The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of the Georgia Institute of Technology or the Georgia Board of Regents.
Back from my trip and off on another one! As such, this week, I won’t be able to comment on all the housing data that came out on Thursday and Friday. I’ll pick all that up next week. Also, this past Wednesday was a holiday and no data came out. So, it is going to be a short week for the update.
Also, I want to say “thank you” to all my readers. Last week’s inflation commentary set a one-day view record that was nearly 40% higher than the previous record. That can only happen because you are sharing this with your various networks, and I appreciate it. I hope to roll out a “referral” program soon to help keep track of those who refer other readers and, in a small way, show my appreciation. Look for that early next week.
Consumer Sentiment
For the third month in a row, the University of Michigan’s Consumer Sentiment Survey (preliminary) for June dropped, falling to a 7-month low as consumers expressed concerns about inflation and slow growth in household income. The drop was broad based as current conditions dropped from 69.6 to 62.5 (the lowest since 2022) and the future expectations index dropped from 68.8 to 67.6.
The one-year inflation expectation was unchanged at 3.3% as consumers expect inflation to be above 3% for all of 2025. The five-year inflation expectation moved up slightly to 3.1%.
The Michigan survey also has a “buying conditions for durable goods” index which gives some insight into the position of the consumer. It fell in June to its lowest level since December 2022. The consumer is tapped out.
Retail Sales
We got more evidence on the sad state of the consumer Tuesday when the Census Bureau released retail sales for May. Expectations were for retail sales to grow 0.3% in May. However, the May number came in at only 0.1%, and that was after the April number was revised down from “unchanged” to a decline of 0.2%. (No one is surprised that previous data was revised down. When was the last time it was revised up?) If you exclude motor vehicles, May retail sales actually DECLINED 0.1%.
But you have to remember, the Census Bureau reports retail sales in NOMINAL dollars, i.e., they are NOT adjusted for inflation. If you adjust for inflation, retail sales in May were actually 1.0% lower than they were a year ago. Over the past 19 months, only five months have posted positive year-over-year REAL growth in retail sales.
Gas stations and food services were the largest drag on retail sales. Building materials and home furnishings were also down for the month. The home furnishings number is interesting because it has been a drag on the total number for 8 of the past 12 months. With housing becoming so expensive for everyone, but especially first-time home buyers, new household formation has to be slowing. With fewer new households, you sell fewer sofas, chairs, dining room tables, washing machines etc. This will be an interesting trend to watch, especially in the durable goods manufacturing sector.
Industrial Production
Speaking of manufacturing, the last piece of data this week was industrial production, and it certainly didn’t slow down in May! After two weak months, total industrial production posted strong growth of 0.9% in May, three times faster than what was expected.
Manufacturing output also grew 0.9% and, despite the slow household formation mentioned above, output was led by consumer goods. This is in direct conflict to what the ISM Manufacturing Index showed us two weeks ago. The ISM data showed manufacturing in May declined sharply. Given that the ISM data comes from a survey of private purchasing managers, and the production numbers above come from the Federal Reserve, I think we can expect downward revisions to this data in the months to come.
Final Thoughts
The week after the Federal Reserve Board of Governors meet, they all hit the road and do the rubber chicken speaking circuit. Earlier this week, we got Minneapolis Fed President Neel Kashkari who told us that it was a “reasonable prediction” that if there was a rate cut this year, there would be only one and that one would be in December. What happened to the 6-7 rates cuts that we were going to get this year? (Regular readers know I anticipated ZERO rate cuts in 2024, and nothing has happened to change my mind on that.)
But, a more concerning comment from Kashkari came when he was discussing when they might cut rates. He said that once inflation has come down enough, they will cut rates and “that will allow mortgage rates to go back down to normal levels.” “Normal levels?” I wonder what he thinks a “normal” level for a mortgage rate is? If you go back to January 1971, the AVERAGE 30-year mortgage rate through May 2024 (638 months) has been 7.7%. In May 2024, it was 7.1%. Looks to me like current rates are already below “normal.” In fact, if you look at the average rate between January 1971 through December 2006 (i.e., prior to the financial crisis) the average rate is 9.3%. We are already below “normal.”
In fact, if we look at the last time mortgage rates were in this territory – back in 2000 – mortgage applications were on the rise because historically, it was such a great rate!
That is the problem with having 10+ years with free money. When money is free, capital gets misallocated. It gets misallocated by businesses, by government, and by households. People start to believe that money should be free, and they come to expect it….apparently even presidents of Federal Reserve Banks.
I have picked on Kashkari before, in particular his complete lack of understanding of basic economics. (He has a bachelors and a masters degree in Mechanical Engineering. My son has a degree in Mechanical Engineering. Doesn’t mean I want him managing my money!) But statements like this show a complete ignorance of history and historical context, and serve to perpetuate the problem. Low rates remove risk, which, in turn, results in poor decisions. And when the consequences of those decisions come home to roost, more money is needed to solve the problem, which is, of course, inflationary.
But perhaps more money is the goal. I mentioned last week that central banks don’t fight inflation, they cause it. One of the great myths of the Federal Reserve Bank is that it supposed to stabilize our economy. Never mind the fact that during it’s tenure, we have had financial crashes in 1921 and 1929; a “Great Depression” from 1929-39; recessions in 1953, 1957, 1960, 1969, 1973, 1980, 1981, 1990, and 2001; Black Monday in 1987; Housing Bubble/Financial Crisis in 2007 and 3,100% inflation since it was created in 1913, which has destroyed the purchasing power of the dollar.
Simply put, the Federal Reserve has utterly failed to achieve its stated objectives. But that is probably because those were never really its true objectives. Perhaps in future updates I’ll discuss more about what those true objectives are. But for now, it is enough to know that Kashkari and his fellow Federal Reserve Bank Presidents don’t really need to understand economics, because, at the end of the day, neither a stable economy, nor the public interest is their primary concern. They are solely focused on protecting the banks and the creation of money. By that standard, they are an overwhelming success.
