by Mike Smitka, Economics Dept, Washington and Lee University
Sept 17 (here) and Sept 24 (below)
The Fed – specifically the Federal Open Market Committee, comprised of the 12 presidents of the regional Federal Reserve banks and the five members of the Board of Governors – meet today, and will issue their press release at 2 pm. Even if they bump rates [they did not], "bump" is the operative term as any increase would be from 0% to 0.25% or 25 bp (basis points). Now 6 month rates have built into them a bump up to 0.5% by March 2016. In the past 12 months two year rates have really climbed – to 0.75%. [Laugh: sarcasm.] Keep going: 5 year rates, car loan territory, are at 1.5%. You have to get to 30 yrs (mortgage rate territory) to be above 3.0%. But those looking at long-term bonds don't have much to gain (or lose) by what the Fed announces tomorrow – they anticipate rates gradually rising, but over 30 years it matters little whether it occurs today or early next year. So don't expect those to move much, whichever way the FOMC votes. Remember, too, that rates jump around every day for a wide variety of reasons – so far this year 10 year and 30 year rates have averaged a bump up or down of 5 bp (.05 percentage points) each business day.
The August CPI is out. Now the CPI overstates inflation; more below. This month's release is more of the same, headline inflation is 0.2% from a year ago, and even if take out energy it's only 1.8%, both very low. The bottom line is no surprises, so I won't detail. But take a look yourself: you can go to the Bureau of Labor Statistics web site and have some fun. There's a huge amount of data to play with. There are 350 series just for beverages – what's been happening to beer? – and 283 series for medical items. Now medical costs were rising over 5% starting in the latter half of the 1960s, and have generally been well above the inflation average. So not only are we consuming more healthcare as our population ages and as medical technology improved, but we were paying more for it. Now 5+% adds up: we pay roughly twice as much as the rest of the developed world for similar treatments and services and drugs. So the past couple years have seen a real slowdown, to 2.5%. That's a bit above average, but certainly is very welcome. Anyway, look for fun items, the CPI aims to capture the top thousand or so categories of what we consume, enough that I always find things I've never thought of as significant, or indeed have never known existed!
Now the CPI overstates actual inflation, probably by 1%, and quite possibly more when inflation is low. One reason is that our economy is dynamic, with retailers coming and going. New retailers aren't sampled, the list of stores and online retailers from which the Bureau of Labor Statistics collects data can't be updated instantaneously. But new retailers offer some advantage – OK, some don't, but they don't last long. Well, the successful new retailers offer cheaper goods, or better goods for the same price, or greater convenience, or some other benefit. Likewise new goods don't show up immediately, and with a few exceptions items that truly are "new and improved" don't get counted as things that are effectively less expensive. Finally, we as consumers substitute from a good whose price has gone up (or not fallen) to one cheaper, think varieties of apples.
In addition, the "dynamic" aspect makes interpreting the CPI hard. We know that over the short run of a year or two energy prices move a lot. The recent drop in gasoline prices doesn't however directly affect the prices of other things we consume. Yes, it costs less for distributors to get their goods onto the shelves of a Kroger or Walmart, and it's also cheaper to run the freezers and vegetable coolers. But such stores don't change their prices for every short-run blip in energy prices.
So how do we know what's happening to inflation when prices of things such as energy and food are volatile? One answer is to look at inflation excluding such goods. Another is to create a sticky price index. The BLS plays around with several versions. One is a trimmed mean index, which cuts out the items that rise the most and fall the most. (That inflation measure is at its lowest for the last several months, at 1.2%.) Then there's the median rate, where half the goods are rising more, half less. That midpoint has been higher than the average. At 2.1%, it is still down from recent months. Then the BLS divides goods into ones whose historic prices are "sticky", seldom changing, from those that are "flexible", moving up or down in most months. The "sticky" rate at 1.9% over 3 months is likewise down from earlier this year. And we can look at sub-series: "sticky" less food and energy rose at the same 1.9%. Remove shelter and it's lower, at 0.4%, and again trending down. Not surprisingly, given the drop in gas prices, the flexible rate is low and trending down even more.
