August 2, 2024
Economic Indicators Turn from Confusing to Ominous
Numerous economic indicators suggest that the U.S. economy is contracting and that conditions might get much worse.
by S. T. Karnick
AmericanThinker.com
Federal Reserve (Fed) chairman Jerome Powell’s Wednesday announcement that the central bank might start lowering interest rates in September sets the stage for a potential reversal of the longstanding pattern of inconsistent and contradictory indicators from the economy.
Unfortunately, that change may not be for the better, with a conservative September interest rate cut of 0.25 percent being too small and arriving too late to do much good.
Additionally, the central bank said it will continue reducing its balance sheet by selling Treasury securities, agency debt, and agency mortgage‑backed securities, which tightens the money supply. Scarcer money is more costly.
Markets have been waiting for an interest rate cut for several months. The Fed, for its part, has been awaiting bad economic news before daring to reduce the federal funds rate, lest it set off a new round of price inflation. In addition to lower price inflation, the Fed has been looking for higher unemployment, slowing gross domestic product (GDP), stock market losses, and other signs of economic misery. The central bank talking about reducing interest rates is a clue that the economy is not in good shape.
Many economists have been predicting a recession for months on end in the wake of the rapid interest rate increases of March 2022 through July 2023, which the Fed has held steady ever since.
The doomsayers are not wrong, though the downturn has been very late in arriving. The bizarre government actions perpetrated during the COVID-19 pandemic distorted the economy so greatly and created such strange conditions that restoration of normal cause-and-effect relationships of government fiscal and monetary policy on the economy has been much slower than expected.
Nonetheless, the laws of economics have not been repealed. The supply disruptions, gigantic infusions of federal spending and helicopter money, enormous increase in consumer dollars spent on services, and other pandemic-related economic mischief grossly warped the price signals that enable markets to create the best possible allocation of goods and srvices across the economy. It is taking an unexpectedly long time for more-normal conditions to develop.
What has kept a recession at bay for so long is the massive amount of money the federal government and Federal Reserve injected into the economy for three years after the COVID-19 lockdowns began. The immense infusion of liquidity took longer than expected to dissipate. It has receded rapidly in the past couple of years, however, with the real M1 money stock declining by 21 percent since its December 2021 peak.
Meanwhile, banks were reducing their reserves at the Fed between February and May of this year, moving more money into circulation and muting the effect of the Fed’s money-tightening. The banks stopped doing that in June.
Economic fundamentals matter. Although it can be very difficult to filter out other highly important factors (liquidity in this case), policy actions will ultimately have their effects. In fact, sometimes those effects will turn out to be even greater, especially the damaging ones, when they finally manifest, because the fundamentals worsened while the problems were obscured by the positive indicators.
That may in fact be happening now, with multiple measurements going south. Economist Peter St. Onge of the Brownstone Institute and Heritage Foundation argues that inflation-adjusted numbers show we are already in a recession: retail sales have decreased since May 2021, manufacturing has decreased since mid-2022, consumer spending has been negative for three years, and, I would add, interest paid on non-mortgage consumer debt rose by 50 percent in 2023.
Banks may be happy about consumers spending more on debt and less on everything else, but it is a very bad sign for the rest of us.
The federal government bears the entire responsibility for this mess. “My base case has been that we’re repeating the 1970s disaster driven by out-of-control government spending and out-of-control Fed money printing. The official numbers are matching that almost to a tee,” St. Onge writes.
Numerous economic indicators suggest that the U.S. economy is contracting and that conditions might get much worse, all because of egregiously misguided government fiscal and regulatory policies and years of central bank monetary accommodation.
If the Fed starts lowering interest rates in September as expected, it will probably not do much to improve economic conditions: it is likely to be a small cut (0.25 percent), and the markets have already priced it in several times now, on (consistently disappointed) expectations of rate cuts in previous months. If the Fed stops selling securities, having already slowed those sales in recent months, it will have a money-loosening effect. Banks may counter that, however, by increasing their reserves at the Fed, as they signaled in June.
That leaves fiscal and supply-side factors as the big influences on the economy. Those are in the exceedingly clumsy hands of the federal government. Cutting tax rates, spending, and regulation would get the economy going again. Nothing along those lines is going to happen before January 20, however, if then. Thus, the future of the American economy depends entirely on whether voters decide to change course this fall.
http://www.americanthinker.com/articles/2024/08/economic_indicators_turn_from_confusing_to_ominous.html
| 
