A quick chart six-pack

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.