Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (October 28, 2022)

October 28, 2022

OcCED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

October 28, 2022

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

Q3 2022 real GDP increased at an annualized rate of 2.6 percent following negative readings in both Q1 and Q2 2022. However, the increase was almost entirely due to a sharp rise in exports and a decline in imports, as opposed to improvements in economic fundamentals. The improvement in the topline growth rate masks deeper weaknesses in the economy. For instance, US consumers, who constitute about two-thirds of the economy, exhibited softening demand in Q3. The Conference Board forecast that a recession will begin over the coming months.

The Conference Board Consumer Confidence Index® decreased in October after back-to-back monthly gains. The Present Situation Index fell sharply, suggesting that economic growth slowed at the start of Q4. Consumers’ expectations regarding the short-term outlook remained dismal. The Expectations Index is still lingering below a reading of 80—a level associated with recession—suggesting recession risks appear to be rising.

September Personal Income & Outlays data show an economy that continues to grapple with inflation as readings for year-over-year (y/y) core inflation rose to 5.1 percent (the highest reading since March). Increases in personal income and consumer spending in September were partially offset when accounting for inflation. These data will likely encourage the Fed to make another large 75 basis point increase in the Fed Funds rate next week. Looking ahead, the stagflationary characteristics of the US economy are likely to give way to a recession beginning in Q4 and extending into early 2023.

The Employment Cost Index report showed that in Q3 2022, compensation for private industry workers grew by 5.2 percent over the past year, slightly down from 5.5 percent in the previous quarter. While compensation gains eased from the previous quarter, compensation growth continues to be historically high despite growing chances of a US recession. Over the coming year, it is projected that wage growth will further decelerate but will likely remain higher than 3 percent.

Finally, home prices fell 0.7% month-over-month, following a 0.6% decline in July, according to the Federal Housing Finance Agency. Despite the recent declines, prices were still up 11.9 percent year-over-year. These home price declines reflect a sharp rise in mortgage rates. The Conference Board’s latest economic forecast shows steep declines in US residential investment in 2023.

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

1. SEPTEMBER PERSONAL INCOME & OUTLAYS DATA HURT BY INFLATION

2. Q3 EMPLOYMENT COST INDEX SHOWED MORE WAGE AND BENEFIT GROWTH

3. THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX PULLS BACK

4. GDP RISES 2.6 PERCENT DESPITE WEAKENING DOMESTIC DEMAND

5. INFLATION CONTINUES TO WEIGH ON INCOMES AND SPENDING

6. GROWTH IN WAGES AND BENEFITS REMAIN ELEVATED

7. DURABLE GOODS ORDERS RISE ON AIRCRAFT PURCHASES

8. TRADE DEFICIT IN GOODS WIDENS

9. INITIAL UNEMPLOYMENT CLAIMS REMAIN AT MODERATE LEVELS

10. HOUSE PRICES DECLINE FOR SECOND MONTH

11. TEST SCORES FOR NINE-YEAR OLDS DECLINE FOLLOWING PANDEMIC

12. DEPARTMENT OF TRANSPORTATION RELEASES IIJA GUIDANCE ON ROAD SAFETY

13. MONKEYPOX UPDATES

1. SEPTEMBER PERSONAL INCOME & OUTLAYS DATA HURT BY INFLATION

September Personal Income & Outlays data show an economy that continues to grapple with inflation. Month-over-month (m/m) readings for both headline and core PCE inflation were unchanged from August, but year-over-year (y/y) core inflation rose to 5.1 percent (the highest reading since March). These inflation metrics remain far too high. Indeed, according to the BEA the 0.4 percent m/m increase in personal income in September was wiped out when accounting for inflation. Furthermore, increases in consumer spending in September were also partially offset by rising prices. These data will likely encourage the Fed to make another large 75 basis point increase in the Fed Funds rate next week. Looking ahead, the stagflationary characteristics of the US economy are likely to give way to a recession beginning in Q4 and extending into early 2023. Read The Conference Board’s full analysis here.

2. Q3 2022 EMPLOYMENT COST INDEX SHOWED MORE WAGES AND BENEFITS GROWTH

The Employment Cost Index report shows that growth in compensation remains strong. In Q3 2022, compensation for private industry workers grew by 5.2 percent over the past year, slightly down from 5.5 percent in the previous quarter. However, this rate continues to be historically high. The increasing likelihood that the US will fall into recession hasn’t deterred employers from raising wages and benefits for workers. Labor shortages across many industries and jobs are driving these rapid pay increases as employers are struggling with recruitment and retention. Workers have more negotiating power. While these wage gains are great for workers, rapid inflation is limiting workers’ growth in purchasing power. Read The Conference Board’s full analysis here.

3. THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX PULLS BACK

The Conference Board Consumer Confidence Index® decreased in October after back-to-back monthly gains. The Index now stands at 102.5 (1985=100), down from 107.8 in September. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—declined sharply to 138.9 from 150.2 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined to 78.1 from 79.5. “Consumer confidence retreated in October, after advancing in August and September,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index fell sharply, suggesting economic growth slowed to start Q4. Consumers’ expectations regarding the short-term outlook remained dismal. The Expectations Index is still lingering below a reading of 80—a level associated with recession—suggesting recession risks appear to be rising.”

“Notably, concerns about inflation—which had been receding since July—picked up again, with both gas and food prices serving as main drivers. Vacation intentions cooled; however, intentions to purchase homes, automobiles, and big-ticket appliances all rose. Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers. And, given inventories are already in place, if demand falls short, it may result in steep discounting which would reduce retailers’ profit margins.”

4. GDP RISES 2.6 PERCENT DESPITE WEAKENING DOMESTIC DEMAND

Real GDP increased at an annual rate of 2.6 percent in the third quarter of 2022, according to the advance estimate by the Bureau of Economic Analysis, following two slightly negative quarters in the first half of the year. Though the topline figure is relatively typical for the US economy, the underlying components of GDP were quite mixed and reflect softening US private-sector demand. For instance, final sales to private domestic purchasers, which excludes government, trade, and inventories, fell to just 0.1 percent, the weakest number since the second quarter of 2020. Personal consumption expenditures rose 1.4 percent for the quarter, led by services, and nonresidential investment rose 3.7 percent. However, residential investment, which is highly sensitive to rising mortgage rates, declined by 26.4 percent, the largest decline since the second quarter of 2020.

The increase in GDP is almost entirely explained by a sharp rise in exports (14.4 percent) and a decline in imports (6.9 percent). Collectively, these figures contribute 2.8 percentage points to GDP growth. The Conference Board’s Economy, Strategy, and Finance Center analysis notes that the topline growth rate “masks deeper weaknesses in the economy“ as US consumers, who “constitute about two-thirds of the economy, exhibited softening demand.”

5. INFLATION CONTINUES TO WEIGH ON INCOMES AND SPENDING

September Personal Income & Outlays data show an economy that continues to grapple with inflation. Month-over-month (m/m) readings for both headline and core PCE inflation were unchanged from August, but year-over-year (y/y) core inflation rose to 5.1 percent (the highest reading since March). According to the Bureau of Economic Analysis, the 0.4 percent m/m increase in personal income in September was wiped out when accounting for inflation. Furthermore, increases in consumer spending in September were also partially offset by rising prices. These data will likely encourage the Fed to make another large 75 basis point increase in the Fed Funds rate next week. Looking ahead, the stagflationary characteristics of the US economy are likely to give way to a recession beginning in Q4 and extending into early 2023. These data show neither a meaningful improvement nor a deterioration in the inflation situation, but it remains quite clear that the readings remain far too high.

6. GROWTH IN WAGES AND BENEFITS REMAIN ELEVATED

The Employment Cost Index report shows that in Q3 2022, compensation for private industry workers grew by 5.2 percent over the past year, slightly down from 5.5 percent in the previous quarter. While compensation gains eased from the previous quarter, compensation growth continues to be historically high despite growing chances of a US recession. Wages for manual services workers (e.g., food services, cleaning, personal care) are rising the fastest (8.1 percent over the past year). Nevertheless, all occupation groups are showing elevated wage growth compared to 2019. Transportation and production workers wages grew by 5.9 percent over the past year. This was 5.9 percent for sales and office workers, 4.7 percent for construction, natural resource, and maintenance workers, and 4.1 percent for management and professional workers. Over the coming year, it is projected that wage growth will further decelerate but will likely remain higher than 3 percent as 85% of CEOs expect to increase wages by 3% or more.

7.  DURABLE GOODS ORDERS RISE ON AIRCRAFT PURCHASES

Durable goods orders rose in September by $1.0 billion, or 0.4 percent, to $274.7 billion. This followed a 0.2 percent increase in August and is the sixth increase in the last seven months. However, excluding two volatile and atypical sectors, defense and transportation, durable goods orders declined by 0.7 percent. This measure is more stable month-to-month and often considered more predictive of future demand. Defense orders, which vary greatly month to month and reflect government policy, declined by $2.6 billion in September. In the private sector, aircraft orders drove a large increase in durables demand. Aircraft orders are extremely large and relatively infrequent; they can vary substantially month to month. In September, they jumped 21.9% from $15.0 billion to $18.2 billion, making up more than all of the total increase in durable goods orders. Outside these two sectors, demand for durables declined modestly, for instance in primary metals (-$0.3 billion), fabricated metal products (-$0.1 billion), machinery (-$0.1 billion), and computers and electronic products (-$0.1 billion).

