Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (October 14 2022)

October 17, 2022

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

October 14, 2022

This week CEOs and financial markets received mostly difficult news about the US economy. 

The Consumer Price Index (CPI) showed no reprieve from inflation in September. Headline CPI growth rose to 0.4 percent month-over-month (vs. 0.1 percent in August) and core CPI, which excludes volatile food and energy prices, rose 0.6 percent (vs. 0.6 percent in August). Given the current inflationary environment, we expect the Fed will hike by 75 bp in November, 50 bp in Dec, and 25 bp early next year. Even with this degree of monetary policy tightening it is unlikely that the Fed will completely rein in inflation in 2023.

Relatedly, the New York Federal Reserve Bank’s Survey of Consumer Expectations contained mixed news. Median one-year-ahead inflation expectations declined 0.3 percentage points to 5.4 percent from the previous month – the lowest reading since September 2021. However, the three-year-ahead inflation expectations rose somewhat, reflecting an expectation that inflation would remain above the Fed’s target. This is mostly consistent with our view that inflation will cool somewhat in 2023, but that in the medium-term rates will remain elevated relative to those seen prior to the pandemic.

High inflation rates are impacting by the private sector and the public sector alike. The Social Security Administration (SSA) announced on Thursday that Social Security and Supplemental Security Income benefits would increase 8.7 percent for 2023. For seniors, many of whom are on fixed incomes, rising prices have been especially challenging. Increases in benefits, however, will yield increases in costs by the government.

Finally, this week, the Economy, Strategy, and Finance Center of The Conference Board released its global economic outlook, including both projections for 2023 and 10-year projections. For 2023, global growth is estimated to be only 2.1 percent, with recessions “all but certain in the US and Europe.” Growth for 2022 is now estimated to be only 3.2 percent -- a dramatic fall from last year’s 6.1 percent. The Conference Board also estimated growth to average 2.6 percent for both 2024-2029 and 2030-2035, down substantially from the pre-pandemic 2011-2019 average of 3.3 percent. Negative demographic forces with aging populations in many advanced economies, contribute to this trend.

For more information on these and other events, please see below:

1. INFLATION AND INTEREST RATES WEIGH ON SEPTEMBER RETAIL SALES

2. INFLATION REMAINS ELEVATED IN SEPTEMBER

3. MIXED NEWS ON INFLATION EXPECTATIONS

4. SOCIAL SECURITY BENEFICIARIES RECEIVE 8.7 PERCENT COST OF LIVING ADJUSTMENT

5. INITIAL UNEMPLOYMENT CLAIMS RISE

6. JOBS REPORT SHOWS MODERATING GAINS

7. THE CONFERENCE BOARD 2023 AND 10-YEAR PROJECTIONS

8. DEPARTMENT OF LABOR PROPOSES INDEPENDENT CONTRACTOR RULE

9. REPORT SHOWS “MATERNITY CARE DESERTS”

10. ADMINISTRATION ACTION ON SEMICONDUCTORS AND CHINA

11. MONKEYPOX UPDATES

1. INFLATION AND INTEREST RATES WEIGH ON SEPTEMBER RETAIL SALES

Nominal retail spending was flat in September — rising zero percent month-over-month and 8.2 percent from a year earlier. However, when adjusted for inflation sales fell -0.4 percent from the previous month.* Demand for goods retreated for the month, falling by -0.1 percent. Spending on motor vehicles and parts fell by -0.4 percent in September from August, while retail sales excluding motor vehicles and parts were flat month-over-month. Spending at gasoline stations dropped -1.4 percent as crude oil prices continued to slip from their June highs. Retail sales less motor vehicles, gasoline, and building supplies (known as “Retail Control”) rose 0.4 percent from the previous month. Online sales at non-store retailers rose 0.5 percent in September. Meanwhile, spending at food services and drinking places rose by 0.5 percent month-over-month, vs. 1.8 percent in August. Looking ahead, we expect consumer spending growth to fall deeper into negative territory as the economy slips into recession. Analysis of these data by The Conference Board Economy, Strategy, and Finance Center can be found here.

