Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (December 2, 2022)

December 02, 2022

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

December 2, 2022

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

During a speech on Wednesday, Federal Reserve Chair Jay Powell gave the strongest indication yet thatthe Federal Reserve would slow the pace of interest rate hikes. In its past four meetings, the Fed has increased rates by 0.75 percentage points each. “The time for moderating the pace of rate increases may come as soon as the December meeting” he said. Powell acknowledges that the future for inflation is uncertain and loosening policy too soon would be risky, but nonetheless admits that “inflation remains far too high.”

Relatedly, the Bureau of Economic Analysis reported that the Personal Consumption Expenditure (PCE) Price Index, a measure of inflation, moderated in October. While higher energy prices kept month-over-month PCE inflation flat at 0.3 percent, core PCE inflation dipped to 0.2 percent. Additionally, both headline and core PCE inflation dropped in year-over-year terms. While these rates remain far too high, it does appear that progress is being made.

The Conference Board Consumer Confidence Index decreased in November after also losing ground in October, most likely due to rising gas prices. The Present Situation Index, based on consumers’ assessment of current conditions, declined suggesting that the economy is losing momentum as the year winds down. The Expectations Index declined as well, which shows there’s still a good chance of a recession occurring. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023.

Manufacturing Purchasing Managers Indices (PMI), published by both the Institute for Supply Management (ISM) and S&P Global, came in below fifty in November – signifying a contraction in activity. While previous reports showed weakening demand for several months, the most recent data is beginning to show signs of supply slowing down as well.

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

1. THIRD QUARTER GDP REVISED UPWARD TO 2.9 PERCENT

2. CONSUMER CONFIDENCE DECLINES IN NOVEMBER

3. JOB OPENINGS EDGE DOWN TO 10.3 MILLION

4. INITIAL UNEMPLOYMENT CLAIMS DECLINE

5. POWELL REMARKS ON INFLATION

6. BEIGE BOOK AND PCE INFLATION FIGURE

7. MANUFACTURING INDICATORS TURN NEGATIVE

8. CONGRESS AVERTS RAIL STRIKE

9. SOME US POWER GRIDS AT RISK THIS WINTER

10. MONKEYPOX UPDATES

1. THIRD QUARTER GDP REVISED UPWARD TO 2.9 PERCENT

On Wednesday, the Bureau of Economic Analysis revised figures for third quarter GDP, showing growth of 2.9 percent, higher than the 2.6 percent in the advance estimate. The revisions showed that personal consumption expenditures, net exports, and government expenditures all grew by more than initially estimated, while gross domestic investment declined by more than previously estimated. The new figure was a rebound from the previous quarter’s decline of -0.6 percent. A large contributor to the rebound was trade: exports grew 15.3 percent, and imports declined by 7.3 percent. Declining imports with increasing consumption mean that consumption is supplied by domestic production. However, investment declined by 9.1 percent, led by residential (-26.8 percent) and nonresidential structures (-6.9 percent.) These investments, often debt-financed, are particularly sensitive to rising interest rates.

2.  CONSUMER CONFIDENCE DECLINES IN NOVEMBER

The Conference Board Consumer Confidence Index decreased in November after also losing ground in October. The Index now stands at 100.2 (1985=100), down from 102.2 in October. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, decreased to 137.4 from 138.7. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, declined to 75.4 from 77.9. “Consumer confidence declined again in November, most likely prompted by the recent rise in gas prices,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index moderated further and continues to suggest the economy has lost momentum as the year winds down. Consumers’ expectations regarding the short-term outlook remained gloomy. Indeed, the Expectations Index is below a reading of 80, which suggests the likelihood of a recession remains elevated.” The Conference Board added that “[i]nflation expectations increased to their highest level since July, with both gas and food prices as the main culprits. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023.”

3. JOB OPENINGS EDGE DOWN TO 10.3 MILLION

The number of job openings in the US edged down to 10.3 million by the end of October, according to the Bureau of Labor Statistics, a decline of 353,000 from the previous month, and about 1.5 million below the all-time high set in March 2022, though about 3.3 million more than the immediate pre-pandemic figure of 7.0 million. Job openings declined most for non-education state and local government (-101,000), nondurable goods manufacturing (-95,000), and federal government (-61,000). Labor turnover was little changed from the previous month. There were 6 million new hires (down from 6.1 million in September) and 5.7 million separations (equal to September’s figure), reflecting moderate job growth. Of those separations, 4.0 million were quits, 1.4 million were layoffs or discharges, and other separations were 0.3 million. New hires in the private sector decreased from 5.7 million to 5.6 million. In construction, new hires declined by 27,000 to 332,000, the lowest figure since January. However, hires in government increased from 380,000 to 390,000. The largest increase in layoffs in discharges came in professional and business services, rising from 293,000 to 360,000.

4. INITIAL UNEMPLOYMENT CLAIMS DECLINE

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, were 224,000 for the week ending November 26, a decrease of 16,000 from the previous week’s revised level, reversing the increase for the week ending November 19. This level of claims is 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 3.7 percent, by the second quarter of next year.

5. POWELL REMARKS ON INFLATION

In a speech delivered Wednesday, Federal Reserve Chair Jay Powell gave the strongest indication yet that the Federal Reserve would slow the pace of interest rate hikes. “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he said. “The time for moderating the pace of rate increases may come as soon as the December meeting.” In its past four meetings, the Fed has increased rates by 0.75 percentage points each. Powell’s remarks are a strong sign that the final meeting of the year may feature a slower increase. The Conference Board’s latest economic forecast predicts that the federal funds rate will finish 2022 in the 4.25 to 4.5 percent band, consistent with a 0.5 percentage point increase in December.

