Economic Recovery Post-Pandemic

The August CPI report showed further progress in #inflation making its way down to 2%, setting the Fed up to begin normalizing monetary policy next week with a quarter point rate cut. Headline CPI rose 0.2% m/m, which brought the year-over-year rate down to 2.5% -- the lowest rate we’ve seen since February 2021. However, core inflation was slightly warm +0.3% m/m and 3.2% y/y, largely due to stickiness in shelter as well as gains in airline fares and transportation services. 🏠 Shelter alone accounted for 1.8%-pts of the 2.6% increase in headline inflation this month, but is predictably coming down at a gradual pace. After rising 0.5% in August, the annual rate for owner’s equivalent rent CPI stands at 5.4% compared to its peak of 8%. Meanwhile, Zillow’s Observed Rent Index shows annual rent inflation for new leases has stabilized around 3.5% for about a year now, compared to its peak of 16% in the post-pandemic rental boom. CPI won’t reflect the full magnitude of this swing in market rent inflation, but it is a heavily lagged measure and compared to OER’s run rate of ~3.5% y/y pre-pandemic, we think there's more progress to come in the coming months. A few more pieces of “good news” on inflation worth mention: ➡️        Grocery store prices were flat m/m and are only up 0.9% y/y. Indeed, food at home inflation has averaged below 2% y/y since Oct. 2023. ➡️        Apparel prices are up just 0.3% y/y, a very different picture from its once 26% y/y rate in Jan. 2023. ➡️        Car prices are also down nicely, -9.5% y/y for used cars and -1.2% y/y for new cars. ➡️        Auto insurance, one area that has been red-hot this year, is coming off the boil. Prices rose (a still warm) 0.6% m/m, but the annual rate has fallen to 16.5% y/y since peaking at 22.6% in April. More relief here should help broader disinflation given its outsized impact recently. ➡️       Energy prices were also down in August across gasoline, electricity and utilities prices. Relative to a year ago, prices at the pump are down 10%. While the inflation rollercoaster seems largely under control now, it has left prices for a number of goods and services at much higher levels than they were just a few years ago. This is likely one factor constraining consumer sentiment, but importantly, wage growth has now outpaced consumer price inflation for 16 consecutive months and consumer spending overall remains resilient. Following gains of 1.5% and 2.9% ann. in 1Q and 2Q, we are tracking a solid 3.2% gain in real consumer spending for 3Q24. 💡  The #Fed is all but certain to cut interest rates at their next meeting and this report should add to Powell’s pile of “good news”. We continue to expect the Fed will opt to cut by 25 basis points, but the pace and magnitude of the easing cycle thereafter will depend crucially on the Jobs mosaic – where a complex picture with sometimes mixed signals continues to show a broadly healthy economy that is slowing, not stalling. 

Some good news on the inflation fighting front; there is strong reason to suspect we have a major tailwind in trying to get inflation (and especially the core consumer price index [which excludes food and energy]) back to 2% year-over-year levels as we move through 2024 into 2025. I make this claim based on recently released New Tenant Rent Index (NTRI) data from the Bureau of Labor Statistics (https://lnkd.in/gRiUXmAm). Rental prices feed into the calculation of owner’s equivalent rents, which together account for ~30% of the headline CPI. Two charts below. Thoughts: •Top chart shows year-over-year percent change in the BLS’s new tenant rent index, along with the 95% confidence interval for this change. What’s so encouraging is that the past four quarters have seen year-over-year increases of 3.1% or less, which is in-line with what we saw in 2017 – 2019. As can be seen, new rents began taking off in Q2 2021, and at their highest, increased 12.1% year-over-year in Q2 2022. •Staying with the top chart, I wouldn’t read too much into the negative Q2 2024 reading, as the calculation of NTRI means that more recent data has a larger standard error. •The bottom chart explains my tailwind claim. Here I’ve overlaid NTRI with a one-year lag (e.g., the most recent quarter of Q2 2024 shows Q2 2023’s data) as well as the CPI for rent (which is the series that feeds into CPI directly and strongly shapes the owner’s equivalent rent calculation). We see a very strong correlation in that the CPI for rent moves in the same direction as NTRI but with a 1-year lag. •Because of the lag, we have strong reason to expect the CPI for rent will continue back to the 3.5% YoY pre-COVID pattern we observed (it is currently at 5.1% YoY). Implication: I can’t think of better news for folks wanting some positive signs on the ongoing battle with inflation than the NTRI data. These data help support the case for the FOMC cutting interest rates in September (and possible additional cuts in 2024 as well). #markets #economics #economy #supplychain #supplychainmanagement 

