Inflation flat, incomes up, spending mediocre. So why keep rates so high?

The always-important income and spending report came out on Friday, and if you have a certain point of view, there were good numbers all around.

US May PCE: Big pop in income on the month as disposable income increased 0.5% and savings rate increased to 3.9%. Spending up 0.2%, income 0.5%, & the PCEPI was flat (-0.008%) on the month & up 2.6% (2.563%) y/y while the core ex food & gas increased 0.1% (0.083) and 2.6%…

— Joseph Brusuelas (@joebrusuelas) June 28, 2024

PCE inflation came in even lower than you would have expected from the CPI/PPI earlier this month. Core PCE was up 0.08% and overall PCE actually fell 0.01%.

Core at an annual rate:

1 month: 1.0%
3 months: 2.7%
6 months: 3.2%
12 months: 2.6% pic.twitter.com/IhcYBq7RKC

— Jason Furman (@jasonfurman) June 28, 2024

That increase in savings is a good sign, for both moderate (but not crazy) spending growth, and higher income growth. However, the one down side I saw in this report is that spending was revised down for both March and April, indicating slower GDP growth than we originally thought for Q2 (although there still is growth).

Not surprising that the Boom part of Bidenomics is over after 3 years of stimulus and job growth, and record run of sub-4% unemployment. But steady growth around 2% is fine, especially if income growth continues at a good pace.

Comversely, if you're someone who was looking for signs of what Federal Reserve policymakers may be doing in the near future, you had to like the flat inflation numbers, and the long-term trend it shows as well. Core inflation has been the high 2%s for the last year, and overall PCE inflation is also only up 2.6% over the last 12 months. In fact, since January 2023, we've not had one month where overall PCE inflation has been above 0.4%, and we've had as many months of 0.0% PCE inflation as we have 0.4% (3 each).

That's a big enough sample size to me to show that the main disruptions are over in our post-COVID economy, and if our new normal is 2.6% inflation instead of 2.0%, with solid wage growth and unemployment staying low, that's not a bad thing. The biggest economic headwind is the cost of housing, and I'd argue high interest rates are a CAUSE more than a mitigation of that at this point.

So why does the Fed continue to punish everyday Americans for inflation that peaked 2 years ago? And because I don't think Fed officials are morons, I have to ask what's the real reason the Fed is refusing to lower rates, and does it relate to November's election?

Damn straight I'm going there, especially after they caved to pressure from Donald Trump and dropped Fed Funds rates in the latter half of 2019 when they were at levels less than 1% above the core rate of inflation. That was in a time when unemployment was at similar levels to what we have today, and inflation was just under 2%. If the same rules applied in 2024 (1% Fed Funds rate above core inflation), the Fed should be dropping rates by 1.5% from where they are today.

Friday's report shows we remain in a good, growing economy, but one that isn't booming with a consumer that isn't as willing to spend as much as they did in 2023. We need a Fed that understands that growth is what is endnagered right now and not one that keeps chasing ghosts of the past, and do its job in keeping the economy on the right track.

US keeps adjusting habits, so it's cheaper to hit the road for the 4th this year

As the Fourth of July nears, it also means that we are in the Summer driving season. With a record amount of drivers expected to hit the road for the Holiday week, it seems to be a good time to check back and see what things look like on the oil and gas fronts.

One thing I've noticed is that> oil futures have gone up a bit recently, increasing by nearly 12% since hitting their lows at the start of this month. That includes another sizable increase on Thursday.

Oil futures settled higher on Thursday on worries about global crude supply disruptions as geopolitical pressure in the Middle East and Europe mounted, while a surprise increase in U.S. crude and gasoline inventories gave prices a ceiling.

Brent crude oil futures settled up $1.14, or 1.34%, to $86.39 a barrel. U.S. West Texas Intermediate crude futures settled up by 84 cents, or 1.04%, at $81.74.....

Cross-border strains between Israel and Lebanon's Hezbollah have been escalating, fanning fears that a widening war could draw in other countries including major oil producer Iran.

So the recent rise is due to nothing besides speculation and traders bidding things up.

It's sure not related to supply-and-demand, especially when it comes to gasoline usage in America. Even as travel amounts have generally gone up, Americans are using less gas than we did this time last year, and noticeably less than we did in the late 2010s. In addition, gasoline is more plentiful now than in June 2023.

