Chief Economist Eugenio J. Alemán discusses current economic conditions.
The Federal Reserve (Fed) lost its chance to lower interest rates further during the first half of the year, when inflation came down to close to its 2.0% target with very limited risk that its decision would have triggered higher inflation. It was probably concerned with a measure of inflation expectations, coming from the University of Michigan (UM) Survey of Consumers, which has been flashing red for several quarters. However, other measures of inflation expectations that are more market-based have continued to flash ‘smooth sailing ahead,’ which means that the survey from the UM has remained an outlier.
At the same time, the Fed Chairman has been repeating for almost a year that wage increases are no longer a source of inflationary pressures, something we agree with. But perhaps the most important difference between today and the post-pandemic environment is that then American consumers were awash in cash from the accumulation of excess savings due to the increase in income transfers from the federal government.
Today, while households have increased how much they are saving compared to their income, the saving rate is very low compared to what it was after the pandemic recession. That is, there is not much air underneath prices that could sustain inflation higher in the longer term, as it was the case during the recovery from the pandemic.
Yes, we are going to see higher inflation because of the effects of tariffs across the US economy but that increase is going to be short-lived, or at least short-lived compared with what happened in the aftermath of the pandemic. That is, we understand why policymakers felt so risk averse during the first half of the year when they decided to stop lowering interest rates, however, they could have continued to lower interest rates during the first half without adding to inflation concerns. However, today, that window has closed, and it is highly unlikely that they will lower the federal funds rate during the next several months. At the same time, as a newspaper reported this week, there are many analysts and investors who are concerned that inflation measures are not going to paint a correct picture of inflation due to recent cuts in the federal work force, but specifically within the statistical institutes that put together these estimates.
Economists have been complaining about Congressional decisions to cut funding for statistical institutions like the BLE, the BEA, the Census, etc., for decades, it is not something new to the current administration. However, DOGE and its obsession with firing government employees has affected these institutions particularly hard. According to recent reports, the Bureau of Labor Statistic (BLS), which is the institution in charge of measuring the Consumer Price Index, has had to rely on “alternative guessing methods,” to estimate the rate of inflation. Furthermore, other economic indicators are published with a delay, which makes analysis of the economy more difficult.
If these issues are correct, and we believe they are, this is probably adding to recent market concerns that are affecting yields across the different maturities, as investors try to figure out what is happening in the economy, knowing that the information being released may no longer be reliable.
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
