Policy Backgrounders

The Weekly Round-Up. Developments on the US Economy (5-19 August, 2022)

August 22, 2022

CED & ESF POLICY BRIEF

The Weekly Round-Up:

Developments on the US Economy

Week of August 15-19, 2022

Economic data and events over the past week point to a rapidly slowing US economy, but no reason for the Fed to let up on its aggressive interest rate hiking campaign.

US Economy Slowing

• The lower trajectory of the LEI and dismal CEO confidence are consistent with our call for a US recession before yearend that extends into next year. Indeed, the recession may have already begun. For five consecutive months, the Conference Board’s leading economic indicators have pointed to a downturn in the underlying US economy. Indeed, the nonfinancial components of the US LEI, which do not include inventories or external trade, have led the decline in the overall index. Meanwhile, our 3Q reading on US CEO Confidence in partnership with The Business Council is back down to pandemic-era lows. Importantly, 81 percent of CEOs canvassed believe there will be a US recession, but with limited global spillover. Another 12 percent expect a deep recession with material global spillover. Together, 93 percent anticipate a recession. Meanwhile, many CEOs expect to continue to be plagued by higher input costs (60 percent), higher wages, and labor shortages. Many firms anticipated continued hiring, suggesting the labor market may not collapse with GDP growth (a “job-full” recession). But intensions have lessened somewhat in the face of an economic downturn. Downside risks to our forecast of a relatively shallow downturn, include a deep housing recession, limited boost from infrastructure spending, and extremely stubborn inflation. One upside is if inflation slows faster than expected as global demand cools and Fed hikes take greater effect.

Likely Fed Response

• Obvious slowing in the US economy is unlikely to prompt the Fed to pause on interest rate hikes. Dampening domestic demand through tighter monetary policy is part of the plan to calm inflation. So far, the progress on tamping down inflation appears to be slow and inflation remains extremely elevated. The marginal cooling seen to date largely reflects lower gasoline and airfare (mostly jet fuel) prices. However, that is due to lower global energy prices as the shock of the war in Ukraine has already been reflected in futures. The Fed has no control over global energy prices. Indeed, the July meeting minutes posted on August 17 indicate that the Fed did not believe lower energy prices constituted a signal of sustainably lower inflation. Higher interest rates are starting to damp demand for financed goods like automobiles. But the cooling in goods prices is also consistent with reduced consumer demand for objects, evident in retail sales prints, and greater demand for services as the pandemic is in the rearview mirror. Services costs are still rising, as are food prices, the latter of which are determined externally and largely outside of the Fed’s purview. Among services, prices are still rising rapidly for health care, personal services, restaurants, and recreation. Most worryingly, shelter costs are still rising even though housing activity (e.g., starts, sales) is on the downturn, reflecting insufficient supplies, rising interest rates, and high prices. Home price valuations are still extremely elevated and that is being reflected in both actual and imputed rents, with somewhat of a lag.

September Fed Meeting and Beyond

• Unless there is material improvement in inflation components the Fed has influence over, a 75bp interest rate hike in September is likely. Between now and then the Fed should receive at least two more inflation reports. A bad August payroll employment print, which is possible given the (unsustainable) more than half million jobs added in July is unlikely to move the Fed. Even an uptick in the unemployment rate would not deter a 50 or 75 bp hike because slowing in the labor market is anticipated by the central bank. We think the federal funds rate will at minimum rise to 3.75-4 percent by early next year, with risk of going even higher if inflation remains stubborn. Even apart from statements from Fed officials on the matter, we believe the Fed is unlikely to start cutting rates next year. The Fed will likely desire to wait until it is clear that inflation will return to readings close to the 2-percent target. We do not anticipate a return to 2 percent inflation until sometime in 2024.