So why would oil be trading 17% higher than it was a year ago? I know the oil market is not necessarily the same as gasoline, but it’s a pretty good correlation. Where’s the indication that there’s going to be some kind of supply tightness or explosion in gasoline usage in the near future?

In fairness, it looks like the gasoline futures have yet to be much different than what we had a year ago, so maybe pump prices for the rest of this Summer won’t reflect the runup in oil. And in fact, AAA says Americans are paying less than they were in gas at this time in 2023, a whole lot less than they were in 2022, and not that much more than they were at the end of June 2021.

Bottom line, Americans have adjusted their oil/gas consumption habits in the 2020s, both due to changing workplaces, but also in response to incentives the Biden Administration has put out for electric vehicles and higher fuel efficiency. It's the right direction, which insulates us from further shocks and variances in the market, and we need to stick with it.

August Constitutional amendment is more WisGOP scumbaggery. VOTE NO

In 51 days, Wisconsin voters are going to be faced with an important ballot question that was placed by the gerrymandered WisGOP Legislature, with the intent of not slipping it through without much attention. Which is a big reason why it should be given attention, and a resounding NO vote.

The ballot question seems to be tame on the surface.

Now you might think "doesn't the Legislature already do this?" And indeed, much of this is determined part of the state budget, and are OK'd by both parties without much concern, because it keeps these needed services going without having to use state tax dollars to do it. Many of these federal dollars are automatically allocated by formula through acts of Congress, and while WalletHub says Wisconsin's state government is 45th out of the 50 states when it comes to reliance on federal dollars, our most recent state budget still had over $28 billion coming from DC.

Not that the WisGOP Legislature hasn't been able to manipulate where these funds go. Sometimes this is done through budget deliberations, moving Federal block funds toward one direction and not another. The Legislature's Joint Finance Committee often has to sign off on increases in federal funding or other allocations as things change throughout the 2-year budget cycle.

For example, in 2022 the GOPs that control the Finance Committee stopped the Wisconsin DOT from using additional Infrastructure Act dollars for the unholy purpose of... improving air quality through more walking and biking trails?

For a statewide $283 million transit and infrastructure package, $4.3 million is not a lot of money.

But Republican legislators on the Joint Finance Committee (JFC), the Wisconsin Legislature’s committee in charge of overseeing the state budget, decided on April 27 to limit the use of those funds. Reversing an element of the state Department of Transportation’s spending plan, the JFC has barred the state from using these funds for bike or walking trails, public transit, basically anything other than highway right-of-way or signaling improvements, setting back initiatives to make communities more walkable, bikeable, and public transit-friendly.

The $283 million was from the federal Infrastructure Investments and Jobs Act, otherwise known as the bipartisan infrastructure bill. The $4.3 million was under the Congestion Mitigation and Air Quality Improvement Program (CMAQ), which allocates funding for states to improve air quality, either by investing in infrastructure to reduce congestion (reducing the amount of exhaust personal vehicles emit while on the road) or to improve alternative forms of transit, such as bikes, walking, or public transit.

So if fed funds are already able to be manipulated by the Legislature, why make it a Constitutional law, which makes it harder to do away with it? Marquette University Professor Philip Rocco does a great job in explaining the real reasons behind it, in an article in The Recombobulation Area.

In August, WI voters will decide on 2 constitutional amendments that affect how the state allocates federal grant $. It’s also first time amendments have been on an August primary ballot in WI.

I wrote about the amendments & their political context here: https://t.co/5NDhWYsIMm

— Philip Rocco (@PhilipRocco) June 20, 2024

Taken together, the amendments contained in Question 1 and 2 would eliminate virtually any power the governor has to allocate certain federal funds without approval from the legislature. This would represent a significant enhancement of the legislature’s power, overturning a law that has been in place since 1931, which says that: “whenever the United States government shall make available funds for the education, the promotion of health, the relief of indigency, the promotion of agriculture or for any other purpose other than the administration of the tribal or any individual funds of Wisconsin Indians, the governor on behalf of the state is authorized to accept the funds so made available.”

