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Inflation Is Fading; So Is The Economy; But Jobs Will Grow – Forbes



The “inflation” story has now moved to page two, not because it isn’t still the financial media’s mantra, but the disaster of the Afghanistan exit has taken its place. We don’t think it will make its way back to page 1. The reason: the burst of economic activity, for the Q1 and Q2 economic reopenings, and the rounds of helicopter money are now both in the rear-view mirror. Almost all the incoming data is on the soft side.

While still on the high side, data from various Fed surveys show easing backlogs at U.S. businesses, falling delivery delays, and some softening in prices paid and received. This implies that inflation is ebbing, although for many businesses, supply-chain issues and associated price increases may remain well into 2022. A lot depends on the path of the pandemic.

In addition, the voices of some deep economic thinkers are now gaining prominence. Lacy Hunt (Hoisington Investment Management) has compelling data implying that U.S. reliance on and build-up of debt, which now appears to be the only tool used by monetary and fiscal authorities, is actually the root of deflation. Chen Zhao (AlpineMacro) discovered strong correlations between real interest rates and inflation due to excessive savings, chronic since the Great Recession. The expected continuation of an aggregate savings glut, he says, will keep inflation and interest rates low for the foreseeable future.

The Data

Retail Sales: The big surprise of the week was the -1.1% M/M fall in July’s Retail Sales (-1.6% in “real” inflation adjusted terms). The overly optimistic consensus estimate was for a -0.3% decline. Excluding autos, sales fell -0.4% (consensus: +0.2%) and excluding autos and gasoline, -0.7% (consensus: -0.1%). Looking at this by selected sectors:

·     Building Materials: -1.2% (negative four months in a row)

·     Autos: -3.9% (negative three months in a row)

·     Web-based Sales: -3.1% (negative two of the last three months)

·     Clothing: -2.6%

·     Groceries: -0.7%

·     Restaurants: +1.7% (unfortunately, Open Table has indicated a significant decline in restaurant reservations; -8% lower than pre-Covid the week of August 10, likely caused by the Delta-variant; reservations were higher than pre-Covid levels in June).

·     The control number from Retail Sales that feeds into GDP: March: +10.6%; May: -2.0%; July: -1.6%. How do we get to the consensus +7% GDP growth for Q3?

Housing: This looks to be well past its peak.

·     The NAHB Homebuilding Index showed up at 75 in July vs. 80 in June. Five points is a huge decline for this index.

·     The University of Michigan (U or M) Consumer Sentiment Index shows Home and Auto buying at 40-year lows and appliances at a 10-year low. The Home Buying Intentions Index: December: 134; February: 125; April: 114; June: 74; August: 61. 70% of those polled say now is a “bad” time to purchase a home – the worst number since August 1982! (For auto buying plans, the survey registered the worst number since May 1981!)

·     Housing starts were off -7.0% M/M (consensus: -2.6%). YTD starts are down -12.8% annual rate (AR), with single family starts down a whopping -25.1% AR. (Multifamily starts are up significantly; perhaps this will help moderate the oncoming upward pressure in rents!)

Confidence, Over-Optimism, and Commodities

·     The U of M overall Consumer Sentiment Index is at its lowest level since 2011 (see chart at the top).

·     Nevertheless, the “consensus” views of where the economy is and where it is going all appear to be on the overly optimistic side. Perhaps these are all sell side economists just wanting to keep stock prices elevated. Citigroup has developed an “Economic Surprise” Index. When the consensus views are “less” than the incoming data release, that is a “positive” surprise. When the consensus is more optimistic than the income data, that is called a “negative” surprise. The overly optimistic views are shown in the chart – 14 straight days of negative readings. And the chart shows general negative readings for the last three months.

·     The commodity price cycle, a major contributor to the “systemic” inflation hysteria, appears to have run its course. The following data show percentage declines from recent peaks (prices are as of August 19):

  • Lumber: -72.8% (13 month low)
  • Iron Ore: -36.5% (8 month low)
  • Oil (WTI): -15.4% (3 month low) (when will it transfer to the pump?)
  • Copper: -15.3% (3 month low)

China and the Delta-Variant

·     China recently closed the world’s third busiest container port. This means more delays in the supply-chain and a continuation of cost and availability issues for many businesses. The chart shows the explosive cost to rent a shipping container because most of them are parked in the ocean waiting for an opening at a port. 