Powell reiterated, however, that “inflation remains far too high” and “has moved stubbornly sideways. The truth is that the path ahead for inflation remains highly uncertain.” The Fed’s goal remains “to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent,” adding that while “there is no doubt that we have made substantial progress” toward that goal, it “seems to be likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting”; “we have more ground to cover.” He concluded with a warning that “[h]istory cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

6. BEIGE BOOK AND PCE INFLATION FIGURE

On Wednesday, the Federal Reserve published its Beige Book, a summary of current economic information in each Fed district. Overall, the Fed characterized activity as “about flat or slightly up,” down from the modest pace of growth reported in October. One of the stronger areas of the economy was travel, dining, and tourism. However, in other sectors, the twin challenges of inflation and interest rates weighed on the economy. Inflation pushed low-to-moderate income consumers towards cheaper versions of goods. Real estate declined, with residential and commercial leasing all trending negative and home sales falling steeply in some districts. In labor markets, there were some signs of weakening labor demand, but firms were reluctant to let workers go after difficulties hiring earlier in the year.

The Bureau of Economic Analysis reported that the Personal Consumption Expenditures (PCE) Price Index, its preferred measure of inflation, showed some progress in October. While higher energy prices kept month-over-month PCE inflation flat at 0.3 percent, core PCE inflation dipped to 0.2 percent. Additionally, both headline and core PCE inflation dropped in year-over-year terms. While these rates remain far too high, it does appear that progress is being made. For more information on these data please see analysis by The ESF Center (link).

7. MANUFACTURING INDICATORS TURN NEGATIVE

Two separate measures of manufacturing activity, published by the Institute for Supply Management (ISM) and S&P Global, showed declining activity in November, ending a 29-month expansion dating back to the summer of 2020. The ISM Purchasing Managers Index (PMI) was 49.0, 1.2 points below October’s 50.2 and below the neutral mark of 50. New orders, already falling last month, dipped further. New export orders also declined, and backlogs of orders declined sharply. Supply side indicators were more mixed: employment moved into contraction; production was in positive territory but slower than the previous month. S&P Global also reported declining activity, with a headline number of 47.7, down from 50.4 in October. S&P reported declining new orders as well as continued decline in export orders. Contrary to ISM, S&P reported slightly increasing employment but declining production. On net, both indexes have for several months shown weakening demand, and November showed signs that supply was beginning to slow or decline as well.

8. CONGRESS AVERTS RAIL STRIKE

On Monday, the President urged Congress to pass legislation to avert a rail strike. Under the Railway Labor Act of 1926, Congress has the power to impose an agreement or even order negotiations to continue. On Wednesday, the House voted 290-137 to impose a settlement on freight railroads and 12 labor unions that would avert a strike planned for December 9 after four unions voted not to ratify a deal that had been worked out in September by the Administration. The Senate followed on Thursday in a vote of 80-15, sending the bill to the President for signature. Railroad and union leaders had reached an agreement with recommendations from a Presidential Emergency Board, but the tentative agreement was subject to ratification by union membership. The five-year agreement comes with a 25% increase in wages, and an additional paid day off. However, unions had sought greater paid leave.

A rail strike would have put very serious pressures on the supply chain and further increase inflationary pressures. About 40 percent of the nation’s long-distance freight moves via rail, and a strike would force more cargo onto trucks (for which there is still a shortage of about 78,000 drivers), and many heavy commodities are not conducive to truck transport. Food and agricultural products would be affected early in a strike. Ethanol, which was already experiencing weakening of rail service contributing to higher gasoline prices, would face particular disruption, as more than 70 percent of ethanol is carried by rail. Disruptions in ethanol supplies would make it more difficult to maintain adequate fuel supplies for gasoline. Passenger rail service would also be impacted, as freight railroads own and maintain nearly 97 percent of the tracks on Amtrak’s 22,000-mile system.

CED issued a statement calling on Congress to act to avert a strike and a Policy Brief on the issue.

9. SOME US POWER GRIDS AT RISK THIS WINTER

If coal, fuel oil, and natural gas supplies tighten this winter, there is a possibility of rolling blackouts during periods of extreme cold, according to the North American Electric Reliability Council (NERC). Electric grids covering up to a quarter of the US population in Texas (ERCOT), the central US (Midcontinent Independent System Operator), and New England are most at risk, with Commissioner James Danly of the Federal Energy Regulatory Commission saying “[t]here is a very real possibility that New England could be facing a dire set of consequences this winter.” High prices, more frequent storms, and greater reliance on renewable sources such as wind and solar all contribute to pressures on grids. Grids in the West and the Southwest, though, are in better shape than last winter according to NERC.

10. MONKEYPOX UPDATES

As of November 30, the US has confirmed a total of 29,367 cases of monkeypox with 15 deaths. States with the highest case numbers include California (5,572), New York (4,167), Texas (2,826), Florida (2,812) and Georgia (1,957). Globally, 81,225 cases have been confirmed, with 80,252 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (29,367), Brazil (9,905), Spain (7,405), France (4,107), and Colombia (3,803). A total of forty-three deaths have been reported in locations that have not historically reported monkeypox.