In other words: suppose Wisconsin experiences a natural disaster, an economic crisis, or — as happened in 2020 — both. The federal government rushes aid to the state. Under current law, the governor would be authorized to accept these unanticipated funds and allocate them to impacted businesses, communities, or individuals.

But if the amendments contained in Questions 1 and 2 pass, the state legislature would be able to insert itself into the process, preventing the governor from allocating the funds until the legislature approves.

And THAT'S the real reason the WisGOPs want to put in this constitutional change. Because Governor Evers was able to use billions COVID relief funds without interference from the gerrymandered Legislature (and especially the GOP-dominated Joint Finance Committee) as the state went through the COVID pandemic and its aftermath, it made for an efficient response that sent funds to people and sectors of the economy that were badly in need.

It is not in the GOP's interest to see the federal government and a Democratic governor actively working to get people and businesses back to work and back on their feet, and to have these programs work and have voters demand they continue in the future. So they want to be able to control every extra dollar that comes in after the budget is passed, and I would bet that the GOPs on JFC would use these new powers to do what they do best - ABSOLUTELY NOTHING.

You know, just like how they're holding up $125 million in funds to clean up PFAS in the state, and holding up $15 million in aid to hospitals in the Eau Claire area to maintain medical services in an area that had multiple hospitals and medical providers close earlier this year. Money that has ALREADY BEEN SIGNED INTO LAW, by the way.

This makes the WisGOP attempt to tie up funds scummy enough, but it is especially sleazy because they are trying to sneak through these permanent changes in an August election, as Professor Rocco points out that there will be many fewer voters at that time compared to what we'll see in November.

In 2022, just 27% of voters participated in the state’s August primaries, which was a 40-year high. Since 2000, turnout in November general elections has been, on average, three times higher than it is in partisan primaries.

In just a few months, Wisconsin voters will for the first time vote on whether to amend the constitution in an August primary election. Unlike 2022, there will be no big-ticket contests for governor or U.S. senator. Of Wisconsin’s eight congressional districts, only two (District 3 and District 7) will see a contested Democratic primary. There are three contested Republican primaries (in Congressional Districts 2, 4, and 8). Of the 99 State Assembly districts, only 21 will feature contested Democratic primaries. In the Republican column, there are 24 contested primaries. In short, August elections will likely see a turnout rate lower than in 2022.

If the WisGOPs in the Legislature believed that casual voters would go for this idea, they'd be glad to promote it as part of their re-election campaigns in November. They're not, and that should tell us a lot.

Plus, it is likely that WisGOP is trying to shove through this BS before the new legislative maps are in effect, with Dems finally having a legitimate chance to win the State Assembly, and are very likely to end the GOP supermajority in the State Senate. So the WisGOPs are trying to leave behind all of these barriers that make it even harder to reverse the garbage they put into law through their rigged maps and sketchy tactics, and keep Wisconsin from moving in a direction that their voters are asking for.

Which helps explain why they're so desperate to handcuff this state while they can. It's a sign of weakness. Needless to say, you should vote NO (HELL NO) to these amendments. And given that it's a lower-turnout election, the more that you can draw attention to this BS to casual voters, the more it has a chance of going down in flames, and further demoralizing a Wisconsin GOP that already seems to be in decline.

Housing costs keep going up despite higher interest rates....or because of them

While the overall economy continues to grow, jobs continue to be added, and inflation continue to leveling off, there seems to be one sector of the economy plagued by stagflation in the first half of 2024 - the housing market.

We got more proof of that in the later part of this week.

With the Federal Reserve making no clear commitment to when an interest rate cut may come, homebuilders are scaling back.

In May, privately owned housing starts fell to a seasonally adjusted rate of 1.277 million units, down 5.5% month over month and 19.3% compared to a year ago, according to data released Thursday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD)....

“Builders are in an ‘if you build them, they won’t come,’ market, as continued high mortgage rates keep more potential buyers out of the market,” Robert Frick, a corporate economist at Navy Federal Credit Union, said in a statement.

The number of building permits issued in May also posted monthly and yearly declines, falling to a seasonally adjusted annual rate of 1.386 million units, down 3.8% month over month and 9.5% year over year.

And it's been a consistent decline for both starts and permits in 2024, with drops in activity for multi-family units being even larger than the decline in single-family homes.