What about inequality and monetary policy? The Fed’s tools via rate movement and its balance sheet operations are blunt. Those who are most vulnerable to rapid price increases at the lowest end of the income strata are also among the most vulnerbals to the slowdown in wage gains, layoffs and increase in the cost of credit when rates rise. In the late 1990s and late 2010s, the Fed realized that unemployment could drop lower than they previously thought possible without triggering inflation. Income inequalities actually narrowed for a brief but noticeable period of time during the later part of the 1990’s boom. That pushed consumer attitudes to a record high. Those policies were later dubbed “higher pressure” policies by the Fed. They experimented with how low unemployment could go without triggering inflation in the late 2010s prior to the crisis to replicate that narrowing of inquality. The Fed was hoping that as the economy reopened and returned to low unemployment, they could, once again, push the envelope on how low unemployment could go. The pandemic-induced inflation caught them off guard and forced them to raise rates. However, they would like to see how far low unemployment can be sustained once we are beyond this bout of inflation. The fact that we were able to make such rapid progress on slowly the pace of rate hikes is encouraging and the main reason Chairman Jay Powell is less willing to take a recession or a rapid rise in unemployment than he once was to quell inflation. He actually went so far as stating a recession due to holding rates too high for too long is a “mistake” the Fed was hoping to avoid. That statement fueled investors hopes of rate cuts. It was not a promise of rate cuts but reflected a shift on how the Fed views the risks of over- and under-tightening. They know that over-tighting hits those who can afford it least and exacerbates instead of eradicates inequalities.

Supply chains are at a critical turning point, driving a trend which is reshaping economies. Amid geopolitical uncertainties, organizations are prioritizing #reindustrialization and supply chain orchestration over short-term profitability. The latest Capgemini Research Institute report, ‘The Resurgence of Manufacturing: Reindustrialization Strategies in Europe and the US’, projects that European and US organizations will spend $4.7 trillion in cumulative investments over the next three years to mitigate supply chain risks, up from $3.4 trillion in 2024. The role of technology cannot be overstated in this journey - 62% of organizations surveyed are focusing on upgrading manufacturing facilities to become smarter and tech enabled. They are investing in #AI technologies to optimize operations and are exploring #robotics, with collaborative robots (#cobots) to improve efficiency, quality, and flexibility while retaining essential human oversight. Read the full report here: https://lnkd.in/eMUNFCgV

Yesterday’s Consumer Price Index (CPI) report for September from the Bureau of Labor Statistics showed that #inflation remains elevated, but not as bad as it was last year. The headline year-over-year number was unchanged at 3.7%, while the Core (w/o food and energy) #CPI was up 4.1% on an annual basis, down 0.2 percent from August. Inflationary pressure has eased, but we’re still paying about 4% more to live life. The CPI is an index that’s based on a set value of 100 dated back to 1982-84, with a few category exceptions (see link in comments). That makes it a barometer for how #prices have behaved in the last 40 years. The all-items index value of 307.8 in September means prices are up 308% in the last four decades overall, or roughly 2.85% per year on average. Alex’s Analysis: In analyzing prices, there’s a lot of nuance lost in looking at headline figures. So, I decided to dig into the #data to see what’s happening at the line-item level. Here are some key observations, along with my take on their meaning: 🥡 Prices for the ‘Food away from home’ category are up 6% over the past 12 months, running at nearly double the 40-year average of 3.2%. If you want to keep more of your hard-earned money, eat out less. 🔌 Energy prices declined 0.5% over the past year, but you’re not likely to benefit from it. ‘Utility (piped) gas service’, for example, is down nearly 20% since September 2022, but your gas and electricity rate from the utility company won’t reflect that due to how consumer energy contracts work. 🏘 Rent and mortgage payments are up 3.5% year-over-year, below the historic trend of ~4% for these categories. However, with COLA (cost of living adjustment) raises in the 2% range for decades prior to the pandemic, it’s not surprising why housing costs are such a burden for most. 🚬 ‘Tobacco and smoking products’ costs are up by an astounding 1,444% in the last four decades, increasing 6.9% per year, on average. If you smoke, you’re literally lighting money on fire. 🚗 The cost of ‘Motor vehicle insurance’ has increased by a shocking 18.9% since last year. After tobacco, this is the spending category with the second highest price increase over the last 40 years, having inflated by 742%, or 5.1% per year on average. 👩⚕️ ‘Medical care services’ are up 594% since the early 80s, increasing by an average of 4.6% per year. They’re down 2.6% over the past 12 months, but I doubt that you’re seeing those savings. ✈ And finally, some good news – the price of ‘Airline fares’ is down 13.4% since last year. This category has been historically benign, with an average annual increase of just 2.5% over the last four decades. So, get out there and see the world - if you can afford it!

Much has been said about gains stemmed from pandemic-era economic circumstances and time-limited policy actions. Before we celebrate, however, perhaps we should pause and examine if those gains are sustainable into the future and who they benefit the most. According to the latest report from The Aspen Institute Financial Security Program, substantial gaps remain: [1] Fewer households spent less than they earned compared to 2019. [2] One in three households did not benefit from rising home prices and instead struggled with rising rents. [3] One in three households remains at risk of lower quality of life in retirement. [4] The wealth gap between white and Black households shrank in percent terms between 2019-2022 but remains large. As it turns out, there is still work to be done ... as it always is. Remember the saying, if it's that easy, someone would have done it already. #PersonalFinance #FinTech #FinancialServices #FinancialInclusion

