Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (December 16, 2022)

December 16, 2022

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

December 16, 2022

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

This week, the Federal Reserve raised the federal funds rate 50 basis points to a range between 4.25 percent and 4.5 percent, a 15-year high. While the increase is large by historical standards, it is smaller than the four prior rate increases of 75 basis points each. Overall, 2022 saw the fastest interest rate increases since the early 1980s. In conjunction with the meeting, the Fed also published its Summary of Economic Projections (SEP) which implied that federal funds rate may rise to above 5 percent in 2023 before declining in 2024 and 2025.

The Consumer Price Index slowed to 7.1 percent year-over-year in November, down from a 7.7 percent year-over-year increase in October. Month-over-month, headline CPI increased just 0.1 percent. While year-on-year inflation rates remain far too high, the smaller month-on-month rates recorded in recent months indicates that inflation peaked in Q2 2022. While inflation should continue to cool over the course of 2023, it is unlikely that the Fed’s 2-percent target will be hit until sometime in 2024.

Retail sales fell a seasonally adjusted 0.6 percent month-to-month in November, according to Census data. This retracted much of October’s 1.3 percent increase and was the largest decrease in eleven months. The decline was entirely driven by the seasonal adjustment; unadjusted sales climbed 1.2% or $8 billion. However, retailers usually expect an even larger increase in November for holiday shopping. The seasonal adjustment is principally driven by “nonstore” retailers, which includes online commerce.

On Tuesday night, it was announced that a Senate Appropriations Chair Patrick Leahy (D-VT) announced that he had reached a “bipartisan, bicameral framework” for an omnibus appropriations bill with Senate Vice Chairman Richard Shelby (R-AL) and House Appropriations Chair Rosa DeLauro (D-CT). Though funding totals have not yet been announced, the deal is expected to boost the defense budget to $858 billion, or 10 percent higher than current levels. The largest difference between the two sides was reportedly over the amount of domestic non-defense spending. The deal comes before a Friday deadline that would have caused a government shutdown if a stopgap bill is not enacted allowing more time to vote on the broader, final package.

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

1. FEDERAL RESERVE RAISES RATES 0.5 PERCENTAGE POINTS

2. INFLATION EASES IN NOVEMBER

3. $248.5 BILLION DEFICIT IN NOVEMBER

4. TOP APPROPRIATORS REPORTEDLY REACH BUDGET DEAL

5. INITIAL UNEMPLOYMENT CLAIMS DECLINE

6. FACTORY ACTIVITY WEAK IN NORTHEAST

7. NOVEMBER RETAIL SALES

8. NRLB EXPANDS REMEDIAL POWERS AND EASES UNION ORGANIZING FOR SMALLER UNITS

9. HUD WAIVES BUILD AMERICA BUY AMERICA REQUIREMENTS

10. MONKEYPOX UPDATES

1. FEDERAL RESERVE RAISES RATES 0.5 PERCENTAGE POINTS

The Federal Reserve raised the federal funds rate 0.5 percentage points Wednesday to a range between 4.25 percent and 4.5 percent, a 15-year high. While the increase is large by historical standards, it is smaller than the four prior rate increases of 75 basis points each. Overall, 2022 saw the fastest interest rate increases since the early 1980s. The decision was widely expected, including in The Conference Board’s forecast. Fed Chair Jay Powell had said in public remarks that it would make sense to “moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down [.]” However, in the Wednesday press conference, Powell cautioned against reacting too strongly to one or two moderate inflation reports: “[w]e welcome these better inflation reports,” he said, “but I think we’re realistic about the broader project.”

In conjunction with the meeting, the Fed also published its Summary of Economic Projections (SEP), for which Fed meeting participants submitted their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2022 to 2025 and over the longer run. The median participant saw the federal funds rate rising above 5 percent in 2023 before declining in 2024 and 2025, ultimately reaching a long-run 2.5 percent, and projected a rise in the unemployment rate to 4.6 percent in 2023 from its current level of 3.7 percent.

See the ESF Center’s analysis of the FOMC meeting here.