But while this portends a drop in the number of homes being completed and added future inventory, current home prices and home sales keep rising, despite the higher interest rates.

The median price of a previously owned US home climbed for the eleventh consecutive month in May, up 5.8% from a year ago, to $419,300, the National Association of Realtors said Friday. That’s the highest price ever recorded by NAR.

“Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers,” NAR’s chief economist Lawrence Yun said in a release. “Still, first-time buyers in the market understand the long-term benefits of owning.”….

The situation could improve somewhat later this year, when the Federal Reserve is expected to begin paring back interest rates from a 23-year high, which should bring down mortgage rates. But Fed officials have penciled in just one rate cut for this year, and the days of ultra-low interest rates are long gone. Economists don’t expect the average mortgage rate to fall below 6% in 2024.

Recent research from Zillow shows that in order for a median-income household to afford a monthly mortgage payment on the typical US home, it would need to save up more than $127,000 for a down payment. That’s roughly double the median salary of a US worker.

Potential homebuyers are indeed facing a tough market, but that doesn’t seem to be deterring some: Sales of previously owned homes in the US are up from the decades lows in the fall and only edged lower by 0.7% in May to a seasonally adjusted annual rate of 4.11 million.

And the Wisconsin Realtors Association says our state is seeing the same trends – higher prices, more sales, and homes becoming even less affordable.

May 2024 home sales rose 11% compared to May 2023, and the median price rose to $315,500, which is a 6.9% increase over the past 12 months.

On a year-to-date basis, home sales were 12.1% higher than the first five months of 2023, and the median price rose 7.3% to $295,000 over that same period.

Improving inventories helped boost sales statewide, with new listings up 4.7% compared to May 2023, and total listings up 5.4% over that same period….

The average 30-year fixed-rate mortgage rose 63 basis points over the past 12 months, hitting 7.06% in May, causing affordability to drop to an all-time low. The Wisconsin Housing Affordability Index measures the share of the median-priced home that a buyer with median family income qualifies to buy, assuming 20% down and the remaining balanced financed with a 30-year fixed mortgage at current rates. The index fell 11.3% from 133 in May 2023 to just 118 in May 2024.

And this is more proof to me that the Federal Reserve is getting it backwards when it comes to the cause-effect situation of higher, less affordable housing prices. What we need to get things more in balance is a higher amount of single-family homes onto the market, but where’s the incentive for people to sell their houses (or buy land and build new ones) when they have to take on much higher interest rates?

I’ll use our situation in Madison as an example. We bought our home in 2013, and the value has nearly doubled in that time period. We also locked into a 3% mortgage through a refinancing 4 years ago. So what incentive do we have to move from our current home to pay more for another home, and at an interest rate more than double what we’re paying now?

But the Fed is more concerned with trying to crush demand for buying homes, and are imposing economic pain and frustration on people who are already getting hurt by high rent prices and a lack of homes on the market. It’s not massive demand that is behind the absurd jump in home prices, and consumers borrowing money certainly wasn’t the reason behind the greedflation that hit the most in 2022 and whose remnants continue to this day.

It really feels like the Fed has used a 1970s playbook for a unique post-pandemic situation in the 2020s. They were slow to start to raise rates when inflation was clearly hitting in 2021, and then had to drastically raise them in order to catch up. Now they’re being caught short in the other way, and aren’t understanding that the effects on consumers and businesses for higher rates is different now (coming off of a time of historically low rates) than if we started from a higher point (like we would have in the 1980s or 1990s).

I also can’t help but notice how Donald Trump was whining about Fed Funds rates in the later half of 2019 that were 3% lower than what we have today, and got them to start cutting even before we knew COVID was a thing.

Trump demanded negative interest rates and then unironically called the Fed Chair he nominated a bonehead.

That’s an impressive lack of self awareness even from him. pic.twitter.com/cIH8z4diCK

— Angry Staffer 🌻 (@Angry_Staffer) September 11, 2019

That was a time period when unemployment was lower than it was today (3.6% then vs 4.0% now) and CPI inflation over the previous six months was only 0.1% a month lower than we have today (1.7% increase today, 1.1% in Aug 2019).

