The US economy’s slowing: the Fed wants to be sure it won’t stall
The American economy is either normalising and headed for a soft landing, or for a crash. Inflation is either tamed, or a threat to society. Shares are so overpriced that a major sell-off is around the corner, or so underpriced, relative to future earnings, as to be ready for an upward surge. Consumers are either tapped out, or merely becoming picky about prices and using their record wealth for expensive concert tickets, to descend on Europe in hordes that prompt jammed cities to impose taxes to keep them away, and legally bet $35 billion on NFL games this season. The jobs market is either in a healthier balance than it has been for a long time, or increasingly unable to provide enough job opportunities for the existing workforce and new entrants.
Even economists who agree on the likely course of the economy can’t agree on the policy prescription. Consider three of the best. Both Barack Obama’s chief economist, Jason Furman, and Bill Clinton’s Treasury secretary, Larry Summers, agree that the economy is slowing. But Furman sees a soft landing ahead if the Fed cuts interest rates, while Summers told a Council on Foreign Relations confab: “Given the magnitude of our fiscal challenges” — debt and deficits much too high in lay speak — “there’s a bit of excessive optimism about inflation” and not a great deal of room for reductions in interest rates. Wrong, chimes in Austan Goolsbee, the talented president of the Federal Reserve Bank of Chicago. He thinks rates must come down to a level consistent with an economy that is not overheating, and a “job market [that] is … flashing warning lights”.
Differences of opinions among economists are no surprise, given the competing signals that the data is sending. It certainly seems plausible to conclude — as Jerome Powell, the Fed chairman has — that the economy is slowing. The latest Fed survey shows that economic activity was flat or declining in nine of its 12 districts, up from five last month, while it grew in three, and only “slightly”. The Institute of Supply Management manufacturing index for August came in at 47.2 per cent. Below 50 indicates a slowdown. Low-income consumers are hurting, eschewing clothes purchases and concentrating on foods. The credit card delinquency rate is at its highest level in almost 13 years. But the economy is growing at a satisfactory 2 per cent rate, according to the Atlanta Federal Reserve Bank. Household wealth rose by $5 trillion in the first quarter, to a record $161 trillion, as rising asset prices — shares and houses — drove consumer confidence to a six-month high. The service sector has moved from decline to growth. Imports are surging, suggesting that the economy cannot produce enough stuff to meet consumers’ demand.
Inflation indicators are equally confusing. The Fed’s preferred measure of inflation did sit at 2.6 per cent in July, reasonably close to its 2 per cent target. But as the Lindsey Group reports, every one of the many other sensible measures of inflation is running much hotter, which may explain continued consumer unhappiness as they confront the real world in their supermarkets, rent and insurance bills, and notice that prices are still rising and remain some 20 per cent higher than when President Trump prowled the corridors of the White House.
Nevertheless, Powell felt sufficiently confident that the Fed’s interest-rate medicine is bringing down the inflation fever to all-but promise a cut in its benchmark interest rate this month. Also, keep in mind that his mandate to bring down inflation is accompanied by one requiring him to maintain full employment. That second mandate just might justify a rate cut given Goolsbee’s “warning lights”.
The number of job openings was once double the number of job seekers. Now the ratio of openings to seekers is about 1:1, the lowest in more than three years. As recently as April 2022, 3 per cent of workers told their employers to take this job and stuff it, confident that the grass was greener elsewhere. In July only a historically low 2.1 per cent took that chance, despite surveys showing a decline in satisfaction with pay and benefits. Bidding wars for workers are no more: pay offers for jobs in most sectors are down, in some cases by tens of thousands of dollars. The government reported that 142,000 jobs were created in August, and also revised the June and July estimates down by a total of 86,000 jobs, almost 30 per cent, continuing major revisions that make initial estimates a pillar of sand on which to build policy.
Powell announced last month that his team, driven as always by the data, discerns support for a cut in its benchmark interest rate. A pilot who has told his trusting passengers they are headed for a soft landing, and then suddenly pulls back on the plane’s joystick would create a panic. Fed chairs don’t like to do that. Look for a rate cut and a denial that it can be taken as a harbinger.
Irwin Stelzer is a business adviser
