Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in December show continuing and slightly worsening softness. 30 states show declines from November, with Montana down 1.1 percent and Massachusetts off nearly .8 percent. Of the 20 states with increases, Minnesota led with a .7 percent rise. Over the 3 months ending in November, 24 states had no change (Hawai’i) or declines, with Montana down 2.5 percent, and West Virginia and Massachusetts both off by more than 1 percent. The indexes for both Minnesota and Nevada rose 1 percent over this period. Over the last 12 months Maryland was yet again on top, but its 5.6 percent increase was notably smaller than the last few months, and the same can be said of number 2 Vermont’s 5 percent gain. Montana was down 1.6 percent over the last year, and Arkansas and New Jersey both experienced declines.

The independently estimated national figures of growth over the last 3 months (.7 percent) seems higher than the state estimates would have suggested, but the 12-month figure (3.0 percent) looks to be roughly in line with the state numbers.

State Coincident Indexes in December 2023

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Ken Matheny

**The US economy is stronger than suggested by the “soft” 1.6% increase in GDP in the first quarter, while a sharp upturn of inflation puts Fed rate cuts on hold for at least several months.**

**Look to final sales to private domestic purchasers, not GDP, for a better indication of the economy’s underlying strength.**
The initial (“advance”) report of the national accounts for the first quarter of 2024 should be interpreted carefully.  Looking beyond the headline figures, the economy’s underlying growth momentum was notably stronger than the disappointing figure of 1.6% quarterly GDP growth in the first quarter.  GDP growth was held down by declines in components that tend to be more volatile  --- inventories and net exports --- in contrast to solid growth in other components, including consumer spending and private investment.  Personal consumption expenditures (PCE) posted solid growth (of 2.9%).  Business fixed investment also rose 2.9%, while residential investment jumped 13.9%, continuing a recovery that began in the second half of 2024.

A more telling indicator of the US economy’s underlying strength is final sales to private domestic purchasers, which rose at a solid 3.1% annual rate in the first quarter, virtually identical to increases in the third and fourth quarters of 2023 of 3.0% and 3.3%, respectively.  This is a clear if preliminary indication that the economy retains solid momentum for growth.

Together, declines in inventory investment and net exports subtracted 1.2 percentage points from GDP growth in the first quarter, but those components are not likely to continue to subtract large amounts from GDP growth on an ongoing basis, even though quarterly swings could be significant (in either direction) from time to time.  The level of inventory investment ($35 billion in the first quarter) is broadly sustainable, suggesting that repeated large declines are not the most likely outcome.  Net exports have been in a sideways waffle since the second half of 2022.  Future large declines are possible if foreign demand were to collapse or the dollar were to appreciate sharply, but neither of those outcomes appear to be highly likely at this juncture.  In short, the 3.1% growth in final sales to domestic purchasers is a better indicator of underlying strength in demand than the smaller 1.6% increase in GDP in the first quarter.

Of course, GDP and other estimates are subject to revision, so the picture of first-quarter growth could be altered in coming months.

**Inflation surged in the first quarter, nearly eliminating any prospect for a Fed rate cut prior to this fall.**
Another major component in today’s report on the national accounts was a disturbing increase in consumer inflation.  The price index for personal consumption expenditures (PCE) rose at a 3.4% annual rate in the first quarter, the largest increase since the first quarter of 2023.  Meanwhile, the core PCE price index rose at an even higher 3.7% annual rate in the first quarter, far above the increase of 2.0% in the final two quarters of last year.  This is a direct challenge to any hope that the Federal Reserve will begin to lower interest rates in coming months.  As of the first quarter, the annual (four-quarter) increase in the core PCE price index was 2.9%.  It is likely that tomorrow’s report on monthly PCE will show annual (12-month) inflation at or slightly above February’s 2.8% reading.

The Federal Open Market Committee (FOMC) will almost certainly not begin to seriously contemplate rate cuts without clear indications that inflation is easing and well on track to fall to 2% over time.  The latest inflation figures suggest that progress on bringing inflation down has stalled.  It will take more than one or two “good” monthly inflation reports to convince policymakers that it is appropriate to begin cutting interest rates.  This makes any rate cut prior to this fall a low probability outcome and adds to the risk that there might not be any Fed rate cut in 2024.

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First-Quarter 2024 National Accounts

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March showed some moderate variance. Four states were down slightly from February. The largest increase was Arizona’s .8 percent; three other states (Iowa, Delaware, and Vermont) had gains of at least .5 percent. Over the three months since December, Massachusetts was up 1.9 percent, while 8 other states (scattered across the nation) rose more than 1 percent. Over the last 12 months, Massachusetts again led, with an increase of 4.9 percent, while New York’s 3.6 percent was a fairly distant second. 5 states were down over the period, with Montana’s slump continuing, with a loss of 3 percent.

The independently estimated national figures of growth over the last 3 months (.75 percent) may be a touch higher than the state estimates would have suggested, but the 12-month figure (2.9) percent) looks to be roughly in line with the state numbers.

State Coincident Indexes in March 2024

State labor markets were little-changed in March, but on the whole the report looked better than February’s. Only five states had statistically significant gains in payrolls (Arkansas, Georgia, Kansas, Kentucky, and Virginia), with two having .5 percent increases (Arkansas and Virginia).  The other states, and DC, had insignificant changes, though numbers had point increases comparable to those that were deemed significant. For instance, California had an increase of about 30,000, though that was less than .2 percent, and New Jersey was up around .3 percent.