Roundup of Weekly Events

1. US LEI FALLS FOR FIFTH CONSECUTIVE MONTH

2. US CEO CONFIDENCE PLUNGES BACK TO PANDEMIC LOW

3. RETAIL SALES FLAT AS GAS SPENDING FALLS

4. FED MINUTES SHOW INTENT FOR CONTINUED RATE HIKES

5. DECLINE IN HOUSING STARTS; MANUFACTURING INDEX REBOUNDS

6. INITIAL UNEMPLOYMENT CLAIMS FALL, REVERSING TREND

7. CDC REFORM PROPOSALS

8. ENERGY DEPARTMENT PUBLISHES WIND POWER ESTIMATES

9. HOMELAND SECURITY I-9 VERIFICATION REFORM

10. NEW TRANSPORTATION DEPARTMENT GRANTS UNDER BIL

11 FURTHER WATER CUTS IN COLORADO RIVER

12. MONKEYPOX UPDATES

1. US LEI FALLS FOR FIFTH CONSECUTIVE MONTH

The Conference Board Leading Economic Index® (LEI)for theU.S. decreased by 0.4 percent in July 2022 to 116.6 (2016=100), after declining by 0.7 percent in June. The LEI was down by 1.6 percent over the six-month period from January to July 2022, a reversal from its 1.6 percent growth over the previous six months. “The US LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” said Ataman Ozyildirim, Senior Director, Economics, The Conference Board. “Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy. The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.”

2. US CEO CONFIDENCE PLUNGES BACK TO PANDEMIC LOW

The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council declined for the fifth consecutive quarter in Q3 2022. The Measure now stands at 34, down from 42 in Q2. The Measure has fallen deeper into negative territory, to lows not seen since the start of the COVID-19 pandemic in 2020, but consistent with prior contractionary periods. (A reading below 50 points reflects more negative than positive responses.) The Q3 survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months.  An overwhelming majority—81%—said they were preparing for a brief and shallow recession, with limited global spillover, while only 7% said they do not expect a recession. Thus far, however, CEOs do not seem to be experiencing the recessionary conditions that typified recent contractions. In fact, three-quarters of CEOs say demand has risen or held steady over the past three months.

3. RETAIL SALES FLAT AS GAS SPENDING FALLS

The Census Bureau’s advance retail sales estimate for July (which contains seasonal and calendar-related adjustments, but no adjustment for inflation) was $683 billion, almost unchanged from June, but 10.3 percent above the same figure from last year. This estimate indicates that nominal consumer spending growth is no longer growing at the accelerated pace of the last year. Spending at gas stations fell 1.8 percent, offsetting slight increases in retail sales elsewhere. Gas station spending has accounted for almost a tenth of retail sales in recent months as prices were driven higher by the war in Ukraine.

4. FED MINUTES SHOW INTENT FOR CONTINUED RATE HIKES

The minutes from the Federal Reserve’s meeting last month were released Wednesday. They show that the central bank intended to continue raising rates, but that it “likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.” The Fed anticipated the low inflation figure for July (which included no headline CPI inflation for the month) and did not expect it to change its plans substantially, because “declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound.”

5. DECLINE IN HOUSING STARTS; MANUFACTURING INDEX REBOUNDS

New housing starts fell 9.6 percent in July to a seasonally adjusted annual rate of 1,446,000, down from 1,599,000 in June and 19.9 percent below the April 2022 high. Higher mortgage rates, driven by the Federal Reserve’s increases in the federal funds rate, reduce the ability of many buyers to pay for homes. The Conference Board’s latest economic forecast projects a steep decline (-10.0 percent) in residential investment in the third quarter of 2022. In contrast the news on housing starts, the Philadelphia Fed’s Manufacturing Business Outlook Survey rebounded in August after two months of consecutive negative readings. The diffusion index was 6.2, meaning that the share of firms reporting increased activity (26 percent) exceeded the share reporting declining activity (20 percent). This was a 19-point positive shift from the previous month, the largest such shift since January 2021.

6. INITIAL UNEMPLOYMENT CLAIMS FALL, REVERSING TREND

Initial claims for unemployment insurance declined to 250,000 for the week ending August 13, arresting a months-long trend. The figure was 2,000 below last week’s revised level, and 12,000 below last week’s advance figure. The four-week moving average also declined, for the first time since April.