2. INFLATION REMAINS ELEVATED IN SEPTEMBER

The Consumer Price Index (CPI) rose 8.2 percent over the last 12 months, and 0.4 percent in September, according to the Bureau of Labor Statistics. The Core CPI index for all items excluding more volatile food and energy prices, which may better predict future inflation, rose 6.6 percent, with 0.6 percent in September. Persistent core inflation is likely to lead to additional increases in interest rates; the Federal Reserve raised the Federal Funds Rate by 0.75 basis points in response to August’s CPI figures, which also showed 0.6 percent monthly core inflation. Energy prices have fallen each month since June’s peak, 4.6 percent in July, 5.0 in August, and 2.1 percent more in September. However, broader inflationary pressures remain; monthly increases in shelter (0.8 percent) and medical care services (1.0 percent) were above levels consistent with the Fed’s long-term inflation target of 2 percent. The Conference Board Economy, Strategy and Finance Center projects that higher interest rates “will trigger a recession in the coming months.” Its analysis of September’s inflation figures can be found here.

3. MIXED NEWS ON INFLATION EXPECTATIONS

The New York Federal Reserve Bank’s Survey of Consumer Expectations, a national survey of a rotating panel of about 1,300 household heads, contained mixed news. Median one-year-ahead inflation expectations declined 0.3 percentage points to 5.4 percent from the previous month: this was the lowest reading since September 2021. However, the three-year-ahead inflation expectations rose to 2.9 percent from 2.8 percent, reflecting an expectation that inflation would remain above the Fed’s target.

The Fed closely monitors inflation expectations, because these are an input into its decisions setting the federal funds rate. The higher inflation, the higher nominal interest rates need to be to achieve the same real interest rate. The impact of inflation expectations on the rate-setting process is one reason the Fed considers well-anchored expectations to be an important goal in monetary policy.

Another significant result from the survey was a sharp drop in expectations of consumer spending growth; the median response for one-year-ahead spending growth fell from 7.8 percent to 6.0 percent.

4. SOCIAL SECURITY BENEFICIARIES RECEIVE 8.7 PERCENT COST OF LIVING ADJUSTMENT

The Social Security Administration (SSA) announced on Thursday that Social Security and Supplemental Security Income benefits would increase 8.7 percent for 2023. This is an automatic feature of the program, a cost-of-living adjustment (COLA) tied to the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the next. For many seniors, take-home benefits will grow by even more than the Social Security COLA because Medicare Part B premiums, which are often deducted from benefits, are set to fall this year, in part because of the Administration’s decision to deny coverage for a class of drugs that may slow the progression of Alzheimer’s disease and other dementias. 

5. INITIAL UNEMPLOYMENT CLAIMS RISE

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, rose to 228,000 for the week ending October 8. This is an increase of 9,000 over the previous week’s level, and the second consecutive increase. Claims are elevated above September’s lowest reading, 190,000, or the immediate pre-pandemic figure of 186,000 for March 7, 2020. And they are well above the spring lows of 166,000. However, they are moderate by historical standards, and below the July highs of 261,000. An increase in initial claims is consistent with recent data from other surveys showing a softening labor market, including the payroll survey, which shows decelerating job growth, and the Job Openings and Labor Turnover Survey, which shows a decline in job openings. The Conference Board’s latest economic forecast shows the unemployment rate rising to 4.3 percent, well above its current level of 3.5 percent, by the second quarter of next year.

6. JOBS REPORT SHOWS MODERATING GAINS

Friday’s Employment Situation report showed moderating job gains in September. The survey, which measures employment by collecting data from firms and government agencies, showed a gain of 263,000 jobs, down from a gain of 315,000 in August. The unemployment rate fell by 0.2 percentage points to 3.5 percent, in part because of job gains, and in part because labor force participation—the percent of people in or seeking employment—ticked down from 62.4 percent to 62.3. The largest job gains were in leisure and hospitality (83,000) and health care and social assistance (75,400). Analysis of the jobs report by The Conference Board Economy, Strategy, and Finance Center can be found here.

7. THE CONFERENCE BOARD 2023 AND 10-YEAR ECONOMIC PROJECTIONS

This week, the Economy, Strategy, and Finance Center of The Conference Board released its global economic outlook, including both projections for 2023 and 10-year projections. For 2023, global growth is estimated to be only 2.1 percent, with recessions “all but certain in the US and Europe.” Growth for 2022 is now estimated to be only 3.2 percent -- a dramatic fall from last year’s 6.1 percent. The Conference Board also estimated growth to average 2.6 percent for both 2024-2029 and 2030-2035, down substantially from the pre-pandemic 2011-2019 average of 3.3 percent. Negative demographic forces with aging populations in many advanced economies, contribute to this trend. As a result, “emerging markets are poised to drive an even larger proportion of global growth over the decade ahead than they did in the 2010s.”