Lately I've seen a lot of takes about our recent spike in inflation, and I think some of them are missing the mark. Let's go back to basics and figure out what really happened. In the simplest example, inflation is the response of prices to the amount of money people have to spend. Imagine if we instantly added a zero to every form of currency in circulation. Most likely, every merchant would just add a zero to their prices. A tenfold increase in the money supply would lead to a corresponding increase in prices, with no change in economic activity. But we know that prices can also respond to changes in supply and demand. All other things equal, an increase in demand raises prices in the short term. All other things equal, a decrease in supply will do the same. So inflation can result from at least three different forces in the economy – monetary policy, demand, and supply. Sometimes monetary policy and demand are grouped together, since monetary policy can affect the supply of credit and thus people's spending power. During the Covid-19 pandemic, the government tried to counteract the downturn in the economy via both monetary and fiscal policy. The Federal Reserve Board expanded the money supply enormously, lowering both short- and long-term interest rates. The federal government provided unprecedented levels of income support. There was more money in people's hands. Yet there was another enormous change that affected supply and demand. Because people were stuck in their homes, a huge amount of consumption shifted from services to goods. There was no way the supply of goods could respond instantaneously, especially with Covid-related drags on supply chains. Then the invasion of Ukraine by Russia made matters worse by restricting the global supplies of fuels and grains. The early manifestations of inflation were primarily in these commodity markets. It surprises me that some economists now attribute this inflation to demand rather than supply. When people have more money, they don't necessarily buy a lot more fuel or grain. The consumption of these items tends to be pretty steady over the economic cycle. Their prices still skyrocketed. Later on, housing became a key driver of inflation. Demand may have contributed to this change. But we also know that supply fell, with existing home sales in 2022 dropping to their lowest level since 2014. New housing starts also dropped sharply in 2022 as rising interest rates made construction more costly. Overall, which factors dominated? The Federal Reserve Bank of San Francisco has an entire line of research breaking down inflation into demand- and supply-driven components. They find a mixed picture throughout the inflationary period (see chart). So if you're going to claim – as some economists have – that one factor or another was dominant, you'd better have a really good explanation for why they're wrong! #inflation #economy [Chart: FRBSF]

Happy New Year! Kicking off 2025 with a live TV spot on AI and agents sets the stage for how these tools will drive growth in the months ahead. The narrative around AI and AI-driven agents often centers on cost reduction and workforce replacement. However, when delivered with the right levels of quality and trust, AI amplifies human expertise rather than replacing it—and this amplification has the potential to drive growth at unprecedented scales. Looking at AI strategy through the lens of growth opens up new horizons. Let's dive in. 📈 AI is a talent amplifier. AI enables experts to accomplish more in less time. Teams using AI tools find themselves able to gather and synthesize information at scale, conduct deeper analysis, and model scenarios rapidly. These capabilities transform how teams collaborate, particularly around complex problems that require multiple perspectives and iterative exploration. 💌 More thinking; less typing. While AI is great at routine tasks like writing emails or creating presentations, the real growth potential lies in its ability to shift how teams spend their time. AI not only creates space for innovation, it actively facilitates and encourages it, allowing teams to dive deeper into problem-solving and identify new opportunities that might otherwise go unexplored. 🤘 This advantage compounds over time. Organizations investing in AI today are positioning themselves for growth reminiscent of what we witnessed during the internet and cloud computing revolutions: growth which is likely to result in larger teams, not smaller ones. Higher returns drive increased investment, which creates demand for more talent, not less. As teams become more capable, they attract stronger talent, further accelerating growth and innovation. Not too shabby. The organizations that thrive in the AI era will be those that recognize its potential as a growth multiplier rather than merely a cost reducer. As we move into 2025, companies that embrace this mindset won't just adapt to change—they'll drive it.

PCE Inflation Preview: Further moderation suggested by CPI and PPI data While the producer price index came out slightly higher than forecasted, it remained on a moderating trend, with July’s figure being revised downward. In fact, we have now seen 18 consecutive months of producer inflation running at or below 2%, continuing to reaffirm our view that the economy has achieved a soft landing. Together with the CPI data released on Wednesday, the August PPI data suggests that the Fed’s preferred inflation metric—the PCE price index—should grow by 0.2% month-over-month for both overall and core metrics, based on our estimation. If our forecasts are correct, the headline year-over-year PCE inflation should come in at 2.3%, the lowest since early 2021. Meanwhile, the core year-over-year number is expected to inch up slightly to 2.7% from the previous 2.6%. 🛑 Given the cooling economy, especially in the labor market, we believe today’s inflation data and our PCE projections should provide enough justification for the Fed to proceed with its first rate cut of this cycle next week. However, with core inflation still somewhat elevated, we see no reason for a 50-basis point cut, as long as the Fed remains focused on maintaining inflation control, as it has emphasized. Last week’s initial jobless claims data continued to suggest that while the labor market is cooling, it is not weakening. New claims remained stable at 230,000, only slightly up from the previous week. 🔑 Still, because monetary policies operate with a long and variable lag, we maintain that the Fed should not wait for visible cracks in the labor market before taking action. Now is the time to begin cutting rates to give the economy the much-needed boost it requires in the post-pandemic era.