Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (October 21 2022)

October 21, 2022

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

October 21, 2022

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

The US Leading Economic Indicator fell again in September and its persistent downward trajectory in recent months. Amid high inflation, slowing labor markets, rising interest rates, and tighter credit conditions, The Conference Board forecasts a recession is increasingly likely to begin before yearend.

September retail sales data showed customers struggling with high inflation and interest rates. In nominal terms, retail spending was flat from August to September. However, adjusted for CPI inflation, retail spending fell by 0.4 percent.

The Conference Board Measure of CEO Confidence™ fell deeper into negative territory in Q4 2022, to lows not seen since the depths of the Great Recession. The survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months. An overwhelming majority—98 percent—said they were preparing for a US recession.

Finally, September new housing starts fell 8 percent month-on-month and were among the lowest recorded over the last two years. Separately, the National Association of Home Builders reported that homebuilder confidence fell for the tenth straight month. The Conference Board’s Economy, Strategy, and Finance Center projects declines in residential investment into the third quarter of 2023, stating that “residential investment will continue to contract as the housing market works to find a new lower equilibrium.”

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

1. THE CONFERENCE BOARD LEADING ECONOMIC INDEX CONTINUES DECLINE

2. FED’S BEIGE BOOK SHOWS MODEST EXPANSION BUT OUTLOOK REMAINS PESSIMISTIC

3. INFLATION AND INTEREST RATES WEIGH ON SEPTEMBER RETAIL SALES

4. HOUSING STARTS FALL SHARPLY

5. INITIAL UNEMPLOYMENT CLAIMS DECLINE TO 214,000

6. SEVERE AVIAN FLU OUTBREAK

7. OCEAN SHIPPING REFORM ACT RULE HELPS SHIPPERS

8. DEPARTMENT OF ENERGY AWARDS $2.8 MILLION IN BATTERY MATERIALS GRANTS

9. CYBERSECURITY REGULATION IN FOUR CRITICAL INFRASTRUCTURE SECTORS

10. IRS ADJUSTS TAX BRACKETS FOR INFLATION

11. MONKEYPOX UPDATES

1. THE CONFERENCE BOARD LEADING ECONOMIC INDEX CONTINUES DECLINE

The Conference Board Leading Economic Index® (LEI) decreased by 0.4 percent in September 2022 to 115.9 (2016=100), after remaining unchanged in August. The LEI is down 2.8 percent between March and September 2022, a reversal from its 1.4 percent growth over the previous six months. The LEI is a composite of ten economic figures that are predictive of the future direction of the economy. “The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The six-month growth rate of the LEI fell deeper into negative territory in September, and weaknesses among the leading indicators were widespread. Amid high inflation, slowing labor markets, rising interest rates, and tighter credit conditions, The Conference Board forecasts real GDP growth will be 1.5 percent year-over-year in 2022, before slowing further in the first half of next year.”

Separately, The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council stands at 32 to start Q4 2022, down from 34 in Q3. The Measure fell deeper into negative territory, to lows not seen since the depths of the Great Recession. (A reading below 50 points reflects more negative than positive responses.) A total of 136 CEOs participated in the Q4 survey between September 19 and October 3. The recent survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months. An overwhelming majority—98 percent—said they were preparing for a US recession; 99 percent of CEOs said they were preparing for an EU recession.

2. FED’S BEIGE BOOK SHOWS MODEST EXPANSION BUT OUTLOOK MORE PESSIMISTIC

A qualitative Fed survey commonly known as the Beige Book, which gathers information on current economic conditions through interviews with key business contacts in each Fed district, showed that economic activity “expanded modestly” overall, with four of twelve districts citing flat activity and two citing declines. Manufacturing activity held steady or expanded in most districts, which the Fed attributed to easing supply chain disruptions. Some areas of consumer spending, including travel and tourism, rose strongly. However, overall retail spending was flat. Real estate, both commercial and residential, struggled under high interest rates. Auto dealers, whose consumers are generally sensitive to interest rates, noted “sustained sluggishness in sales.” Though most districts reported continued hiring, several reported slowing labor demand, with businesses hesitant to add more payrolls under an uncertain economic outlook. Most contacts expected wage growth to continue, because higher pay remains necessary to retain workers. Overall, “outlooks grew more pessimistic amidst growing concerns about weakening demand.”