2.  INFLATION EASES IN NOVEMBER

The Consumer Price Index slowed to 7.1 percent year-over-year in November, down from a 7.7 percent year-over-year increase in October. Month-over-month, headline CPI increased just 0.1 percent. Core CPI, which excludes volatile food and energy prices, increased 0.2 percent month-over-month, for a 6.0 percent year-over-year increase. The low headline figure was attributable in part to a 1.6 percent month-over-month decline in energy prices, including a 2.0 percent decline in retail gasoline prices. Also declining substantially (2.9 percent) were used cars and trucks, which had seen high inflation in 2021 and early 2022. However, in some sectors, high inflation remained: food rose 0.5 percent and shelter rose 0.6 percent. The 0.2 percent month-over-month increase in core CPI inflation is consistent with the Federal Reserve’s inflation target, which is 2.0 percent annual inflation in the core Personal Consumption Expenditures index. The Conference Board Economy, Strategy and Finance Center forecasts that topline CPI peaked in Q2 2022 and notes that many components showed “moderating month-over-month price increases or even contractions.” The analysis is available here.

3. $248.5 BILLION DEFICIT IN NOVEMBER

The monthly US federal budget deficit widened to $249 billion in November, up from $88 billion in October. The higher budget deficit for November is attributable in part to lower receipts ($252 billion, down from $319 billion). Large month-to-month fluctuations in these figures are common, because neither corporate nor individual taxpayers distribute their payments evenly throughout the year. Since October, when the new fiscal year began, receipts are $571 billion, up from $565 billion the previous year, and total outlays have fallen to $907 billion, compared to a $922 billion figure last year. The Department of Health and Human Services, the highest-spending agency, reduced spending to $231 billion year-to-date, down from $255 billion for the same period last year. However, interest on Treasury debt nearly doubled from $55 billion to $103 billion, showing that rising interest rates are rapidly increasing the size of this budget expenditure.

4. TOP APPROPRIATORS REPORTEDLY REACH BUDGET DEAL

Tuesday night, Senate Appropriations Chair Patrick Leahy (D-VT) announced that he had reached a “bipartisan, bicameral framework” for an omnibus appropriations bill with Senate Vice Chairman Richard Shelby (R-AL) and House Appropriations Chair Rosa DeLauro (D-CT). Though funding totals have not yet been announced, the deal is expected to boost the defense budget to $858 billion, or 10 percent higher than current levels. The largest difference between the two sides was reportedly over the amount of domestic non-defense spending. The deal comes before a Friday deadline that would have caused a government shutdown if a stopgap bill is not enacted allowing more time to vote on the broader, final package. Senate Majority Leader Charles Schumer (D-NY) stated that he believed the final deal would include bipartisan reforms to the Electoral Count Act to clarify that the Vice President has no power to overturn the vote of the Electoral College as well as additional funding for Ukraine.

5. INITIAL UNEMPLOYMENT CLAIMS DECLINE

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 211,000 for the week ending December 10, a decrease of 20,000 from the previous week’s revised level. The previous week was revised upward by 1,000 from 229,000 to 230,000. The four-week moving average was 227,250. This level of claims is low or moderate by historical standards and below the July highs of 261,000 and reflects continued labor market strength even as some leading economic indicators tip into negative territory. The Conference Board’s latest economic forecast shows the unemployment rate rising to 4.5 percent, well above its current level of 3.7 percent, by the fourth quarter of 2023.

6. FACTORY ACTIVITY WEAK IN NORTHEAST

Two surveys conducted by the Federal Reserve Banks of New York and Philadelphia in early December, both showed weakening manufacturing activity. The New York Fed survey, focusing on New York State, reported a general business conditions index of -11.2, sixteen points below the prior month’s figure. This indicates that the percentage of firms reporting worse business conditions (34.3 percent) exceeded the percentage reporting general business conditions (23.1 percent). Firms also reported declining new orders but higher shipments. Despite the overall decline in activity, employment grew but hours worked declined. The Philadelphia Fed survey showed a current activity index of -13.8, the fourth straight negative reading and the sixth in seven months. The new orders index was extremely negative at -25.8, and the shipments index turned to negative territory at -6.2, the first decline since May 2020. Slightly more firms reported employment decreases than increases, and hours worked also declined.