So explain to me why interest rates today are more than twice what we had before the Fed started cutting in Summer 2019? There is zero reason for this beyond an arbitrary desire for the Fed to have inflation be 2% instead of 3% (neither figure would change outcomes much), and the high cost of housing is basically the only negative part of what is still a good economic situation. I know it’s not considered proper for President Biden and Dems to complain about the decisions of the Federal Reserve, but if the Fed’s policies are something that might hurt the Dems’ chances of victory in November, why shouldn’t they be talking about the Fed’s choices? AND DO IT NOW, ahead of the Fed’s next meeting at the end of July.

After all, if Donald Trump can bully the Fed into a wrong policy in 2019, why can't Dems push the Fed to do the right thing, and cut rates in Summer 2024?

Good Wis jobs report for May, and April looks a lot better

Another Wisconsin jobs report came out this afternoon, and it was largely steady as it goes.

Place of Residence Data: Wisconsin's unemployment rate remained at 2.9% in May, 1.1 percentage points below the national rate of 4.0%. The labor force gained 900 workers over the month for a total of 3,140,500 workers. The number of people employed hit a new high in May, with a total of 3,048,000 employed. DWD last announced a record number of people employed in March 2024.

• Place of Work Data: Total nonfarm jobs decreased 1,500 over the month and increased 28,700 over the year to a total of 3,037,400 jobs. Private sector jobs added 2,300 over the month, hitting a record high 2,630,300 jobs. DWD last announced a private sector nonfarm job record in March 2024. "Wisconsin's economy continues to gain momentum, setting new records in state employment and private jobs," said DWD Secretary Amy Pechacek. "The state's unemployment rate remains below the national rate, as well. These numbers validate what we know is true: Wisconsin residents are eager to work, employers are eager to employ them, and DWD endeavors to support sustainable employment opportunities for all.

As alluded to in the Place of Work Data, the only reason there wasn't a gain in total jobs was because of a loss of 4,200 jobs in state government. And that's likely because UW graduation was on Saturday May 11, and the week of the jobs report surveys started on Sunday, May 12. So I'd expect a sizable seasonally-adjusted "gain" in state govt jobs next month to make up for that.

Even better news is that April's jobs gains were revised up by 3,600 (from 900 to 4,500), leaving us up more than 15,000 jobs since the end of last year, and with over 100,000 since the start of 2022.

Another good sign is that manufacturing has recovered all of their losses from February, and the number of jobs in that sector is back to where it was more than a year ago.

In addition, after 10 months of a plateaued level of jobs in Leisure and Hospitality, it had a seasonally adjusted increase of 3,400 for May, taking it to a new post-COVID high.

The unemployment rate staying below 3% in Wisconsin is also a great sign, although I'll note that the labor force is only up 9,600 in the last year, and employment only up 6,500 in that time, so we need to keep attracting people to come here if we wish to grow much further.

Overall, this is a good report, and Wisconsin's jobs market is still in a very good place. Seems like something we'd want to keep building on for the rest of the year.

Recent reports indicate lower growth is bigger risk than higher prices

Wanted to forward you to a couple of good posts by UW-Madison's Menzie Chinn at Econbrowser going over recent reports on the economy.

The first puts together a number of recent indicators, and gives us a mixed bag. Industrial production had a surprising increase, and finally got back to the levels we were at in Spring 2023. The payrolls numbers keep rising, but the household survey hasn't changed much at all. In addition, inflation-adjusted consumption, incomes, and sales at the wholesale level have been largely flat in the first half of 2024.

In addition, we saw retail sales for May be disappointing, with only a minor rise of 0.1%, and April's retail sales numbers were revised down to a 0.2% (seasonally adjusted) loss. Combine that with the flat inflation numbers for May, and it's more evidence to me that we have downshifted from the higher inflation of 2022-2023, and likely have also see the Biden Boom of 2021 through 2023 also cool off into a post-COVID normality.

The other post of Professor Chinn's that I want to point you toward is one that discusses the recent economic outlook released by the Congressional Budget Office.

The CBO projections are based on data available as of May 2nd. The latest CBO projection is substantially above the February projection (see discussion here), largely due to the intervening upside GDP surprises. It’s currently in line with the FT-Booth June median forecast, and the slightly below (for Q2) the Atlanta Fed nowcast. (It’s slightly above the May median Survey of Professional Forecasters estimate).

