by tyler | Apr 28, 2023 | CNN, economy
Compensation for US workers picked up in the first three months of the year, showing that a major source of inflationary pressure persists and cementing the path for an interest rate hike at the Federal Reserve’s meeting next week.
The Employment Cost Index, released Friday by the Bureau of Labor Statistics, showed that workers were paid 1.2% more in wages and benefits in the first quarter from the prior three-month period. That’s up from analysts’ expectations of 1.1%.
The report is closely watched by officials at the Fed because of the role that high labor costs can play in feeding inflation. When businesses struggle to hire and retain workers — an issue many companies are still dealing with — they beef up compensation, then those costs are typically passed on to consumers.
Wages and salaries paid to workers rose 5.1% in March from a year earlier, up from the 5% annual rise in March 2022. Service-providing businesses contended with the highest labor costs in the first quarter.
Still, compensation gains have slowed from their highest level on record in the first half of 2022. That coincides with a gradual cooling in average hourly earnings, which grew 4.2% in March from a year earlier, down from the 5.9% rise in March 2022.
The ECI reading shows the Fed that some underlying pressures on consumer prices remain. Economists expect the Fed to raise interest rates by a quarter point at its meeting next week.
“The Fed needs a pretty substantial increase in unemployment to reduce overall aggregate demand, which would then lead to layoffs, less competition for labor, and lower wages,” said Thomas Simons, a senior economist at Jefferies. “Short of that, I don’t really see how we would get a quick return to a lower wage trajectory, especially for these lower skilled jobs.”
Simons said a weakened jobs market, including softer wage growth, would be necessary for “the consumer to retrench and break the inflation cycle.”
The unemployment rate stood at a half-century low of 3.5% in March, though other signs have shown that the labor market is losing momentum. Employers added 236,000 jobs in March, the smallest monthly gain since December 2020, and job openings fell below 10 million in February for the first time since May 2021. However, there were still about 1.7 jobs for every unemployed person seeking work in February.
The labor market’s effects on consumer prices varies by industry, with service-providing businesses still a source of inflationary pressures while other businesses cut back as demand slows.
“The industries that experienced explosive growth during the pandemic are now cutting hours, jobs and that’s lowering wage pressures,” said Julia Pollak, chief economist at ZipRecruiter. She added that labor costs have been the highest for employers in low-skilled industries, mostly in the services sector, because of the difficulty hiring and retaining workers.
While wages paid to employees have shown some early signs of slowing, others still struggle with those higher labor costs while trying to meet demand.
“An insurance contact in Louisville reported rising wages cutting into their profit margins, and a home building contact in Little Rock reported margins being down 15-20% due to increased wages for employees,” the Fed’s most recent Beige Book report said.
by tyler | Apr 27, 2023 | CNN, economy
US economic growth slowed to an annualized and seasonally adjusted rate of 1.1% in the first quarter of this year, as businesses rebalanced their inventories and pulled back on spending amid punishing rate hikes from the Federal Reserve.
The increase in gross domestic product — the broadest measure of economic activity — was far below economists’ expectations of 2% and represents a more moderate pace compared to the previous two quarters, according to data released Thursday by the Department of Commerce.
The January-to-March period was also marked in its later weeks by mounting fears that a meltdown in the banking sector and a pending debt ceiling crisis could trigger a recession.
The GDP report affirms that the US economy has lost momentum in recent months, with many economists also forecasting a recession later in the year. The Federal Reserve has been striving for months to cool the economy, which has remained strong despite nine straight rate hikes.
“The slightly cooler than expected GDP report will not prevent the Fed from making another quarter percentage point rate hike at its decision next Wednesday,” said Bill Adams, chief economist for Comerica Bank. “The Fed wants the economy to run below potential for a while to allow supply and demand to get into better balance.”
Consumer spending, which accounts for more than two-thirds of economic output, contributed the most to the first quarter’s growth as Americans continued to spend robustly on goods and services, especially in restaurants and bars.
Spending was stronger compared with the previous quarter, led by purchases of cars and vehicle parts and health care services. Meanwhile, a rise in imports and a sharp decline inventories dragged on growth.
However, high inflation and the Federal Reserve’s yearlong rate-hiking campaign weighed on business spending, which fell in the beginning of the year. Residential and nonresidential investment declined for the fourth consecutive quarter.
Robust economic activity in January helped to drive the overall growth in the first quarter, economists said.
