going down.
OT but fun:
"Analysts estimate aggregate S&P 500 earnings to grow 6.1% year-over-year in Q4, compared with an expected rise of 4.7% at the end of the quarter, per LSEG."
The best-run large organizations on earth are publicly held US companies.
The are making more money even in this environment, and with an anti-business US government.
Powell killed any chance of a rate cut in March.
Trulflation rate down to 1.40% annual inflation rate - seems to lead the PCE inflation rate by 3-4 months. Combined with impact of the delayed housing cost deflation coming up per your earlier posts, there should be some very good CPI and PCE inflation numbers upcoming in the next 2-3 months.
Question on the PCE inflation number - does it calculate housing in the same delayed manner.
Thanks for your wonderful posts - always my first read once they are posted!
Tom
@Adam Krueger, all good points my man. That's not a comparison I've thought a lot about. I wonder what the long-term correlation is between the prices of goods and services, and what it might be today. I bet a mean reversion analysis would be interesting.
And to help my brain make sense of that correlation...more expensive services would pull up the price of goods how?
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