Last week was the longest Economic Update I have put out since I started this publication in late August 2023. There was just a lot of information released last week. Conversely, this issue might be the shortest with only a couple of data points being released this week.
However, several Federal Reserve bank presidents came out this week to speak to various groups and their comments can provide insight into what they are thinking regarding rates, inflation, the future of the economy.
One of the more well known Fed Presidents is Austan Goolsbee, President of the Chicago Fed. You may remember that Goolsbee was chairman of the Council of Economic Advisers from 2010 to 2011 and a member of President Obama’s cabinet. In his comments this week, he played the good soldier, but if you read between the lines, you can tell that he believes inflation has been beaten and rate cuts should commence immediately, especially when he says things like “the economic data doesn’t have to change in order to justify interest-rate cuts.” It seems pretty clear to me that he is ready to cut now. That would be a mistake, and thankfully, it isn’t going to happen.
Richmond Fed President Tom Barkin said Wednesday that we are in a “world of elevated uncertainty.” (I truly wish I could come up with cool phrases like that!) He believes that there is more inflationary pressure in the economy than people are seeing, and I believe he is right. As such, he believes that the Fed should take its time with any rate cuts and he doesn’t believe any changes are imminent. I hope he is right.
Similarly, Cleveland Fed President Loretta Mester believes it would be a mistake to cut rates too soon without more evidence that inflation was clearly headed back to 2%. Similar statements were made by Boston Fed President Susan Collins.
Then, we have Neel Kashkari, President of the Minneapolis Fed. He also believes that rate cuts can wait, but only because he sees “little to no connection between the high rates and the slowdown in inflation.” Really? Then what, pray tell, is the reason that inflation has come down from 9%? He believes it is the end of the supply shortages that disrupted global trade in 2021 and 2022. In other words, he believes the inflation was all “cost-push.” He’s an idiot. Yes, there was a little bit of that, but the vast majority of the inflation was due to the extra $7.5 trillion dollars we tossed into the economy. More money chasing the same about of goods…that is classic “demand-pull” inflation. Of course, he wants to ignore this. In fact, he went on 60 Minutes to say that “there is an infinite amount of cash at the Federal Reserve.” This is why we can’t have nice things…Fed officials who think cash is endless and interest rates have no impact on the rate of inflation/money supply. If there is no connection between rates and inflation, why did we raise them in the first place?!? Kashkari would benefit from a basic macroeconomics class. He has a bachelors and a masters degree in Mechanical Engineering and, by his own admission in a 2009 interview, didn’t have grades good enough in high school to apply to a top-tier university. Certainly this is not someone we want running a Federal Reserve bank and making decisions on the U.S. economy. (I often wonder how some of these people get to be President of a Federal Reserve bank.)
While the manufacturing economy struggles, the services sector continues to grow, as the ISM Services Index has now been above 50 for over a year, and rose to a four-month high in January. The new orders portion of the index rose to 55.0, and even the employment portion, which had plunged down to 43.8 in December (despite all the absurd employment data from the BLS) rose to just over 50.
Respondents to the survey said overall business activity was steady. However, part of their optimism is driven by their expectations of rate cuts. Unfortunately, they are likely to be disappointed as I don’t expect any rate cuts in the near-term. They are, however, concerned about future inflation.
As well they should be! The prices portion of the index shot up to 64.0 which is the highest it has been in a year and that was the largest monthly jump in prices in more than 12 years! The impacts of the Suez Canal being completely unusable (due to the attacks on ships in the Red Sea by Houthi rebels) are having a significant impact on the costs of global goods which, in turn, can impact services like construction, retail, etc. These inflationary pressures are quite real (they represent the cost-push inflation mentioned above) and, while not the prime source of overall inflation, are likely to feed forward to the consumer in the form of higher prices in the coming months, making the inflation outlook even more uncertain.
The big news of the week was the release of consumer credit data by the New York Federal Reserve Bank on Wednesday. According to the NY Fed, despite what we saw from the retail sales numbers, at least with respect to adding more debt, consumers may have finally hit the wall in December. Total revolving debt grew only $1 billion, and total credit grew only $1.6 billion. That sounds like a lot, but compared to November, it was virtually flat.
I have been incorrectly suggesting for months that the consumer was finally tapped out, so I certainly won’t go that far here. But is December just an anomaly, or the beginning of the end to the consumer’s ability to spend well beyond what their income can sustain? Are consumers finally feeling the pain from all their borrowing? According to the N.Y Fed, “credit card and auto loan transitions into delinquency are still rising ABOVE pre-pandemic levels. This signals increased financial stress, especially among younger and lower-income households.” You have to go back to 2011 to see this level of credit card accounts and auto loans being transferred to delinquent status.
Further, accounts moving into “serious delinquency” (i.e., accounts that are more than 90 days past due) are up nearly 59 percent over the past year, and have been growing at that rate for roughly 4 quarters.
In total, in the fourth quarter, consumers now have $1.13 trillion of credit card debt; $1.61 trillion in auto loans; $1.60 trillion in student loans; $360 billion in home equity lines of credit; and $554 billion in “other” debt. This is all in addition to the $12.25 trillion in home mortgages. All in, total household debt is now at $17.5 trillion, or roughly $130K per household. Take out mortgages, and that number drops to $40K per household of non-mortgage consumer debt.
With credit card balances having a current interest rate of 22.5%, that is quite a debt load for the average U.S. household. But again, I have stopped trying to anticipate when consumers will hit their debt limit. And for good reason…the current limit on all outstanding credit cards is $4.8 trillion so we have only used 24% of our available credit card limit! We still have $3.7 trillion in available credit! (That is a truly scary thought.) But again, the December reading may suggest that servicing that debt is becoming too much. We’ll see what the next few months hold.
Next week, I am traveling to Savannah, GA for a conference, and then taking a little time off and heading to the mountains with my wife for a late Valentines Day retreat. As such, I am giving fair warning that there may not be an update published next week. (My wife gets a little annoyed when I spend our personal time writing about economics.) That said, there is a LOT of data coming out next week on inflation and retail sales, and I don’t want to wait to report on it. So, I may try to hammer one out when she isn’t looking, and if I can, it will likely be short and sweet, and it may not come out until Saturday.