7. CDC REFORM PROPOSALS

In a meeting with senior staff on Wednesday, CDC director Dr. Rochelle Walensky outlined in broad terms a plan to reorganize the agency’s structure which seeks to prioritize public health needs and efforts to curb continuing outbreaks, while putting less emphasis on the publication of scientific papers and rare diseases. CDC leaders call the plan a “reset,” and it comes amid growing criticism of the agency’s response to COVID-19, monkeypox, and other public health threats. The Department of Health and Human Services (HHS), which oversees CDC, plans to beef up the team responsible for responding to public health emergencies and require those officials to remain in their positions for at least six months. The plan also includes the establishment of a new executive team to set priorities and make decisions on spending “with a bias towards public health impact,” according to a briefing document. Additionally, the plan includes restructuring the agency’s communications office and further revamping CDC websites to make guidance for the public more clear and easier to find. “My goal is a new, public health, action-oriented culture at CDC that emphasizes accountability, collaboration, communication and timeliness,” noted Walensky.

The plan follows an external review launched by Walensky and headed by James Macrae, who has held senior positions at HHS, to evaluate the “CDC’s structure, systems, and processes” and “strategically position CDC to support the future of public health.” The review came as a response to criticism of CDC’s confusing public messaging and the agency’s inability to more quickly track critical COVID-19 data. “I actually really think many people have thought, this is CDC’s responsibility, to fix public health [and] the pandemic,” Walensky said in January in an interview with Politico. “The CDC alone can’t fix this. Businesses have to help, the government has to help, school systems have to help. This is too big for the CDC alone,” she said.

8. ENERGY DEPARTMENT PUBLISHES WIND POWER ESTIMATES

The Department of Energy released three reports on Tuesday documenting the growth of wind power, which it estimates accounted for 32 percent of US energy capacity growth in 2021. The land-based wind report showed that 13,413 megawatts (MW) of wind power was added in 2021, bringing the US to a cumulative capacity of 135,886 MW. The offshore wind capacity was much smaller: 42 MW of operating capacity, 932 MW currently under construction, and 18,581 MW awaiting permitting. The Committee for Economic Development has outlined general principles for streamlined permitting to improve the pace of infrastructure construction. Distributed wind power, smaller turbines installed on-site at homes, farms, or businesses, added 12 MW of capacity in 2021 to reach a cumulative total of 1,075 MW.

9. HOMELAND SECURITY I-9 VERIFICATION REFORM

The Department of Homeland Security is seeking to make Form I-9 verification for new hires more compatible with remote work. Form I-9 is the paperwork that shows a new hire is eligible for work in the US, either through citizenship or through a work authorization for noncitizens. The proposed reforms would ease the requirements for physical document examination and permit employers (or agents acting on an employer’s behalf) to use alternatives to physically examining the documentation, possibly as a pilot program, if the Department determines that the procedures offer an equivalent level of security. Comments on the proposal are due October 17.

10. NEW TRANSPORTATION DEPARTMENT GRANTS UNDER BIL

The Department of Transportation announced $2.2 billion in grants from the Rebuilding American Infrastructure with Sustainability and Equity (RAISE) program under the Bipartisan Infrastructure Law (BIL). The funds are designed to be widely dispersed throughout the country. No one project received more than $25 million, no state may receive more than $341 million, and funding is split 50-50 between urban and rural communities. The types of projects funded are diverse, including roads, bridges, sidewalks, ports, and broadband. Separately, $1.66 billions of BIL funds were awarded under the Low- and No-Emission Bus and Bus Facilities programs. The largest of these grants were to the Massachusetts Bay ($116 million), New York ($116 million), and Los Angeles ($104 million) transit authorities, to purchase electric buses.

11. FURTHER WATER CUTS IN COLORADO RIVER

As the West continues in severe drought, the Interior Department’s Bureau of Reclamation will cut the supply of water that Arizona and Nevada receive from the Colorado River; the amount shared with Mexico will also fall. The eight Colorado River Compact states (Arizona, California, Colorado, Nevada, New Mexico, Utah, Wyoming) had failed to agree on an overall plan for joint water reduction of 15-30 percent, forcing this week’s cuts. Arizona will lose about 3 percent of its water level from last year, for a total of 21 percent water reduction over two years. Mexico’s share will fall to 7 percent of what it should receive, potentially impacting farming in the Mexicali Valley in the state of Baja California. The Interior Department will continue to press the Compact states for agreement on further reductions. Because of the low flow in the Colorado River, Lake Mead is less than one-quarter full, raising concerns that the water level will fall so low as to prevent hydroelectric power generation at the Hoover Dam on the Nevada-Arizona border.