In January, consumer spending advanced a solid 2% and employers added close to half a million jobs. Spending and payroll growth cooled in the following months as inflation, higher borrowing costs, and colder weather weighed on output. The 236,000 jobs added in March was the smallest monthly gain in more than two years and household spending grew by a modest 0.2% in February.
Spending on goods and services in the January-through-March period was the strongest since the second quarter of 2021.
But spending is expected to fizzle out in the coming months because that strength earlier in the year was due to higher credit card usage, a drawdown in savings, warmer weather, and “increased reliance on sputtering state and local stimulus programs,” said Lindsey Piegza, chief economist at Stifel Financial.
“Instead of the consumer continuing to pull back, we saw a lot of that temporary support hold up spending in the first quarter or, as I like to describe it, the consumers’ last stand,” Piegza said. “Most of those supports will not prove lasting, so it’s likely that growth will continue to slow under the weight of elevated inflation and as the Federal Reserve continues to raise rates.”
Business spending, which is highly sensitive to the direction of the economy, remained in contraction territory in the first quarter as companies cut back on equipment, and residential fixed-investment firms continued to struggle.
“This data, while firmly in the rearview mirror, illustrates that American firms are growing increasingly concerned regarding the sustainability of the current business cycle as the lagged impact of rate hikes, elevated inflation and tighter lending which is now evident inside the real economy will all combine to finally cause the consumer to capitulate later this year,” Joseph Brusuelas, chief economist at RSM US, wrote in an analyst note.
Business investments are often made through credit, so higher borrowing costs coupled with slowing economic activity can curb those investments, but that also varies depending on the size of a firm, said Eugenio Aleman, chief economist at Raymond James.
“Small businesses, which typically use their own cash flows instead of borrowing, have continued to invest in the economy, so nonresidential fixed investments have continued to expand, but their contribution to GDP growth is very small,” Aleman said.
Residential fixed investment, which includes construction of housing units, dragged on growth in the first quarter as rising interest rates continued to take a toll on the interest rate-sensitive housing market, despite a brief reprieve from rising mortgage rates earlier in the year.
Economists, including those at the Federal Reserve, expect the US economy to tilt into a recession later in the year. Aleman said that he expects the economy to grow by an annual rate of 0.8% in the second quarter, then to enter a mild recession in the third quarter, mostly due to the effects of tighter monetary policy.
Some businesses remain optimistic in their outlooks for the rest of the year.
Adrian LaTrace, chief executive of Boyd Industries, a manufacturer of dental equipment based in Clearwater, Florida, said that activity in the first three months of year wasn’t as strong as last year, and instead resembled pre-pandemic times. Still, he said sales for the quarter were up about 10% and that quotes for equipment orders have been strong. He said part of that was likely due to deferred patient loads that dental offices are chipping away at, helping sustain activity.
“I don’t see sales being affected significantly in any unfavorable way the rest of the year, and we are dealing with input cost pressures related to materials, which have normalized a bit, but the biggest challenge I see is on the labor force side,” LaTrace said.
LaTrace said his company has struggled to hire workers across the board, which he said has held back the company’s expansion.
“If we can get even more rank-and-file employees for the factory with certain skill sets and for the sales and customer service side, I have no doubts that we can continue to grow the company and perhaps even at a faster rate than what we’re growing presently,” LaTrace added.
by tyler | Apr 25, 2023 | CNN, economy
US consumer confidence worsened in April as Americans become more pessimistic about the job market.
The Conference Board’s Consumer Confidence Index, which measures attitudes toward the economy and the job market, fell to 101.3 in April, down from 104 in March and marking the lowest level since July 2022. The business group’s measure of economic expectations fell in April and has remained below a threshold “associated with a recession within the next year” for every month since February 2022, with the exception of an uptick in December.
Consumer attitudes have held steady since the turbulence in the banking industry last month, but high inflation and economic uncertainty have continued to weigh on consumers.
“Consumers became more pessimistic about the outlook for both business conditions and labor markets,” said Ataman Ozyildirim, senior director of economics at The Conference Board, in a statement accompanying the data. “Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months. They also expect fewer jobs to be available over the short term.”
That matches government figures showing the labor market has begun to show some cracks. Employers added 236,000 jobs in March, the smallest gain in two years, and job openings fell below 10 million for the first time since May 2021. Large companies have continued to announce layoffs, such as 3M, which announced on Tuesday that it is cutting 6,000 jobs.