·     Retail sales in China were slightly negative for July (-0.1%), very unusual for the fastest growing developed economy in the world. Even Industrial Production was off -1.3% and that has been negative in four of the last five months. The unemployment rate ticked up to 5.1% in July from 5.0%. The headline of the story on page A16 of the Wall Street Journal (8/17) read: “China’s Recovery Is Losing Steam.”

·     The Delta-variant continues to play havoc with the economic recovery in the U.S. and worldwide:

  • Air travel in the U.S. has declined two weeks in a row.
  • Hotel bookings are falling.
  • Restaurant reservations are falling.
  • Many companies have announced significant delays in their return-to-office schedules.

Labor Markets

Initial Claims (ICs): Initial Unemployment Claims, a proxy for new layoffs, moved down -12K in the state programs to 309K (Not Seasonally Adjusted) the week of August 14. They rose +5K in the federal Pandemic Unemployment Assistance (PUA) programs. Only a small decline (-7K) on net about offsetting last week’s small rise.

The PUA IC programs, which have been running just north of 100K/week, end on September 4. State programs will be all that is left for new claimants. The state programs, at about 309K/week are not that far above their pre-pandemic norm of 200K. We expect that, by September’s end, we will see the state numbers re-approach this pre-pandemic norm, albeit the re-emergence of the virus may keep some parents from rejoining the labor market due to child-care and school issues.

Continuing Claims (CCs): Continuing Unemployment Claimants from all programs continue to fall. They were 12.1 million the week of July 24 and fell to 11.7 million the week of July 31 (latest data). As indicated in past blogs, the vast majority of these claimants are in the PUA programs which end September 4. Unless Congress extends these programs (haven’t heard such talk yet), nearly 9 million will be without a weekly check. There will be an impact on Retail.

We have been following the state CC data for several months from the point of view of Opt-In states vs. Opt-Out (those states in or out of the federal $300/week supplemental unemployment benefit program). As reported in our last blog, the data appears to be conclusive that the federal supplement has dis-incented the desire or need to work. The table shows the progression of the fall in CCs in the Opt-Out and Opt-In states and includes a line showing the Opt-In state totals without CA, as the data from that state are too volatile to be meaningful.

As can be seen, the reduction in CCs in Opt-Out states is at a far higher rate than in the Opt-Ins whether CA’s data is included or excluded. The table below continues the analysis:

Note that for the 7/31 week (final data) while representing only about a quarter of the total number of CCs, the Opt-Out states produced 85% of the reduction in total CCs. A similar story for the preliminary data for the 8/7 week. And when the data from CA are excluded, the rest of the Opt-In states showed an increase in their unemployment rolls.

We believe there will be two consequences come the end of the federal programs in early September:

  • There will be a rush to fill open job slots. Nevertheless, that is not an instantaneous process and make take several weeks, or even months. In addition, those that do find jobs must wait for the next pay cycle to get cash. 
  • Retail Sales will weaken further as the federal benefits end, and, given the overly optimistic consensus estimates we have seen lately, the hit to Retail Sale will likely be more severe than markets currently contemplate.


We question the still high expectations for GDP growth in the second half of 2021, still near +7%. We believe that much of Q2 GDP growth was front-loaded by two rounds of helicopter money and initial economic reopenings. In addition, as discussed, the cash distributions to the vast majority of unemployed end in the next two weeks! In our view, if there is positive GDP growth in Q3, it will be quite low, and we worry that there won’t be any growth at all in Q4.

So far, our calls on the economy (slowing growth) and interest rates (lower for longer), while out of sync with most media pundits, have been the correct ones. FYI, our confidence in our economic view is rising!

(Joshua Barone contributed to this blog.)

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Charting the Global Economy: Job Growth in US Powers Ahead – BNN



(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The strongest US job growth in five months and firmer-than-expected worker pay assuaged recession concerns, while also helping clear the path for the Federal Reserve to continue large interest-rate hikes.