3. INFLATION AND INTEREST RATES WEIGH ON SEPTEMBER RETAIL SALES

Seasonally adjusted retail sales data for September released by the Census Bureau last Friday showed customers struggling with high inflation and interest rates. In nominal terms, retail spending was flat from August to September. However, adjusted for CPI inflation, retail spending fell by 0.4 percent. Spending on goods fell in September by 0.1 percent in nominal terms, largely attributable to lower gas prices which continued to fall from their June highs. Overall, there was deflation in goods, and in real terms, goods spending actually rose by 0.2 percent. Spending on motor vehicles and parts, which is often debt-financed and sensitive to interest rates, fell 0.4 percent, continuing a steady decline seen throughout the year. By contrast, spending at food and drinking establishments rose by 0.5 percent in nominal terms, but declined 0.2 percent after accounting for inflation, reflecting consumers’ struggles with high inflation in services. Analysis of the retail sales data by The Conference Board’s Economy, Strategy, and Finance Center can be found here.

4. HOUSING STARTS FALL SHARPLY

The Census Bureau released on Wednesday figures on new residential construction. New housing starts for September, seasonally adjusted and annualized, were 1,439,000, 8.1 percent below August’s figure and one of the three lowest months in the last two years. Single family starts fell to 892,000, 4.7 percent below August’s figure and the lowest since May 2020. People have shown a high willingness to pay for housing in the last year; Consumer Price Index inflation for shelter has reached 6.6 percent. However, the average 30-year fixed rate mortgage in Freddie Mac’s Primary Mortgage Market Survey has reached 6.92 percent, the highest figure in decades. The National Association of Home Builders, a private industry group, reported Tuesday that homebuilder confidence fell for the tenth straight month. The Conference Board’s Economy, Strategy, and Finance Center projects declines in residential investment into the third quarter of 2023, stating that “residential investment will continue to contract as the housing market works to find a new lower equilibrium.”

5. INITIAL UNEMPLOYMENT CLAIMS DECLINE TO 214,000

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 214,000 for the week ending October 15. This was a decrease of 12,000 from the previous week’s revised level. Claims remain elevated above September’s lowest reading, 190,000, or the immediate pre-pandemic figure of 186,000 for March 7, 2020. They also remain well above the spring lows of 166,000. However, they are moderate by historical standards, and below the July highs of 261,000. 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. SEVERE AVIAN FLU OUTBREAK

An outbreak of avian flu has led to over 47 million deaths of chickens and turkeys in 42 states, a near-record number, just short of 2015’s 50.5 million deaths in a smaller number of states. A subvariant of the H5N1 strain of avian flu (the goose/Guangdong lineage) survived the summer and has led to a worse outbreak this fall both in the US and in Europe, which has seen nearly 50 million poultry cullings. The subvariant seems to live for longer in wild birds, according to Rosemary Sifford, chief veterinary officer for the US Department of Agriculture. She noted that the virus “could be present in wild birds for the foreseeable future.” USDA believes there may be an elevated threat from avian flu until the summer of 2023. Infections have led to export restrictions, including China’s suspension of all poultry imports from Arkansas (the third-biggest producer of chickens). As Thanksgiving approaches, prices for turkey have risen significantly, with retail prices for fresh boneless, skinless turkey reaching a record $6.70 per pound, up 112 percent from a year ago, while production is expected to decline 6 percent this year to 5.2 billion pounds; antibiotic-free turkey products are selling at wholesale for $7-$9 per pound instead of about $3 before the COVID-19 pandemic.

