Best economy in history, Jack! My word as a Biden. Also I was appointed to Annapolis but blew it off because I was a Big Football Hero but Annapolis already had Roger Staubach as a quarterback so I went to the University of Delaware and rode the bench, Jack!
David Strom is one of those lucky people who has a subscription to the WSJ, so I'll quote his quote.
The economy is slowing, real income is declining, and inflation is still well above the Fed's target of 2%.
The U.S. economy continues to lose momentum. Growth hasn't yet slowed to the point that it would be a concern to policymakers, but it might soon if current trends continue.
Investors' attention on Friday was initially focused on the personal-consumption expenditures price index, part of a package of data released by the Commerce Department. That makes sense since it is the Federal Reserve's preferred measure of inflation and will help them decide whether or not to cut rates before November's U.S. presidential election. But accompanying data on underlying economic activity turned out to be more significant.
The PCE price index rose 2.7% from a year earlier in April, in line with economists' expectations and unchanged from the prior month. The core PCE price index that strips out food and energy, which the Fed favors, was up 2.8%, a tad more than expected.
More noteworthy were the figures for personal income and consumption. Incomes rose 0.3% from the preceding month, in line with expectations and down from 0.5% growth in March. Personal spending rose just 0.2%, below expectations and slowing from 0.7% in March. In real, inflation-adjusted terms consumption and disposable incomes both fell 0.1%.
So income and disposable income actually fell. Got it.
An important measure of regional economic health fell:
Also on Friday, the Chicago Business Barometer, also known as the Chicago purchasing managers index and a gauge of economic activity in the region, fell to 35.4 in May from 37.9 in April. The importance of regional PMIs shouldn't be exaggerated, but this one seemed more noteworthy than most. It was at its lowest since May 2020, during the lockdown period of the pandemic, according to FactSet.
All those readings came on the heels of a downward revision in first-quarter gross domestic product growth on Thursday, to an annualized 1.3% from an earlier estimate of 1.6%. It was mainly driven by a declining estimate of consumption, again suggesting a flagging consumer. In a note, economists at Capital Economics said they are now expecting growth of just 1.2% in the second quarter, down from an estimate of 2.7% a couple of weeks ago.
I know all of you know this, but in case you don't: One of the Fed's biggest tools for influencing the economy is raising or lowering interest rates.
When the economy is slow or tipping into a recession, they lower interest rates. This allows the big banks to borrow money at low rates, which they then lend to companies at low rates. The net effect is to magic more dollars into the economy. This is inflationary, of course, but they think that goosing the economy with more dollars is better than a deep recession.
When there is too much inflation -- too many of these magicked-into-existence dollars floating around -- they raise interest rates. So the big banks borrow less money and have less money to lend out. The money supply drops, which will, over time, reduce inflation, because inflation is caused by a surplus of dollars which cheapens the value of each dollar.
The Fed is currently keeping interest rates at an elevated level to try to sop up some of the excess dollars that have caused 20% inflation over the past three years.
So what does the Fed do when economic activity is grinding to a painful halt? They usually reduce interest rates.
But they can't reduce interest rates, because inflation is already very high.
Biden should be proud. 1970's style stagflation -- which is inflation plus low growth -- is back, baby!