The April survey showed that worries about the economy slipping into a recession persisted last month. Economists, including those at the Federal Reserve, expect a recession later in the year as the Fed’s rate hikes take a deeper hold. The share of consumers expecting more jobs to be available fell to 12.5% in April, down from 15.5% in March, while the share who anticipate fewer jobs increased to 21% from 20.5% during the same period.
“Expectations signal weaker consumption, but not a disaster,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in an analyst note.
Household spending rose at a slower pace in February compared with a 2% jump in January. The Department of Commerce will release consumer spending figures for March on Friday.
The University of Michigan’s preliminary consumer-sentiment reading for April also showed that consumers were more affected by economic fears and high inflation than the failures of Silicon Valley Bank and Signature Bank.
by tyler | Apr 20, 2023 | CNN, economy
The United States will safeguard its national security, even if it comes at an economic cost to its relationship with China, US Treasury Secretary Janet Yellen said on Thursday.
The federal government will address any national security concerns through export controls, sanctions and by restricting foreign investments, Yellen said.
In a speech at the Johns Hopkins School of Advanced International Studies, Yellen outlined three objectives of the US relationship with China: prioritizing national security and defending human rights, promoting a healthy and fair economic relationship with China and cooperating with China to address global issues.
Yellen’s remarks come at a time when tensions with China remain high, a few months after a Chinese spy balloon flew across the continental United States. Beijing’s role on the world stage, especially when it comes to the war in Ukraine, has also been a growing concern for US officials. The Biden administration is also expected to lay out restrictions on American companies investing in China, which would escalate tensions further.
Economic policymakers at this month’s World Bank Spring Meetings also expressed concerns at China’s lending practices. A study published last month showed that China spent $240 billion to bail out 22 countries between 2008 and 2021, including Argentina, Pakistan, Kenya and Turkey. That’s in addition to the loans China has given to countries in Asia, Africa and Europe to fund infrastructure megaprojects.
TikTok, which is owned by a Beijing-based parent company, has also come under scrutiny for its ties with China as governments around the world have banned the social media app for national security reasons, though there still isn’t any public evidence that the Chinese government has spied on people through TikTok.
And while Yellen has criticized China in the past, her speech on Thursday took on a more hawkish tone by underscoring that the United States is not afraid to take action when it comes to national security.
“Even though these policies may have economic impacts, they are driven by straightforward national security considerations,” said Yellen, a former Federal Reserve Chair. “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”
Previously, Yellen has called for the United States to undo some tariffs introduced under former President Donald Trump, in order to ease inflationary pressure on businesses and families.
This story is developing and will be updated.
by tyler | Apr 19, 2023 | CNN, economy
Businesses across the country said banks have tightened their lending standards since last month’s banking crisis, according to an economic survey from the Federal Reserve released Wednesday.
Overall economic activity held steady in recent weeks, with nine of the central bank’s 12 regional districts reporting no change, or slight growth; and three others reporting modest gains. The report captures the effects of last month’s banking turbulence on businesses and banks themselves.
“Lending volumes and loan demand generally declined across consumer and business loan types,” the Fed said in its periodic compilation of business survey responses, known as the Beige Book. “Several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity,” according to the economic summary.
Consumer spending, manufacturing activity and construction activity were either flat or down slightly this spring, businesses said. Tourism activity was a bright spot in recent weeks, with several firms reporting a notable pick-up.
Conditions in the jobs market improved; fewer businesses reported mass layoffs and more businesses said it has become easier to hire and that employee retention has improved. That coincides with government figures showing that the US labor market has lost some steam recently, though it remains strong. Some firms also said that the pace of price increases has slowed.
A tightening in credit conditions was perhaps the biggest change reflected in the latest Beige Book report. The collapse of Silicon Valley Bank and Signature Bank underpinned the worst banking crisis since the Great Recession, prompting swift action from regulators to quell fears of additional bank runs. While those concerns have largely subsided, many economists feared it would make it harder to access credit.
“Such a tightening in financial conditions would work in the same direction as rate tightening,” Fed Chair Jerome Powell said at a news conference last month after officials voted to raise the central bank’s benchmark lending rate by a quarter point, the ninth rate hike in a row.
Several small and midsize banks in the New York Fed’s district reported “widespread declines in loan demand across all loan segments.” Several bankers in the Cleveland Fed’s district said that customers have reached out to ask if their deposits were safe.