12. MONKEYPOX UPDATES

As of August 16, the US has 12,689 confirmed cases of monkeypox, with cases confirmed in every state except for Wyoming. States with the highest total case counts include New York (2,620), California (1,945), Florida (1,268), Texas (1,048), and Georgia (1,013). Globally, as of August 16, there have been 38,019 confirmed cases, with 37,632 of those cases reported in locations that have not historically reported monkeypox. There have been five confirmed deaths in locations that have not historically reported monkeypox, in Spain, Brazil, Ecuador, and India. The US leads the world in the most cases at 12,636, followed by Spain (5,792), the UK (3,201), Germany (3,186), and Brazil (2,985).

Across the US, at least seven children have tested positive for monkeypox. The most recent confirmed case was in Florida, with a child under four years old testing positive, according to state health data. The Florida case follows one in Maine reported Friday, and two in California, two in Indiana, and a case in a non-US resident reported in Washington DC.  An eighth child, in the Houston area and under the age of two, has a presumptive case of monkeypox. Testing confirmation will take a week, but officials are expecting it will be confirmed. The CDC suggests that monkeypox should be considered when children or adolescents present with a rash that could be consistent with the disease, especially if epidemiologic criteria are present. Young children, children with eczema, and children with immunocompromising conditions are thought to be at increased risk of severe disease.

In a meeting with senior staff on Wednesday, CDC director Dr. Rochelle Walensky outlined in broad terms a plan to reorganize the agency’s structure which seeks to prioritize public health needs and efforts to curb continuing outbreaks, while putting less emphasis on the publication of scientific papers and rare diseases. CDC leaders call the plan a “reset,” and it comes amid growing criticism of the agency’s response to COVID-19, monkeypox, and other public health threats. The Department of Health and Human Services (HHS), which oversees CDC, plans to beef up the team responsible for responding to public health emergencies and require those officials to remain in their positions for at least six months. The plan also includes the establishment of a new executive team to set priorities and make decisions on spending “with a bias towards public health impact,” according to a briefing document. Additionally, the plan includes restructuring the agency’s communications office and further revamping CDC websites to make guidance for the public more clear and easier to find. “My goal is a new, public health, action-oriented culture at CDC that emphasizes accountability, collaboration, communication and timeliness,” noted Walensky.

The plan follows an external review launched by Walensky and headed by James Macrae, who has held senior positions at HHS, to evaluate the “CDC’s structure, systems, and processes” and “strategically position CDC to support the future of public health.” The review came as a response to criticism of CDC’s confusing public messaging and the agency’s inability to more quickly track critical COVID-19 data. “I actually really think many people have thought, this is CDC’s responsibility, to fix public health [and] the pandemic,” Walensky said in January in an interview with Politico. “The CDC alone can’t fix this. Businesses have to help, the government has to help, school systems have to help. This is too big for the CDC alone,” she said.

The first possible case of human-to-dog monkeypox transmission has been reported in Paris in a four-year-old Italian Greyhound. The dog belongs to two men who were diagnosed in early June; twelve days after their symptoms began, their dog began developing lesions and later tested positive for the virus. Dr. Rosamund Lewis, technical lead on the monkeypox response for WHO, noted that previously, only animal-to-human transmission of the virus had been reported. " Lewis said during a Washington Post Live event on Monday that  "[t]his has not been reported before, and it has not been reported that dogs have been infected before.”

Bavarian Nordic A/S, the only vaccine company with an approved monkeypox vaccine, is no longer certain it can meet demand as cases continue to rise around the world. The Danish company is now exploring options such as outsourcing production, including the transfer of technology to a US contract manufacturer, to meet accelerating demand. “We’re looking at ways to get help from partners in all the various production steps of the vaccine,” said Rolf Sass Sorensen, a vice president at the firm. Bavarian has raised its financial outlook as governments around the world have spent hundreds of millions of dollars ordering its Jynneos vaccine, which was originally created for smallpox. At its current bulk facility located north of Copenhagen, the company can produce 30 million doses per year.