8. DEPARTMENT OF LABOR PROPOSES INDEPENDENT CONTRACTOR RULE

The Department of Labor (DOL) this week issued a proposed rule to provide guidance on determining which workers are employees or independent contractors. Key aspects of the rule include guidance on an “economic realities” test for worker status. This test includes seven factors, including (1) opportunity for profit or loss depending on managerial skill, (2) investments by the worker and employer, (3) degree of permanence of the relationship, (4) the nature and degree of control, (5) extent to which the work performed is an integral part of the employer’s business, (6) skill and initiative, and (7) other factors. However, DOL notes that these factors are not exhaustive and that “no single factor is dispositive.”

DOL said that it “does not believe [the rule] would result in widespread reclassification of workers.” However, contractors in passenger transportation or delivery services could be affected; personal vehicles would not be counted towards the investments test. In a statement, Secretary of Labor Marty Walsh said that “[w]hile independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers. Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”

 9. REPORT SHOWS “MATERNITY CARE DESERTS”

The March of Dimes released a report showing that up to 6.9 million women of childbearing age live in areas of low or no access to maternity care which account for one in eight births in the US, with 2.2 million women living in what the organization terms “maternity care deserts,” which are counties without a hospital or birth center offering obstetrics services and without any obstetrics providers. This includes 36 percent of US counties; five percent of all counties are in a worse position for maternity care than in 2020. Closures of hospitals and obstetrics centers and a shortage of obstetrics physicians in the pandemic are driving the figures, with the impact particularly strong in rural areas and among communities of color. One in four Native American babies were born in areas with no or limited access to maternity care services, and one in six Black babies were born in those areas. The organization also called for expanded access to broadband to increase opportunities for telehealth services.

10. ADMINISTRATION ACTION ON SEMICONDUCTORS AND CHINA

In what could be the largest shift in technology policy towards China in 30 years, on Friday, the Administration announced new US export controls on semiconductors and AI technology, including export restrictions on some supercomputing chips and tighter sales restrictions on some semiconductor equipment, focusing on “sensitive technologies with military applications [.]” The new policy includes the “foreign direct product rule” also invoked against Huawei 5G technology in 2020 and semiconductor exports to Russia after the invasion of Ukraine; items covered by the rule apply to sales anywhere in the world of covered products made with US equipment. Assistant Secretary of Commerce for Export Administration Thea D. Rozman Kendler said that China “has poured resources into developing supercomputing capabilities and seeks to become a world leader in artificial intelligence by 2030. It is using these capabilities to monitor, track and surveil their own citizens.” The move is expected to slow down, but not stop, China’s advanced chipmaking efforts. However, the US has also acknowledged the potential risks of the new approach: an unidentified official said, “[w]e recognize that the unilateral controls we’re putting into place will lose effectiveness over time if other countries don’t join us. And we risk harming US technology leadership if foreign competitors are not subject to similar controls.”

China criticized the measures, saying they were designed to maintain US “technological hegemony,” adding the US “will only hurt and isolate itself when its actions backfire.” In the US, some companies are taking steps to seek the subsidies available under the CHIPS and Science Act Congress passed this summer. Micron recently announced that it chose a site in central New York State over one in Austin, Texas, for its new facility. There are also increasing concerns over what would happen to the Taiwan semiconductor industry in the event of a Chinese invasion; the US National Security Council has estimated that the loss of leading chipmaker TSMC would cost the world economy over $1 trillion. TSMC is establishing a $12 billion chip fabrication plant in Arizona.

11. MONKEYPOX UPDATES

As of October 11, the US has confirmed a total of 26,778 cases of monkeypox. States with the highest case numbers include California (5,135), New York (4,010), Florida (2,608), Texas (2,444), and Georgia 1,850). Globally, 71,408 cases have been confirmed, with 70,679 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (26,778), Brazil (8,270), Spain (7,219), France (4,043), and the UK (3,654). A total of thirteen deaths have been reported in locations that have not historically reported monkeypox. CDC has reported that the rate of growth in monkeypox cases began slowing in late August. CED Trustees published an opinion piece on ways to prevent the outbreak, and others like it, from becoming pandemics, including closer cooperation with business.

A study published in The Lancet Microbe shows widespread monkeypox DNA surface contamination in health care settings, with 93 percent of surfaces in infected patient rooms contaminated and significant contamination on health care worker PPE. The study was based on testing on four respiratory isolation rooms in the Royal Free Hospital in London. The rooms were occupied at various times by six patients with confirmed symptomatic monkeypox from May 24 to June 17, 2022. Of 20 air samples taken, 5 were positive, including 3 of 4 collected before and during a bedding change. This “highlights the importance of suitable respiratory protection equipment for health-care workers when performing activities that might suspend infectious material within contaminated environments," the authors wrote.