Other banks in the Richmond Fed’s district reported higher inflows of deposits following the collapse of Silicon Valley Bank, the report said. One large bank in the Chicago Fed’s district that also saw new deposits since the banking crisis said it was “uncertain whether the deposits would stick once there was more clarity about the health of smaller banks.”
One bank in the Memphis area also said that it saw a pickup in deposits from residents who had deposits “in distressed West Coast banks.”
In the San Francisco Fed’s district, where SVB was headquartered before it was taken over, accessing credit became notably tough. That uncertainty, coupled with higher borrowing costs, meant that planned projects across industries were either delayed or canceled, according to the report.
“Lending standards tightened notably, and several depository institutions opted to reduce loan volumes, especially for new clients, despite reporting ample liquidity,” the report said.
Other data shows a similar sentiment among consumers. The New York Fed’s latest Survey of Consumer Expectations showed that the share of respondents reporting that it’s harder to obtain credit from a year earlier climbed to its highest level on records dating back to 2013.
Still, consumer sentiment overall remains largely unaffected by March’s banking tumult, according to the University of Michigan’s latest reading.
The Federal Reserve releases a quarterly survey of senior loan officers from up to 80 large domestic banks and 24 US branches of foreign banks, which will offer additional insight into how credit conditions have shaped up since the meltdown in the banking sector. The survey for the first quarter, which would capture last month’s banking stresses, will be released in May.
by tyler | Apr 18, 2023 | CNN, economy
The post-pandemic US economy has tortured economists and defied expectations.
It’s anybody’s guess what happens next.
In the optimist camp is Treasury Secretary Janet Yellen, who told CNN’s Fareed Zakaria last week a damaging recession can be averted.
“I think what people call a soft landing is possible,” she said. “I do think there is a path to bring down inflation while maintaining what I think all of us would regard as a strong labor market.”
After months of inflation at close to 40-year highs, prices are cooling. Readings on consumer and producer prices show inflation at its slowest pace since early in the crisis: The Producer Price Index registered 2.7% annual growth in March, and the Consumer Price Index, at 5%, is down dramatically from its 9.1% peak last summer.
And the mighty American job market keeps chugging along. The jobless rate of 3.5% is near the lowest in half a century. By most measures, the job market is stronger today than it was in February 2020, before the Covid pandemic crashed the global economy. More Americans are working, and they are making more money.
The Treasury Secretary said she sees rising unemployment claims, declines in job openings and upticks in labor force participation as evidence that stress in a too-tight labor market is easing — a good thing.
“I think the strong labor market and bringing down inflation are compatible goals,” Yellen said.
Economists at Goldman Sachs are forecasting only a 35% chance of recession, noting “rebalancing of supply and demand is on track.”
But there are risks around every corner.
A bout of bank stress last month caught global markets by surprise and may act to slow lending activity.
Bank strain was a byproduct of the Federal Reserve’s aggressive rate-hike campaign. Monetary policy works with a lag. Now forecasters are struggling to understand how else it will reverberate through the economy, and when.
It’s why many economists are firmly in the negative camp. A Bloomberg survey of forecasters pegs recession odds at 65%.
The International Monetary Fund last week slightly lowered its global growth forecast, in language more foreboding than usual.
“Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the IMF said, noting the difficulty in making forecasts at all in this environment.
The “fog around the world economic outlook has thickened,” it said.
Adding to the gloom, the debt ceiling drama in Washington, if not resolved, would certainly risk a debt default in the United States, crash the economy and roil bond and stock markets.
Even optimists like Yellen admit there are risks. But resilience in the economy has been hard to keep down.
Early into earnings season, the big banks look better than fine, and other companies are beating analysts’ expectations. Oil prices are down sharply compared with last year, in part reflecting global growth concerns — but at the same time lowering costs for oil consumers.
And stock markets have climbed a wall of worry, as the old Wall Street trader cliché goes.
The Dow is up 2.5% this year, the broader Standard and Poor’s 500 is up more than 8% and the Nasdaq Composite has rallied 16% in 2023.
One explanation is that last year’s utter rout in stocks may have factored in a worst-case scenario for the economy. Last year was the worst year for stock investors since the Great Financial Crisis.
Another read is that a recession, if there is one, will be mild and brief, without a big spike in the jobless rate.
Bottom line: No one knows for sure.
