Popular Economics Weekly
The benchmark 10-year Treasury Bond Yield that determines mortgage and other long term rates ended at 3.13 percent today from 3.11 percent last week with the continued stock market selloff. It was as high as 3.22 percent at times. The Fed is on track to raise short term interest rates another one-quarter percent in December, which will boost the Prime Rate used for credit card and installment debts to 5.50 percent. What does that mean for continued job and economic growth?
The jury is out on the answer. Consumer confidence is booming, but stocks are fluctuating madly because investors are fretting over what happens next year, which is what investors always attempt to predict—i.e., how much to discount future corporate earnings. A majority of S&P 500 companies reported higher earnings than predicted in Q3, so there should be a minimal discount. And corporations are using most of their extra profits from the December tax cut to buy back stock. But that is one-time booster shot that investors worry will soon end the stimulus.
If interest rates continue to rise, it will cut into consumer spending, while bond traders worry about incoming inflation. But the Producer Price Index and Consumer Price Index show inflation are remaining below 3 percent—hardly levels that could diminish asset valuations. Both indexes continue to hover around 2.5 percent before seasonal adjustment and inflation are factored in.
The U.S. economy isn’t overheating, in other words. The US Bureau of Economic Analysis reported that the Personal Consumption Expenditure Index of inflation has been basically flat for months; at 2.0 percent, right on the Fed’s inflation target. Robust growth with little inflation is the Goldilocks economy we all yearn for, and the stock market should be applauding, not fearing.
And consumers’ holiday spirits are high, with the U. of Michigan sentiment survey close to its 12-month high. “Inflation expectations are mixed with the year-ahead reading down 1 tenth to 2.8 percent, said Econoday, “but the 5-year outlook up 2 tenths to 2.6 percent. These levels have been steady all year and, for the Federal Reserve, confirm that inflation expectations remain fully anchored.”
What about jobs? The economy looks to be fully employed for another year, at least. The Labor Department’s most recent JOLTS report indicates the gap between openings and hires, which had been widening in previous months and reached a record high of 1.386 million in August, shrank in September—to a still wide 1.265 million.
That means 1.265 million jobs lack applicants, which could put a brake on future growth. Employers aren’t finding enough qualified workers to expand production, and wages are finally rising above inflation.
What’s not to like about this economy? Even the National Federation of Independent Businesses (NFIB); made up mainly of the small business owners that create most new jobs; reported record-high optimism in its October survey.
“Small business optimism continued its two-year streak of record highs, according to the NFIB Small Business Optimism Index October reading of 107.4,” per its press release. “Overall, small businesses continue to support the three percent-plus growth of the economy and add significant numbers of new workers to the employment pool. Owners believe the current period is a good time to expand substantially, are planning to invest in more inventory, and are reporting high sales figures.”
It seems U.S. consumers aren’t yet reacting to the higher tariffs on imported wash machines and stoves hit by rising aluminum and steel prices. But higher vehicle prices are sure to follow. Total vehicle sales are booming at the moment, topping 18 million units in October, according to the St. Louis Fed.
What can go wrong, you ask??
Harlan Green © 2018
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