There’s an old story about Charles Darwin, which may or may not be true but seems appropriate to our current economic moment. According to the tale, two boys glued together pieces of various insects — a centipede’s body, a butterfly’s wings, a beetle’s head and so on — then, as a gag, presented their creation to the great naturalist for identification. “Did it hum when you caught it?” he asked. When they said yes, he declared that it was a humbug.
That’s kind of where we are in the economy right now. I’m not suggesting anyone is faking the data, but the different pieces of information we have don’t seem to line up — they almost seem to come from different countries. Some data suggest a weakening economy, maybe even on the verge of recession. Some suggest an economy still going strong. Some data suggest very tight labor markets; others, not so much.
Let’s talk about the numbers, and how they don’t add up.
The number we usually use to assess where the economy is going is real gross domestic product — and according to the official estimate, real G.D.P. shrank in this year’s first quarter. We won’t have an official (advance) estimate of second-quarter G.D.P. until later this month, but “nowcasts” that try to estimate G.D.P. based on partial information — like the Atlanta Fed’s widely cited GDPNow — suggest slow growth or even an additional period of shrinkage.
In case you’re wondering, no, two quarters of declining G.D.P. won’t mean we’re officially in a recession; that determination is made by an independent committee that takes a wide variety of information into account. And given the confusing picture right now, it’s unlikely to declare a recession, at least yet.
Among other things, another widely used number — job creation — is telling quite a different story. The official estimate of growth in nonfarm employment in June came in quite strong — 372,000 jobs added — which doesn’t look at all like what you’d expect in a recession.
So do we have a conflict between data on output and data on employment? If only it were that simple. We also have alternative measures of both output and employment — and in each case these are telling different stories than the more widely cited numbers.
We usually track economic growth using gross domestic product — the total value of stuff produced. But the government creates a separate estimate of gross domestic income, the money people get from selling stuff, including additions to inventory. The basic accounting says these numbers must be the same. But they’re estimated using different data, so the estimates never agree exactly. And right now the estimates are diverging a lot: G.D.P. shows a shrinking economy, but G.D.I., well, doesn’t:
What about employment? The Bureau of Labor Statistics carries out two surveys, one of employers — which is where the payroll numbers come from — and one of households, which produces an alternate estimate of the number of Americans working. The payroll number is usually considered more reliable — household data are famously noisy — but for technical reasons (the birth-death model; aren’t you sorry you asked?) the payroll data often seem to miss turning points, when employment growth either surges or plunges.
And right now the two surveys are telling different stories. I use quarterly rather than monthly data to smooth out some of the noise; the household data points to a much bigger slowdown than the payroll data:
But wait, there’s one more puzzle. Everyone says we have an extremely tight labor market, and when you combine that with high rates of consumer price inflation, there are widespread fears that we’re on the verge of entering the dreaded wage-price spiral. But wage growth isn’t accelerating. In fact, it’s falling fast, and at this point may not be much above the level consistent with the Federal Reserve’s long-run target of 2 percent inflation:
Are you confused? You should be. I’ve been in this business a long time, and I can’t remember any period when economic numbers were telling such different stories. On the other hand, we’ve never before faced the kind of shocks we’ve gone through in the past few years: Both the pandemic-induced recession and the recovery from that recession were, to use the technical term, weird, and maybe we shouldn’t be surprised the measures we normally use to track the economy aren’t working too well.
My guess about what’s really happening is that the economy is indeed slowing, but probably not into a recession, at least so far. And a moderate slowdown is actually what we want to see.
At the beginning of 2022, the U.S. economy was almost surely overheated, and this overheating was contributing to (although not the only source of) inflation. We wanted to see the economy cool down before inflation got entrenched in expectations, and that’s an area where all the available data — slowing wage growth, inflation expectations in the financial markets, surveys that ask consumers what inflation rate they expect over the next few years — are telling the same story: Inflation is not, in fact, getting entrenched.
Overall, the picture appears consistent with a “soft landing” — a slowdown that falls short of a full-on recession, or involves a mild recession at worst, together with stabilizing inflation.
But, of course, we don’t know that. In fact, given the wide discrepancies in economic data, economic pundits (including me) have unusual freedom to believe whatever they want to believe. Just pick and choose the numbers that tell you what you want to hear and glue them together.
Wall Street is confused, too.
How tight is the labor market, really?
Has the Fed already done enough?
Be glad we’re not Sri Lanka.
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Facing the Music
The future is certain, give us time to work it out.
Charting the Global Economy: US Inflation Comes Off the Boil – BNN Bloomberg
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Inflationary pressures in the US simmered down on the heels of cheaper gasoline and other fuel costs, which may help persuade the Federal Reserve to ease up a touch on the monetary policy brakes.