In Europe and Asia, factory production weakened on lingering supply-chain constraints that are contributing to persistent price pressures. The Bank of England stepped up its inflation fight with the biggest rate increase in more than a quarter century, while also cautioning that the UK is headed for more than a year of recession. 

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:


Central banks around the world continued raising interest rates this week. Australia, Brazil, India and the UK were among those hiking by 50 basis points, while Romania went for 75 basis points and Madagascar for 90 basis points.

The standoff between the US and China over Taiwan has thrown a spotlight on growing risks to one of the world’s busiest shipping lanes — even a minor disruption could ripple through supply chains. Almost half of the global container fleet and a whopping 88% of the world’s largest ships by tonnage passed through the Taiwan Strait this year, according to data compiled by Bloomberg. 

European factory activity plunged and Asian manufacturing output continued to weaken in July amid lingering supply-chain complications and a slowing global economy. Purchasing managers’ indexes for the euro area’s four largest members all indicated contraction, while China, South Korea and Taiwan took the biggest hit in Asia.


Employers added more than double the number of jobs forecast, illustrating rock-solid labor demand that tempers recession worries and suggests the Federal Reserve will press on with steep interest-rate hikes to thwart inflation.

Household debt increased by 2% to $16.2 trillion in the second quarter, with mortgages, auto loans and credit-card balances all seeing sizable jumps, according to a report by the Federal Reserve Bank of New York.

With almost two openings for every person looking for work, US companies are increasingly tapping high school students for skilled jobs. As a result, apprenticeships are seeing a renaissance after failing to gain a foothold over the past few decades.


The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession under the weight of soaring inflation. The half-point increase to 1.75% was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed.

German factory orders sank for a fifth month in June as rampant inflation and global supply disruptions continued to weigh on the outlook in Europe’s largest economy.

Germany’s presidential palace in Berlin is no longer lit at night, the city of Hanover is turning off warm water in the showers of its pools and gyms, and municipalities across the country are preparing heating havens to keep people safe from the cold. And that’s just the beginning of a crisis that will ripple across Europe.


It’s 2025 in Beijing, five years since the start of the pandemic, and Chinese President Xi Jinping’s Covid Zero policy is still an inescapable part of daily life. As omicron sub-variants become ever-more infectious, Xi’s resolve to avert virus fatalities is growing stronger – leading many experts to warn that Covid Zero could continue well beyond 2022.

Major South Korean firms are agreeing to the biggest pay rises in 19 years, according to a government survey, fueling concerns that a wage-price spiral is taking hold in the economy. Salary agreements at companies with 100 workers or more climbed 5.3% in the first half of the year, exceeding every increase since 2003, a labor ministry poll showed.

Emerging Markets

Turkish inflation accelerated again and may be months away from peaking, soaring to levels unseen since 1998 as the central bank sticks with its ultra-loose monetary course.

Brazil’s central bank raised its key interest rate by half a percentage point and left the door open for a smaller boost in September as it shifts its focus to the outlook for inflation more than a year ahead. 

©2022 Bloomberg L.P.

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The economy is growing by one measure, shrinking by another – The Washington Post



Friday’s blowout jobs report may have quieted claims that the U.S. is in a recession, but it did not end the mystery about the state of the economy or resolve questions about where it is headed.

Government data showing the economy had contracted for the second consecutive quarter — meeting one informal definition of recession — was still fresh, as the Labor Department on Friday said employers had added 528,000 jobs in July. That was more than twice as many as economists expected.

Only eight days separated the two government reports, yet they seemed to describe entirely different realities.

The first showed a weak economy that — coupled with the highest inflation in 40 years — offered consumers nothing but grief. The second reflected a juggernaut that was minting jobs faster than workers could be found to fill them, with an unemployment rate that matched the pre-pandemic low of 3.5 percent.

The factors driving inflation higher each month

“It’s normal for different economic indicators to point in different directions. It’s the magnitude of the discrepancies right now that’s unprecedented,” said Jason Furman, formerly President Barack Obama’s top economic adviser. “It isn’t just that the economy is growing in one measure and shrinking in another. It’s growing incredibly strongly in one measure while shrinking at a pretty decent clip in another.”

