Fed Stays in Accommodative Mode

Popular Economics Weekly

It looks like Janet Yellen’s Fed will continue to keep interest rates low this year, based on the latest FOMC press release. This is great news for the housing market, in particular, but not necessarily for consumers that continue to save more than they are spending, for fear of another economic slowdown.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” said the press release; “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

And sure enough, the NAR’s gauge of future closings, the Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.4 percent to 110.5 in March from an downwardly revised 109.0 in February and is now 1.4 percent above March 2015 (109.0). After last month’s slight gain, the index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0).

Lawrence Yun, NAR chief economist, says last month’s pending sales increase signals a solid beginning to the spring buying season. “Despite supply deficiencies in plenty of areas, contract activity was fairly strong in a majority of markets in March,” he said. “This spring’s surprisingly low mortgage rates are easing some of the affordability pressures potential buyers are experiencing and are taking away some of the sting from home prices that are still rising too fast and above wage growth.”

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Graph: Econoday

Why are consumers cutting back on spending, per latest retail sales figures that show lower auto sales, in particular? Consumer confidence has declined, is one reason. The Conference Board’s index slipped more than 2 points to 94.2 when it is 100 plus during normal growth periods (but is roughly in line the 6-month trend). Weakness in the report is centered in the expectations component which fell 4.3 points to 79.3, said Econoday. Here, in contrast to the assessment of the current jobs market, there’s outright pessimism with 17.2 percent seeing fewer jobs ahead vs only 12.2 percent seeing more ahead.

Pundits aren’t sure why confidence in future jobs and growth has declined, when more than 200,000 new jobs per month have been created over the past 2 years, and 11 million jobs during Obama’s presidency. But incomes are still not rising fast enough for the majority of consumers, though the Fed maintains household incomes will eventually rise faster, as the unemployment rates falls further.

What is usually overlooked, however, are the almost deflationary times we consumers currently live in. Believe it or not cheaper gas and energy prices are just one of the factors causing this uncertainty about future prospects.

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Graph: Econoday

History shows that consumers spend less when prices are falling, because they expect prices to fall further. Whereas consumer spending picks up when prices are rising, in an attempt to save money by getting ahead of the next price increase. This is Japan’s history during its 2 decades of deflation.

What will cause retail inflation to return to its historical 2 percent plus level? Economists say it is greater aggregate demand, or the demand for goods and services by both consumers, businesses, and governments. The sectors are related, of course, with rising household incomes the main driver of growth, since ithis stimulates more investments in plants and equipment—so-called capex spending, that in turn stimulates more job growth.

But in fact, governments have been the least spendthrift due to falling tax revenues, hence the huge backlog in deferred infrastructure maintenance and construction (more than $2 trillion per the American Society of Civil Engineers), as well as public investment in schools, new research, protecting the environment, social security and Medicare, and so forth.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Housing, housing market, Politics, Weekly Financial News and tagged , , , , , , , , . Bookmark the permalink.

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