In the UK, the economy shrank in the second quarter for the first time since Covid-19 lockdowns more than a year ago. Singapore reduced its growth forecast for this year after its economy contracted last quarter, while rapid inflation encouraged steep interest-rate hikes by monetary authorities in Mexico and Argentina.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively boosting interest rates. Consumer prices increased 8.5% from a year ago after hitting a more than 40-year high of 9.1% a month earlier.
Ending emergency unemployment benefits had a significant impact on boosting employment, according to a St. Louis Fed working paper that may underline Republican criticism of a 2021 program.
Rental costs are soaring at the fastest pace in more than three decades, surpassing a median of $2,000 a month for the first time ever.
The UK economy shrank in the second quarter for the first time since the pandemic, driven by a decline in spending by households and on fighting the coronavirus. Gross domestic product fell 0.1% after an 0.8% gain in the first quarter. The Bank of England expects that inflation raging at a 40-year high will tip the economy into a recession later this year.
Spain is opening its doors to foreign workers to fix labor shortages and ease a demographic slump threatening its future prosperity. In contrast with more anti-immigrant politics in much of Europe, the government has loosened rules to allow the recruitment of employees in their countries, mostly in Latin America, for both skilled and unskilled jobs that are hard to fill.
Singapore trimmed its 2022 growth forecast to reflect an increasingly challenging global environment, after the economy slipped into contraction in the second quarter. Final data for the June quarter Thursday showed gross domestic product shrank 0.2% from the previous three months, and worse than the zero growth estimated by Ministry of Trade and Industry earlier.
A global spell of high inflation, aggressive monetary tightening and the risk of a recession are prompting economists to revise Indonesia’s economic forecasts for the remainder of the year. Analysts raised inflation projections for the third and fourth quarters by almost a full percentage point to 5% and 5.15%, respectively, median forecasts from Bloomberg’s latest monthly survey showed.
Argentina’s central bank raised its benchmark Leliq rate to 69.5%, representing the largest hike in almost three years and signaling a more aggressive stance against surging inflation. Mexico’s central bank boosted its key rate to an all-time high of 8.5%.
Brazil consumer prices tumbled by the most on record in July after President Jair Bolsonaro slashed utility taxes to tame the soaring cost of living and lift his re-election chances.
Kenya’s presidential election took place Tuesday as East Africa’s largest economy grapples with surging living costs and rampant unemployment. Deputy President William Ruto and Raila Odinga, a former prime minister who’s running for president for a fifth time, were the clear front-runners to succeed incumbent leader Uhuru Kenyatta. Final results are expected by Aug. 16.
When Group of Seven leaders gathered in the Bavarian Alps in June, they pledged to stand with Ukraine for the long haul. Their Group of 20 counterparts are proving less supportive. Only half have joined the international sanctions imposed on fellow member Russia over its invasion of Ukraine.
Chinese exports to Russia are back near levels seen before the Kremlin’s invasion of Ukraine, propelling a rebound in trade that’s helped cool off a historic rally in the ruble. Russia bought $6.7 billion of goods in July from China, an increase of more than a third from the previous month and up by more than an annual 20%.
Bloomberg interviewed several families — in Nigeria, India, Brazil and the US — various times between June and August last year about the swaps and sacrifices they were making in order to keep food on the table as prices rose. It turns out, chronicling what was then eye-popping food inflation wouldn’t capture the depths of what was to come.
©2022 Bloomberg L.P.
Victoria looks to be a national leader in the circular economy – Saanich News
When athletes stood on the podium during last summer’s Tokyo Olympics, the medals hanging from their necks were made from melted-down metals in six million old cell phones and other discarded electronics.
Others, nowadays, enjoy having their home moderated by insulation made from the excess scraps of denim that don’t get to become jeans.
Those are two examples of the circular economy that researchers say could recover $4.5 trillion worth of otherwise wasted resources by 2030. Keeping materials out of the landfill in the market is something the City of Victoria hopes to capitalize on as it adds a circular lens to its 20-year economic strategy.
Spurred by a motion from Coun. Jeremy Loveday, the city will now add a section to Victoria 3.0 on becoming a national leader in the circular economy.
“Making sure our economic priorities align with our goals regarding climate action and waste reduction, I think this helps us also to be in a better place to capitalize on the economic benefit of the circular economy which is predicted to continue to grow,” Loveday said before council approved the motion this month.
The action will include ensuring there are zoned areas for circular businesses and non-profits to operate within the city. Those will include light industry spaces, which Victoria-based Project Zero says reduces a key barrier for entrepreneurs trying to scale up their up-cycle or repair businesses.
“There isn’t anything right now that’s on that smaller scale or that’s financially accessible,” said Georgia Lavender, who leads Project Zero’s circular economy program.