In Washington on Friday, President Biden took a victory lap for the job growth while claiming credit for gas prices having declined for more than 50 consecutive days. Yet he also acknowledged the disconnect between the sunny employment report and the inflation headaches that afflict many households.

What causes a recession?

“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel it in their own lives,” the president said, speaking from a White House balcony. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re dealing with rising prices, food and gas, and so much more. I get it.”

The surprisingly robust jobs number seemed to call into question the president’s argument that the economy is undergoing a “transition” from its faster growth rates last year to a slower, more sustainable pace.

No one expects the economy to continue producing half a million new jobs each month. No one thinks it could without inflation remaining at uncomfortable heights.

Almost five months after the Federal Reserve began raising interest rates to cool off the economy and to bring down the highest inflation since the early 1980s, the labor market report showed that the nation’s central bank has more work to do. Average hourly earnings for private sector workers rose by 5.2 percent over the past year, which hints at the sort of wage-price spiral that the Fed is determined to prevent.

Last month, the Fed lifted its benchmark interest rate to a range of 2.25 percent to 2.5 percent, its highest level in almost four years. Yet in “real” or inflation-adjusted terms, borrowing costs remain deeply negative, which acts as a spur to economic growth.

Fed Chair Jerome H. Powell said last month that additional rate increases are likely when policymakers next meet on Sept. 21. The size of the next increase – either half a percentage point or three-quarters of a point – will “depend on the data we get between now and then,” he told reporters.

Soaring dollar could help Fed in fight against inflation

Investors see a 70 percent chance of the larger move, according to CME Group, which tracks purchases of derivatives linked to the central bank’s key rate.

On Wednesday, the government is scheduled to release inflation readings for July, which are expected to show a modest improvement compared to June’s 9.1 percent figure, thanks to falling energy prices.

Powell’s decision to stop telegraphing Fed moves by providing “forward guidance” of its plans is itself a sign that the current environment is murkier than usual.

“A lot of what’s happening in this economy is being driven by the pandemic, and then the pandemic response. And so, we are in a very unusual time, in many ways [it’s] challenging to sort of read through those data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, and a voting member of the Fed’s rate-setting committee, told The Washington Post this week.

Fed’s interest rate hikes may mark start of tough, new economic climate

Almost 22 million Americans lost their jobs between February and April of 2020 in covid’s first months. The unemployment rate hit 14.7 percent, the highest figure recorded by the Labor Department in a series that began in 1948.

With July’s gains, the economy now has recovered all of the lost jobs.

But the workforce has been reshaped. There are more warehouse and logistics workers today and fewer employees working for hotels and airlines.

Employers are reacting differently than they did before the pandemic to indications that the economy may be slowing, according to Gregory Daco, chief economist for EY-Parthenon. Rather than immediately resorting to significant layoffs, they are instead scaling back hiring or engaging in targeted job cuts.

Weekly first-time unemployment claims are up, but only to 260,000 from their 54-year low of 166,000 in March.

Consumers have also acted differently, buying more goods than normal while trapped at home during the pandemic’s initial wave. Retailers that ordered unusual volumes of furniture, electronics and apparel from overseas suppliers later misjudged the pace of consumers’ return to traditional buying patterns, leaving stores stuffed with unwanted goods.

On top of the pandemic’s lingering ills, the war in Ukraine has disrupted global commodity markets, contributing to higher inflation.

All of these forces combined to produce economic data that is unusual and sometimes contradictory. Friday’s jobs report showed 32,000 new construction jobs and 30,000 new factory jobs created in the month. Yet housing starts have fallen for the past two months and the latest ISM manufacturing reading was the weakest in two years.

“We are in somewhat of a dizzying business cycle. We’re getting economic data that is fluctuating quite rapidly and it’s very hard to get a precise read on where the economy is at any point in time,” Daco said.

Individual data points also provide snapshots of the economy that are out of sync, said Kathryn Edwards, an economist at the Rand Corp.

Friday’s Labor Department report tallied up jobs gained in July. The last consumer price index reading covered June. And the gross domestic product reading that started the recession furor described activity that occurred between April and June – and will be revised twice.