7. NOVEMBER RETAIL SALES

Retail sales fell a seasonally adjusted 0.6 percent month-to-month in November, or about $4 billion, from $693 billion to $689 billion, according to Census data. This retracted much of October’s 1.3 percent increase and was the largest decrease in eleven months. The decline was entirely driven by the seasonal adjustment; unadjusted sales climbed 1.2% or $8 billion. However, retailers usually expect an even larger increase in November for holiday shopping. The seasonal adjustment is principally driven by “nonstore” retailers, which includes online commerce. Absent seasonal adjustments, this sector increased sales by $15 billion. But the seasonally adjusted figure declined $1 billion, as the sector usually has an even bigger holiday sales boom in November. Sales for motor vehicles and parts dealers fell 2.3 percent, or about $3 billion, from October. In other categories, spending remained relatively flat.

8. NLRB EXPANDS REMEDIAL POWERS AND EASES UNION ORGANZING FOR SMALLER UNITS

A National Labor Relations Board (NLRB) ruling in Thryv, Inc. broadened the NLRB’s ability to require employers to compensate workers for “all direct and foreseeable pecuniary harms” resulting from a violation of labor laws. The ruling expands NLRB’s remedial authority by adding foreseeable harms into the definition of make-whole compensation, which traditionally included back pay for lost wages and reinstatement of an employee’s former position. The decision provided a non-exhaustive list of pecuniary harms including expenses for medical and health insurance, lost compensation on 401(k) accounts, and legal fees, among others. Dissenting Board Members Marvin Kaplan and John Ring stated that “this standard opens the door to awards of speculative damages that go beyond the Board’s remedial authority” and would increase ambiguity and the length of compliance proceedings.

In a separate ruling, American Steel Construction, the NLRB reversed a previous standard that had raised the bar for unions to organize smaller groups of employees within larger workplaces. The prior 2017 rule had shifted the burden to unions to show that workers included in proposed bargaining units had “sufficiently distinct” interests from workers that were excluded. Under the revised standard, regional NLRB officials will approve elections when the proposed unit shares an “internal community of interest” and is identifiable as a sufficiently distinct group, unless an employer proves the proposed bargaining unit shares an “overwhelming community of interest” with workers not included.

9. HUD WAIVES BUILD AMERICA BUY AMERICA REQUIREMENTS

The Department of Housing and Urban Development (HUD) Wednesday posted final notice of a public interest waiver of Build America, Buy America Act (BABA) requirements for grantees and recipients of Federal Financial Assistance for iron, steel, manufactured products, and construction materials. HUD notes that “without this waiver, delays may occur to critical activities to protect life, safety, and property, which may negatively impact the most vulnerable Americans HUD seeks to serve.” It gives several examples of problems in public housing that might quickly threaten the safety of residents if not addressed immediately, such as malfunctioning appliances or damaged exit doors.

10. MONKEYPOX UPDATES

As of December 13, the US has confirmed a total of 29,643 cases of monkeypox. States with the highest case numbers include California (5,622), New York (4,186), Texas (2,855), Florida (2,835) and Georgia (1,980). Globally, as of December 13, 82,550 cases have been confirmed, with 81,577 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (29,643), Brazil (10,235), Spain (7,412), France (4,110), and Colombia (3,880). A total of 52 deaths have been reported in locations that have not historically reported monkeypox.

In a study posted in bioRxiv (not yet peer reviewed),researchers developed an mRNA technology-based vaccine against mpox, the virus formerly known as monkeypox, and evaluated its immunogenicity in animal models. Researchers designed a polyvalent, lipid nanoparticle (LNP) encapsulated mRNA vaccine candidate, MPXVac-097, against 2022 MPXV clade B.1, and tested its antibody response and T cell receptor in vaccinated mice. The study revealed that MPXVac-097 elicited adequate antibody titers in mice against two of five MPXV antigens. Researchers determined that the study showed initial feasibility of the MPXV mRNA vaccine and preliminary evidence of its efficacy.