The non-profit has been running a local entrepreneur incubator for five years, but the term “circular economy” was still new to people a couple of years ago, she said. But Lavender has been inspired lately by all sectors and levels of government seeing the approach as a way to support local innovation, job creation and supply chain resiliency.
“We’ve seen a really big shift toward regions wanting to implement a circular economy model and really seeing the opportunities it holds, not only from an environmental perspective but also an economic development perspective,” she said.
Some of Project Zero’s Victoria start-ups now commercializing include the cup-share service Nulla and BinBreeze, which uses waste wood to improve compost bin productivity and pest deterrence.
Lavender said the innovators are helping to cut emissions while creating jobs, and Vancouver Island as a whole has the opportunity to position itself as a leader in the circular sector. The focus could help the supply chain be more resilient, Lavender said, by using local manufacturing to reuse resources instead of shipping waste off the Island for processing.
The Victoria direction also commits to business space in the coming Arts and Innovation District, the creation of a circular economy hub, exploring partnerships for a zero waste demonstration site and launching an innovation grant.
“Things like that just create more opportunity for these ventures to keep their operations within Victoria and not have to move to other regions,” Lavender said.
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Soft landing hopes for U.S. economy brighten outlook on stocks – The Globe and Mail
Optimism is seeping back into the U.S. stock market, as some investors grow more convinced that the economy may avoid a severe downturn even as it copes with high inflation.
The benchmark S&P 500 has rebounded about 15% since mid-June, halving its year-to-date loss, and the tech-heavy Nasdaq Composite is up 20% over that time. Many of the so-called meme stocks that had been pummeled in the first half of the year have come screaming back, while the Cboe Volatility Index, known as Wall Street’s fear gauge, stands near a four-month low.
In the past week, bullish sentiment reached its highest level since March, according to a survey from the American Association of Individual Investors. Earlier this year, that gauge tumbled to its lowest in nearly 30 years, when stocks swooned on worries over how the Federal Reserve’s monetary tightening would hit the economy.
“We have experienced a fair amount of pain, but the perspective in how people are trading has turned violently towards a glass half full versus a glass half empty,” said Mark Hackett, Nationwide’s chief of investment research.
Data over the last two weeks bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report allayed fears of recession, inflation numbers this week showed the largest month-on-month deceleration of consumer price increases since 1973.
The shift in market mood was reflected in data released by BoFA Global Research on Friday: tech stocks saw their largest inflows in around two months over the past week, while Treasury Inflation-Protected Securities, or TIPS, which are used to hedge against inflation, notched their fifth straight week of outflows.
“If in fact a soft landing is possible, then you’d want to see the kind of data inputs that we have seen thus far,” said Art Hogan, chief market strategist at B. Riley Wealth. “Strong jobs number and declining inflation would both be important inputs into that theory.”
Through Thursday, the S&P 500 was up 1.5% for the week, on track for its fourth straight week of gains.
Until recently, optimism was hard to come by. Equity positioning last month stood in the 12th percentile of its range since January 2010, a July 29 note by Deutsche Bank analysts said, and some market participants have attributed the big jump in stocks to investors rapidly unwinding their bearish bets.
With stock market gyrations dropping to multi-month lows, further support for equities could come from funds that track volatility and turn bullish when market swings subside.
Volatility targeting funds could soak up about $100 billion of equity exposure in the coming months if gyrations remain muted, said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.
“Should their allocation increase, this would provide a tailwind for equity prices,” Omprakash said.
Investors next week will be watching retail sales and housing data. Earnings reports are also due from a number of top retailers, including Walmart and Home Depot, that will give fresh insight into the health of the consumer.
Plenty of trepidation remains in markets, with many investors still bruised from the S&P 500′s 20.6% tumble in the first six months of the year.
Fed officials have pushed back on expectations that the central bank will end its rate hikes sooner than anticipated, and economists have warned that inflation could return in coming months.
Some investors have grown alarmed at how quickly risk appetite has rebounded. The Ark Innovation ETF, a prominent casualty of this year’s bear market, has soared around 35% since mid-June, while shares of AMC Entertainment Holdings , one of the original “meme stocks,” have doubled over that time.
“You look across assets right now, and you don’t see a lot of risks priced in anymore to markets,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
Keith Lerner, co-chief investment officer at Truist Advisory Services, believes technical resistance and ballooning stock valuations are likely to make it difficult for the S&P 500 to advance far beyond the 4200-4300 level. The index was recently at 4249 on Friday afternoon.
Seasonality may also play a role. September – when the Fed holds its next monetary policy meeting – has been the worst month for stocks, with the S&P 500 losing an average 1.04% since 1928, Refinitiv data showed.
Wall Streeters taking vacations throughout August could also drain volume and stir volatility, said Hogan, of B. Riley Wealth.
“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.
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