8. TRADE DEFICIT IN GOODS WIDENS

The US trade deficit in goods widened to $92.2 billion in September, $4.9 billion more than the $87.3 billion trade deficit in August, according to advance figures published by the Census Bureau. This increase reverses five months of consecutive decreases from the March  figure of $126.4 billion, an all-time high. Both lower exports and higher imports contributed to September’s figure. Exports fell by $2.8 billion on lower commodity prices, led by a $2.3 billion decline in Industrial Supplies (including petroleum) and a $2.2 billion decline in Foods, Feeds, and Beverages. These two categories more than offset increased exports in other categories. Imports increased $2.2 billion, despite the declines of $2.2 billion in Industrial Supplies and $0.2 billion in Foods, Feeds, and Beverages, again driven by lower commodity prices. Imports in other categories more than offset these decreases, led by a $3.2 billion increase in Capital Goods and $0.9 billion in Consumer Goods.

9. INITIAL UNEMPLOYMENT CLAIMS REMAIN AT MODERATE LEVELS

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 217,000 for the week ending October 22. This was a small increase of 3,000 from the previous week’s level. Claims remain 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.

10. HOUSE PRICES DECLINE FOR SECOND MONTH

House prices fell with a 0.7% decline month over month, following a previous 0.6% decline in July, according to the Federal Housing Finance Agency (FHFA). As late as May, home prices had grown 1.2 percent month-over-month. Overall, despite the recent declines, prices were still up 11.9 percent year-over-year. These home price declines reflect a sharp rise in mortgage rates; the Freddie Mac primary mortgage market survey this year has shown the average 30-year fixed-rate mortgage climbed from prior lows under 3 percent to reach 7 percent. The Conference Board’s latest economic forecast shows steep declines in US residential investment in 2023.

11. TEST SCORES FOR NINE-YEAR OLDS DECLINE FOLLOWING PANDEMIC

The National Center for Education Statistics released the results of a special administration of the National Assessment of Educational Progress (NAEP) assessment for reading and mathematics for nine-year olds to measure the effect of the COVID pandemic on student learning. The results showed that average scores declined 5 points in reading and 7 points in mathematics compared to 2020 – the biggest average score decline in reading since 1990 and the first ever decline in mathematics. Scores declined at all five percentiles of students tested (10^, 25, 50, 75, and 90), with scores declining more at lower percentiles compared to 2020, showing that students already struggling were hit the hardest.

12. DEPARTMENT OF TRANSPORTATION RELEASES IIJA GUIDANCE ON ROAD SAFETY

The Department of Transportation released new guidance for states’ Vulnerable Road User Safety Assessments under the Highway Safety Improvement Program in the Infrastructure Investment and Jobs Act (Sec. 11111). The assessments will use data to understand the causes of roadway deaths for non-motorists in an effort that Transportation Secretary Pete Buttigieg said would move the US “closer to reaching the ultimate vision of zero fatalities.”  Once these assessments are complete, the Federal Highway Administration encourages states to use them to help determine what safety investments to make. The guidance requires that the assessments include “data such as location, roadway functional classification, design speed, speed limit, and time of day” and consider “the demographics of the locations of fatalities and serious injuries” and use that data to identify areas as “high-risk.” The assessments must be completed by November 15, 2023.

13. MONKEYPOX UPDATES

As of October 25, the US has confirmed a total of 28,061 cases of monkeypox. States with the highest case numbers include California (5,372), New York (4,082), Florida (2,697), Texas (2,677), and Georgia (1,899). Globally, as of October 24, 75,568 cases have been confirmed, with 74,677 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (28,004), Brazil (8,890), Spain (7,277), France (4,084), and the UK (3,686). A total of twenty-one deaths have been reported in locations that have not historically reported monkeypox.

The Wuhan Institute of Biological Products, a research unit of state-owned Sinopharm’s China National Biotech Group, announced October 20 that it has begun working on its own domestic monkeypox vaccine. The research institute said it has successfully isolated monkeypox virus strains from clinical samples and has begun researching vaccines and drugs to fight the disease. China has not reported any locally transmitted cases of monkeypox. However, an incoming traveler from Germany arriving in Chongqing in September was confirmed to have contracted the disease. All inbound travelers to the mainland will be screened for both COVID-19 and monkeypox. "The priority task now is to implement diagnostics work at customs firmly, and develop rapid testing kits," said Lu Hongzhou, president of Shenzhen Third People’s Hospital in Guangdong province.