While the revised q/q growth rate projections are higher in the short term, relative to February forecast (based on data available as of January 6), then decelerate to slower rates by end 2025, implying reversion to potential. That being said, the current implicit CBO projection of the output gap is dramatically different than reported in the February Economic Outlook....

This means the CBO is projecting a positive output gap for the next year and half, under current law. For perspective, the pre-pandemic peak output gap was 0.9 ppts, while the highest in recent history is 2.4% in 2000Q2.

But that also means America's economy has been exceeding its potential in the last year, and inflation has settled into a 3% annual rate for the better part of the last year, and indications that it will fall further in the coming months. It tells me that our bigger concern should be that things slow further and we run a risk of recession, and not worry about whether inflation is 2% or 3%.

And it's all the more reason for the Federal Reserve to start lowering interest rates from these 23-year highs. Instead, Chinn says the CBO now predicts there won't be rate cuts until early next year.

That better not be true. If so, it makes me all the more suspicious that the Fed doesn't really understand what things are like for the typical American, and that they are still trapped in 1970s thinking in a 2024 reality.

Tourism keeps rising in Wisconsin. In places big and small

One thing that Wisconsin has had an impressive increase in for the 2020s has been tourism. And this week we found out that this continued with a record-breaking year in 2023.

Wisconsin’s tourism industry had a record-breaking $25 billion in economic impact in 2023, according to a new report from the state Department of Tourism.

It’s the second year in a row Wisconsin broke that record. In 2022, Wisconsin’s tourism industry had an economic impact of $23.7 billion, breaking the prior milestone of $22.2 billion in 2019.

The report found Wisconsin also hit a high in the number of overnight visitors, with nearly 46 million people staying overnight across the state last year.

“We’re becoming a little less of a hidden gem and just simply a gem. And as Wisconsin gets added to more and more people’s bucket lists, we really benefit from that exposure,” said Craig Trost, communications director for the Wisconsin Department of Tourism.

The report said the tourism industry supported more than 178,000 jobs last year. All 72 Wisconsin counties experienced an increase in economic impact.

Great to hear, let's dig into the full report to see what more we can find.

While the state had a 5.4% increase in economic impact from tourism, 3 counties had jumps of more than 10% - Monroe County (11.2%), Menominee County (10.3%) and Green Lake County (10.1%). However, Menominee and Green Lake Counties are smaller and less reliant on tourism (even those the locals probably appreciate the added business), so those 2 increases impacts totalled less than $7 million of the total increase of $1.273 billion in added impact statewide.

But Monroe County is among the 44 counties that had a tourism-related impact of more than $100 million for 2023, and when you look at those more tourism-reliant places, it's double-digit increase outpaces 2nd-place Dane County (up 8.4%), as well as the other large counties with the biggest rate of increase in tourism dollars from last year.

But Monroe County's $165 million in tourism impact is dwarfed by the biggest attractors of tourism-related economic activity in the state. As it's been for a long while, the state's 2 most-populous counties also have the largest tourism industries in the state, accounting for nearly 27% of that $25 billion impact. For the rest of the 8 counties with the largest tourism impacts in Wisconsin, it's a split evenly between smaller-population places that are heavy on tourism (Sauk, Walworth, and Door Counties), and the counties that rank 3, 4, and 6 for population in the state.

Good thing the Milwaukee area is now starting to get some of those tourism-related revenues back in the form of higher sales taxes this year. You know, like how communities around the Dells and Door County have for several years. Maybe we can get a similar deal here in Dane County instead of being faced with referenda just to keep local services at the same levels.

It also illustrates how we have essentially two types of tourism markets in the state. One is largely rural and based on the natural beauty and recreational opportunities that Wisconsin carries with it, and the other is an urban-based one based on big events, conventions and amenities that little communities don't have the ability to provide (and certainly not at the scale that a place like Milwaukee, Madison, or Green Bay can give.

The tourism figures for Wisconsin are very good news, and it tells us that we need to keep on investing in the types of resources and events that keep people wanting to visit Wisconsin....and maybe encourage a few of them of them to stay here permanently.