Six states had statistically significant declines  in their unemployment rates in January, while one had a significant increase. The only move larger than .1 percentage point was a decline of .3 percentage point in Arizona.  The highest unemployment rates were in California  (5.3%), DC (5.2%) and Nevada (5.1%). States with unemployment rates of 4.8% (one point above the national rate)were Illinois, New Jersey, and Washington.   Maryland, Minnesota, Nebraska, New Hampshire, North Dakota, South Dakota, Utah, Vermont, and Wyoming  had rates of 2.8% or lower, with North Dakota at 2.0%.

Puerto Rico’s unemployment rate moved up to 5.8 percent, while the island’s job count moved up by 2,200.

State Labor Markets in March 2024

Paul L. Kasriel

In an April 16, 2024 Bloomberg News article entitled “**[What If Fed Rate Hikes Are Actually Sparking US Economic Boom?](https://www.bloomberg.com/news/articles/2024-04-16/booming-us-economy-inspires-radical-theory-on-wall-street?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTcxMzM5MTUyNSwiZXhwIjoxNzEzOTk2MzI1LCJh)**”, it is argued that the Fed’s increase in the federal funds rate from 0.08% in March 2022 to 5.33% in July 2023, which, in turn, pushed up other interest rates, stimulated US domestic aggregate demand for goods and services by increasing interest income to holders of fixed-income assets. Wow! This novel hypothesis, if valid, turns monetary policy theory on its head.

Let’s look at some data. As can be seen in Chart 1, there does indeed seem to be some positive correlation between the level of the federal funds rate and the level of personal interest income. For example, when the Federal Open Market Committee (FOMC) hiked the federal funds rate from the beginning of 2016 through the first quarter of 2019, personal interest income moved up sympathetically. Although personal interest income had started increasing in 2014, before the FOMC had begun raising the federal funds rate. Similarly, as the FOMC began hiking the federal funds rate in 2022, personal interest income starting rising, too. So far, so good for this hypothesis that FOMC federal funds hikes raise personal interest income.

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But, when we compare personal interest income to total personal income, the story changes (see Chart 2). As the federal funds rate increased in 2016 through early 2019, personal interest income as a percent of total personal income moved up only marginally. In the 2022 through early 2024 period, the ratio of personal interest income to total personal income did move up, but only slightly higher than the level that prevailed in 2020, when the federal funds rate was effectively zero percent, and considerably below the 2019 level, despite a much higher federal funds rate in the more recent period. If higher personal interest income were responsible for the recent resilience in aggregate domestic demand, personal interest income as a proportion of total personal income would be higher. Alas, another beautiful theory spoiled by ugly facts.

240418X2.jpg

Let me offer a different hypothesis as to why US aggregate demand has remained resilient in the face of the FOMC’s federal funds rate hikes starting in 2022. This hypothesis was hinted at by one of my readers, Tague Goodhue, Managing Partner at Pantheon Investments, LLC. A year or so ago, Mr. Goodhue observed that although the growth in thin-air credit (the sum of the monetary base and loans/investments at depository institutions) had slowed dramatically, the amount outstanding of thin-air credit remained exceedingly high, such that the ratio of nominal GDP-to-thin-air credit, or the “velocity” of thin-air credit was comparatively low in terms of the period from the recovery of the Great Financial Crisis up until the Covid negative supply shock. This low velocity on thin-air credit implied that the public’s demand to hold rather than spend the resulting liquid assets created by thin-air credit was relatively high. If I had paid more attention to Mr. Goodhue’s observation I might not have made one of the worst calls of my career, including my retirement. That bad call being that a recession would begin in 2023 because of the precipitous slowing in the growth of thin-air credit. I won’t make that mistake again, just a different one.

As I mentioned, the creation of thin-air credit results in the creation of liquid assets. Plotted in Chart 3 are quarterly observations of thin-air credit (the blue bars) and quarterly observations of households’ and nonfinancial businesses’ holdings of deposits (demand, saving and time) and money market mutual fund shares (the red line). As you can see, starting in Q2:2022 through Q4:2024, the levels of thin-air credit and household/nonfinancial business holdings of deposits and money market mutual fund shares are almost equal.

240418X3.jpg

Now, let’s look at the relationship between the private nonfinancial sector’s holdings of deposits and money market mutual fund shares and private Gross Domestic Purchases (private aggregate demand). This is plotted in Chart 4. It is, in effect, the inverse of a velocity concept. As can be seen, as of Q4:2023, the private nonfinancial sector’s holding of deposits and money market mutual fund shares as a percent of nominal private Gross Domestic Purchases remains high relative to percentage levels in years prior to the Covid negative supply shock of 2022. Thus, the private nonfinancial sector as of the end of 2023 still held an abnormally-high amount of liquid assets, assets that could easily be used to purchase goods, services and assets.

240418X4.jpg

As an aside, the data plotted in Chart 5 show that growth in a narrower variant of thin-air credit has picked up in the past two quarters, including its bank credit component. Could it be that the Fed’s monetary policy has eased in the past two quarters despite the fact the federal funds rate has been held steady at 5.33.

240418X5.jpg

In sum, I would argue that the “new” view on how monetary works, namely that higher federal funds rates are stimulative, is utter nonsense. (I was going to use another term, but this is a family publication). Rather, the massive amount of liquidity that the Fed created in reaction to the Covid negative supply shock has not disappeared in either an absolute sense, but more importantly in a relative sense. This implies that the private nonfinancial sector, at least through Q4:2023, still has excess funds that it can use to purchase goods, services and assets.

State Coincident Indexes in December 2023

Charles Steindel

More Viewpoints

First-Quarter 2024 National Accounts

State Coincident Indexes in March 2024

State Labor Markets in March 2024

Another Beautiful Theory Spoiled by Ugly Facts