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A quick update to focus on some market-moving stats released today.
Chart #1
Chart #1 shows the results of the March survey of purchasing managers in the service sector (by far the largest part of the economy). It is consistent with the view I've maintained for well over a year, which is that the economy continues to grow at a non-spectacular pace.
Chart #2
Chart #2 shows that the number of firms that report paying higher prices continues to decline. This same statistic surprised to the upside in January, thus fueling speculation that maybe the Fed was right to move slowly on rate reductions. But as often happens, sudden jerks in monthly numbers are just flukes and subsequently reversed. Inflation pressures remain quite subdued; disinflation is still in place.
On balance, the picture is one of an economy that continues to grow while inflation continues to subside. The market, unfortunately, continues to harbor a long-ingrained reflex that says that in order for inflation to decline, the economy needs to weaken. Not so. Inflation is not growth-friendly. Low and declining inflation and moderate to strong growth can coexist indefinitely if the Fed is acting correctly.
Nothing in these recent stats argues for the Fed to refrain from lowering short-term interest rates.
11 comments:
I really enjoy your posts. Thanks for all the hard work and breaking it down for us novices.
Thank you Scott.
This will be good news for Real Estate coming shortly - As an MAI and long time RE Developer the appraisal is generally figured by adding 1% to the 10 yr T Note.
The lower the rate the higher the RE value.
Scott, How do you square your view on inflation with the rising CRB Index right now?
Yeah, this seems about right IMHO.
How the private sector keeps growing with endless government entanglements...is a tribute to the ingenuity of man.
Some sort of 10-year hiatus on all property zoning would probably set off an economic boom to last for a generation.
Gerry, re "rising CRB Index." I suppose you're referring to the crb index that Steve Moore has featured in his "Hotline." If so, my response is that the index he refers to includes a variety of things (e.g, silver, gold, uranium) that have rise strongly in recent months but do not figure into the cost of making things. The CRB indices I follow do not include those items; they mainly consist of mundane things such as (in the Raw Industrials Index) hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber. The Raw Industrials index has ticked up recently, but remains lower relative to year-ago levels.
Nevertheless, it is legitimate to wonder why gold has gone up (now at a new all-time high), and what that tells us (the WSJ asked the same question in an Op-Ed today). I don't have a good answer for that. Gold sometimes moves up ahead of a rise in inflation, but not always, just as it doesn't always decline in advance of a disinflation. It could be driven by geopolitical concerns unrelated to monetary policy or inflation. Over the years, I've leaned that gold is very often inscrutable.
Gold is a last save heaven, more reliable than USD. There is now a lot of a hype of war like stories.
Contrary to most economists, banks don't lend deposits.
See: Banks Are Intermediaries of Loanable Funds | Cato Institute
No, deposits are the result of lending/investing. Those economists simply can't see the forest through the trees.
See: Recent developments in bank deposits
https://fredblog.stlouisfed.org/2024/03/recent-developments-in-bank-deposits/?utm_medium=email&utm_campaign=202404%20Research%20Newsletter&utm_content=202404%20Research%20Newsletter+CID_f08590b383a14e53b8ab9ff10b084eec&utm_source=Research%20newsletter&utm_term=away%20from%20less-liquid%20savings
That's the opposite trend in secular stagnation.
Scott a great article.
However it would be nice to see you cover the issue of "sticky" inflation data now, for the past 3 months. "owners equivalent rent" was supposed to pull the inflation rate down sharply. Can you explain why it has not?
re "sticky inflation." The Owners equivalent rent component of the CPI is coming down very slowly. It will take 6-7 more months before it reaches its maximum reduction from its previous highs. Recall that OER tracks the year over year change in housing prices from 18 months ago.
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