None of us are exactly average, either: we don't consume ever item the CPI measures, much less consume them in the same proportion as the mythical average American. More on Sept 24th on the experimental CPI for older Americans (age 62 and above).Sept 24th: just bullet points, not proper prose
- New Residential Sales out later today – that is, after I record but before this airs. local sales moribund, no one looking. but we're not average. However, New Residential Construction data released a week ago showed a decline
- Oil: both Cushing OK and Brent (Europe) at $47, except for a brief trough in 2009, ultra-low sulfur at lowest in the 10 years for which I have data
- The Fed (I): they have to work from data on what's happened, whereas what they do affects the economy over the coming 18-24 months. So inevitably it's a judgement call. With inflation low, there's no harm on waiting – they next meet Oct 27th, and then again Dec 15th. In the early post-WWII era Milton Friedman and others had hoped to find rules that would work, but he gave up and by the late 1960s didn't talk about that when he spoke to other economists in professional gatherings. Our economy is simply too dynamic. So what the Fed does remains a judgement call. As we know, local real estate markets are moribund. But is that representative? Those gathered around the Fed's (very) large table listen to qualitative reports from each of the 12 regional banks – multiple regions because the Fed was set up before we had a national financial system. Anyway, part of the job of the regional Feds is to talk to people and businesses in their district, how many homes are realtors showing relative to last year, foot traffic at retailers, new malls doing well or poorly, the local cement plant booking orders or not. That feeds into the formal data that I routinely talk about.
- The Fed (II): caught some by surprise, short-term rates (6 m/s) had risen, but since it will be 6 weeks before the FOMC again meets, then that will be delayed by at least 1½ months. the amount of money people expect to be able to earn over 6 months is now lower by at least ¼ and so bond prices shifted. but at long maturities nothing happened: 6 weeks over the life of a 30 year bond is no big deal. rates 0.24% but fell to 0.11%. 11 bp. 1 year 10 bp. 20 year 8 bp. 30 year 6 bp. and if you're thinking about buying a house it's the LR you care about.
- Experimental CPI for age 62 and above: different weights in consumption. up 0.6% over a year ago. medical care rising 5% in early 2000s, rate slowed during Great Recession to 3%, lowest sustained rate, but then fell further in early 2013. ACA hasn't resulted in a jump. [did not talk about on the radio
- [topic brought up by Jim Bresnahan] China: most commentators don't follow China, no one has the time to follow everything. but no surprise that growth is lower, it's been slowing for years. the working age population in China is falling, they've finished their national superhighway system – and it's new, so no maintenance costs – and so on. Yes, there was a blip due to their successful 2009 stimulus package – they didn't suffer from a recession, unlike the US and Europe and Japan – so that helped hide the trend. Anyway, while China is big, it's still only a bit over 10% of global trade, and trade is 10% of the US economy, and their imports from the US are merely slowing (say, 10%), and it's only a share of US exports, say 10%. So the impact is 10% of 10% of 10% of 10%, or 0.01%. Now there are feedback effects that mean the impact is bigger, but it's still likely less than the normal volatility of US growth.
- [topic brought up by Jim Bresnahan] Debt ceiling shutdown threat: this is really a political question, Congressman grandstanding for one or another reason. If you listen to the news, you've not heard much about deficits, none of the scare-mongering of 2009 – and for good reason. Deficits balloon during recessions, and more during deep recessions, and our Great Recession was a doozy. Tax receipts fall, people lose their jobs and collect unemployment insurance and medicaid, and older workers decide to start receiving social security sooner rather than later. Well, tax receipts are back up, unemployment claims are way down, and the budget deficit is now much, much smaller. No crisis. There are long-term issues, but that's not what happens in an election cycle.
- United Way of Rockbridge: our campaign starts Friday, the banner is up over Main Street in Lexington (we don't have one for Buena Vista – but they tap programs we fund roughly proportional to their population, we serve the entire Rockbridge area).