“It’s a challenge for an economist, but also for a reader who wants to understand how at risk they are for an economic downturn,” she said.

Labor market and output data have been telling different stories about the economy all year. After six straight months of shrinkage, the economy is roughly $125 billion smaller than it was at the end of 2021, according to inflation-adjusted Commerce Department data.

Yet employers have hired 3.3 million new workers over that same period.

How could more workers be producing fewer goods and services?

One explanation is that workers are less productive today than during the emergency phase of the pandemic, when companies struggled to keep producing their required orders with fewer workers, Furman said.

Indeed, non-farm business productivity in the first quarter fell 7.3 percent, the largest decline since 1947, according to the Bureau of Labor Statistics. Preliminary results for the second quarter will be made public on Tuesday and are likely to show the largest two-quarter drop in history, he said.

Those figures may overstate the change. During the pandemic, companies may have been able to maintain output with a covid-thinned workforce by exhorting or incentivizing the remaining workers to work harder or longer. But there is a limit to how long bosses can motivate people by citing emergency conditions.

“They worked extra hard, but they wouldn’t work extra hard forever,” Furman said.

World Bank warns global economy may suffer 1970s-style ‘stagflation’

Likewise, the labor force participation rate usually rises when employers are adding jobs and the unemployment rate is falling. But since March, it has fallen, according to the Bureau of Labor Statistics.

Some Americans retired instead of risking working during the pandemic. Others — mostly women — who lacked adequate child care, stayed home with young children or other vulnerable relatives.

An April paper by economists at the Federal Reserve Bank of Richmond found that “the pandemic has permanently reduced participation in the economy.”

Participation by Americans in their prime working years, ages 25 to 54, has almost entirely recovered. But for those 55 and older, there has been almost no improvement since the initial plunge at the outset of the pandemic. And for younger workers, age 20 to 24, participation is lower now than at the end of last year.

“I don’t think we have a great handle on why other workers are not coming back,” said Kathy Bostjancic, chief U.S. economist for Oxford Economics. “It’s just such an unusual period.”

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Canadian economy sheds jobs for second straight month – BNN



Canada’s economy lost 30,600 jobs in July, according to data from Statistics Canada on Friday. This marks the second consecutive month of employment losses for the country.

The data came in weaker than expected. The median estimate among economists tracked by Bloomberg was for a gain of 15,000 jobs last month and an unemployment rate of 5.0 per cent.

The country’s unemployment rate remained steady at a historic low of 4.9 per cent. 

The wholesale and retail trade, health care and social assistance, and educational services sectors collectively saw a loss of 53,000 jobs. The losses were partially offset by the goods-producing sector which gained 23,000 jobs, the labour force survey revealed. 

The decline in jobs was roughly the same in both part-time and full-time work, though employment fell the most among women aged 55 and over. 

The overall participation rate fell 0.2 per cent to 64.7 per cent in July, compared to the 0.4 percentage point drop in June.

The average hourly wages of employees rose 5.2 per cent on a year-over-year basis, matching the pace set in June.

“This is a notoriously noisy survey, especially in the summer months, July and August. The numbers bounce around a lot. I think what’s important here is that the North American economies are slowing,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute and a former chief economic analyst of Statistics Canada, said in an interview Friday morning. 

He also cautioned that Canada’s housing sector is vulnerable to the rising interest rate environment and could lag behind the U.S. 

“There are some pockets of resilience in the economy. The resource sector is one,” Cross said.

The Bank of Canada has attempted to rein in runway inflation with aggressive interest rate hikes. Friday’s jobs data will likely help inform the central bank’s next scheduled interest rate decision in September. 

“While today’s figures muddied the waters further for policymakers, the Bank of Canada will likely focus on the historic low unemployment rate and still strong wage growth to justify another non-standard rate hike at its next meeting,” Andrew Grantham, a senior economist at CIBC Capital Markets, wrote in a note to clients on Friday. 

The Bank of Canada remains committed to reaching its target rate of two per cent inflation. 

“Evidence that the economy is slowing due to weakening demand, rather than supply constraints, will bring a pause in this rate hike cycle following the next hike,” Grantham said. 

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