7. OCEAN SHIPPING REFORM ACT RULE HELPS SHIPPERS

Fulfilling a requirement of the Ocean Shipping Reform Act enacted earlier this year, the Federal Maritime Commission (FMC) proposed a rule to require common carriers and marine terminal operators to include specific information on invoices for demurrage (technical failure to abide by a ship charter agreement, especially the failure to load or discharge the ship within an agreed time) and detention (not returning an empty container to a port by an agreed time) and related billing practices to shippers. Pressures on shippers from rising cargo volumes at congested ports, which delays loading and unloading of ships in the wake of the pandemic has brought greater focus on demurrage and detention charges, leading to passage of the Act. According to the FMC, “between 2020 and 2022, nine of the largest carriers serving the U.S. liner trades individually charged a total of approximately $8.9 billion in demurrage and detention charges and collected roughly $6.9 billion.” The rule should help shippers which continue to face congested ports. Comments on the proposal are due by December 13.

8. DEPARTMENT OF ENERGY AWARDS $2.8 BILLION IN BATTERY MATERIALS GRANTS

The Department of Energy awarded $2.8 billion for high-tech battery manufacturing facilities to bolster the supply chain for batteries and battery electric vehicles, with 20 companies building facilities in 12 states. The grants are matched by $9 billion in private funds, with no project exceeding a 50 percent federal cost share. The facilities typically process battery-grade lithium, graphite, and nickel or use those materials in separators, anodes, and cathodes. The Department released fact sheets on each of the individual projects. In making the awards, the Department considered not only technical merits and contributions to production of battery components but also benefits for communities and workers, including building facilities in or near disadvantaged communities. A main purpose of the initiative is to reshore the supply chain for electric vehicles, much of which is currently located in China. The Bipartisan Infrastructure Law will eventually provide up to $7 billion for the battery supply chain.

9. CYBERSECURITY REGULATION IN FOUR CRITICAL INFRASTRUCTURE SECTORS

Deputy National Security Adviser Anne Neuberger said the Administration will release cybersecurity requirements for four critical infrastructure sectors: transportation, communications, water, and healthcare. In communication, the FCC is addressing the security of the National Alert and Warning Systems in its October 27^th meeting and is circulating a notice of proposed rulemaking on the subject. Neuberger further previewed rulemaking by the Environmental Protection Agency in cybersecurity for water systems, and the Department of Health and Human Services for hospitals, with additional work in healthcare to come. Neuberger’s comments suggest that firms in critical infrastructure are likely to be required to separate regular corporate IT networks from networks actually operating the infrastructure.

10. IRS ADJUSTS TAX BRACKETS FOR INFLATION

On Tuesday, the IRS announced tax brackets for 2023 that reflect 7 percent inflation in the Consumer Price Index (CPI), following an automatic adjustment in place since 1985 to end the former “bracket creep” in periods of higher inflation. The 37 percent top tax rate will now apply to individuals with income over $578,125 and to married couples filing jointly with income above $693,750. Social Security, which follows a different measure of CPI, announced last week that benefits will rise 8.7 percent.

11. MONKEYPOX UPDATES

As of October 18, the US has confirmed a total of 27,558 cases of monkeypox. States with the highest case numbers include California (5,278), New York (4,051), Florida (2,658), Texas (2,594), and Georgia 1,878). Globally, 73,782 cases have been confirmed, with 72,922 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (27,558), Brazil (8,652), Spain (7,239), France (4,064), and the UK (3,673). A total of eighteen deaths have been reported in locations that have not historically reported monkeypox.

As cases climbed to a peak in early August, experts worried that it was only a matter of time before monkeypox would circulate widely in close-knit settings such as daycares and college dorms. Now, it is clear that those threats did not materialize, as daily new cases are hovering around 60, the lowest since June. As of October 12, only 0.2 percent of US cases have been in children under 16. Fear stemmed from the understanding that monkeypox could be spread through saliva, but several studies have shown that it is quite rare to catch the virus this way. A study at Israel Institute of Biological Research measured the levels of the virus in 44 monkeypox patients, taking samples from the throat and lesions on the skin. It found that the skin lesions contained, on average, 17 times the infectious particles than the swabs from the throat. This study, among others, explains why monkeypox is spreading almost exclusively though contact during sex, rather than through aerosol exposure. Some experts are now saying that it may be possible to combat monkeypox “transmission chains” in the US and bring down new daily cases to nearly zero. "I think we can expect to see regional elimination, potentially national elimination, where we would not see a sustained number of cases," says Dr. Jeffrey Klausner, professor of medicine and public health at the University of Southern California.