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The US economy is not in recession. In this LinkedIn and UHERO article, I illustrate this by comparing the current situation to a past recession. And I address several important issues: Whether the absence of recession means we are free from economic pain, whether we could be in recession despite recent data, and when we would know we are in recession if we in fact slipped into one. Here is a video intro to the article. To read the article, please browse to https://uhero.hawaii.edu/how-i-know-were-not-in-a-recession-and-when-well-know-if-we-are/ or https://www.linkedin.com/pulse/how-i-know-were-recession-when-well-we-byron-gangnes-qfxnc/?trackingId=Iu5PKHBEQ4qpkihy3jnPhg%3D%3D #linkedin #recession #slowgrowth #datainterpretation #UHERO

by Byron Gangnes COVID's aftermath brought soaring inflation to Japan, a country that averaged less than 0.2% inflation between 1995 and 2019. The result was a marked decline in real wages that has undercut consumer spending. Exports have also suffered from a weak global economy. Where do things stand at present, and what is the likely path forward in the near term and longer run? Read the UHERO Blog Post.

UHERO blog post: The US economy surprised to the upside last year. Inflation receded rapidly without large-scale labor market pain. In part this reflects growth in the supply side of the economy, linked to higher productivity and a rising immigrant labor force. How might artificial intelligence (AI) and other factors affect US economic growth over the longer-term? Read the UHERO Blog Post.

UHERO blog post: There is a marked difference between what Fed officials expect about their likely interest rate cuts this year and what the financial markets expect. Based on their December meeting, the median outlook of Federal Open Market Committee members is for three quarter-point cuts this year. The recent actions of financial market participants imply that they expect six cuts, bringing the federal funds rate to the 3.75-4.00% range by year end. Could the markets be right? Or perhaps a better way to say this: What would have to happen for the Fed to cut rates that much in 2024? Read the UHERO blog post.

by Byron Gangnes Since it keeps coming up, let me spend a few minutes explaining this. Here is a basic summary of the approach used by the US Bureau of Labor Statistics (BLS): For renters, shelter costs are straightforward: what they are paying in rent. For owner-occupants, the services provided by housing are estimated based on prevailing market rents (what is called "imputed rent: what you would pay to rent your own home.) That's because we want to know what housing services people are consuming in a given month, just as we measure the cost of other services consumed, like medical care, etc. Buying the house itself is treated as an investment. It is a capital good that provides the housing services that we consume over time, as well as capital gains or losses when it is sold. This is a consistent and economically sound approach that follows what most other countries do. It has been in place since 1983, with some tweaks since then, mostly to fine-tune how the sample of households is obtained for the underlying survey. Here's a quote from the BLS methodology page (link to the page is below): "The shelter service that a housing unit provides to its occupants is the relevant consumption item for the CPI. Most of the cost of shelter for renter-occupied housing is rent. For an owner-occupied unit, most of the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes...." "Owned housing units themselves are not priced in the CPI Housing Survey. Like most other nations' economic statistics programs, the CPI program views owned housing units as capital (or investment) goods distinct from the shelter service they provide, and therefore not as consumption goods. Spending to purchase and improve houses and other housing units is treated as investment and not consumption in the CPI." One issue that has gotten much attention recently is that the estimated rents, and therefore imputed rents, are based on current and a limited number of past (lagged) values of market rents. Note that data like Zillow's on rents is only for new asking rents. Some renters in each BLS survey are in the middle of leases, and so they do not change often. Effectively, it takes about 12 moths for market rent increases to fully filter through. Of course, home prices increases themselves do eventually get reflected in the CPI, to the extent that they raise market rents. Here is a link to the rather technical methodology page on the BLS web site. And a less technical overview of the issues from a Brookings Institution blog post. Measuring Price Change in the CPI: Rent and Rental Equivalence, US Bureau of Labor Statistics, September 8, 2023. How does the Consumer Price Index account for the cost of housing? David Wessel and Sophia Campbell, May 18, 2022. Note: This post was also provided on LinkedIn.

The Federal Open Market Committee begins its last meeting of the year tomorrow in Washington, DC. Here’s the economic picture they will be looking. This is a summary. Please read the LinkedIn article for discussion and charts. 🔹 Labor market conditions have eased further, even if still somewhat tight by historical standards. 🔹 Current economic activity is slowing, although consumer spending remains too strong so far. 🔹 Indicators of future economic growth point toward more pronounced slowing. 🔹 Deflation progress is occurring, but core service inflation remains a problem. The Fed is all but certain to hold rates steady at this week's meeting. 🔹 The ongoing easing of labor market conditions, progress in reducing year-over-year inflation, and evidence that inflation expectations remain well anchored should be enough to keep the FOMC members on the sidelines. 🔹 Further lagged effects and pending real interest rate rises should eliminate the need for further hikes. 🔹 Still, the Fed is not poised to begin cutting rates soon. They will wait to see further decline in core service inflation. Read the artice in LinkedIn:

A UHERO Blog Post To most of us, faster economic growth is a good thing. Aside from possible environmental concerns, faster growth reduces unemployment, raises profits and wages, and helps balance government budgets. But the Federal Reserve fears that continued strong growth is threatening its ability to achieve 2% long-term inflation and maximum employment. Does this mean we have too much of a good thing?

🔸Credit card balances broke the $1 trillion mark recently, but their share of disposable income remains moderate by historical standards. And they have risen only to pre-pandemic levels when expressed in real (inflation-adjusted) terms. There’s no consumer debt binge. 🔸But average interest rates on credit card balances have soared during this Fed tightening cycle, rising from less than 16% in May 2020 to more than 22% in May 2023. 🔸And a large number of households roll over balances from month to month. How much more are they now paying to do so? Read my UHERO Blog Post for the answer:

Jobless claims data provide a timely indication of the employment costs inflicted by last month’s tragic Maui wildfires, which killed at least 118 people and destroyed more than 2,300 structures. A number of factors are driving Maui jobless claims higher. All told, they add up to a staggering hit to Maui County employment. Read the blog post

The Federal Open Market Committee begins its two-day meeting in Washington, DC today. Here's my take on what the Fed will be seeing when it reviews the current state of the US Economy, and what that means for their rate decision. Just a few of the takeaways: Labor market conditions have eased broadly, but remain tight by historical standards. Monthly job growth has dropped to a level more consistent with trend labor force growth, but average hourly earnings remain stubbornly high. Current economic activity remains strong. Consumer spending is growing at a moderate pace and has picked up recently. Growth estimates for the current quarter are higher than in recent quarters. Indicators of future economic growth are mixed. Survey-based data showing some improvement, and durable goods orders are rising. But excess household savings have been used up, which may slow consumer spending. Deflation progress is occurring, but slowly. Except for the gas price spike, the CPI is notably lower, but the Fed's preferred PCE measure is taking longer to slow, particularly core non-housing services. The Fed is likely to see this as a mixed picture, but with enough evidence of labor market easing, promises of economic slowing, and partial disinflation to warrant the expected pause in interest rate hikes. But Chair Jerome Powell will make it clear that the inflation-fighting job is far from over. Financial markets expect the Fed to hold rates at their current level through the middle of next year, with no further rate increases. But failure to see further slowing, especially in consumer spending and core services inflation, could mean another rate hike before the end of the year. Read the complete article on LinkedIn.

This collaborative UHERO report explores frameworks for assessing the devastating impacts of the Maui wildfires, their ongoing effects, and the challenges that will need to be addressed to achieve a full recovery. By Steven Bond-Smith, Daniela Bond-Smith, Carl Bonham, Leah Bremer, Kim Burnett, Makena Coffman, Peter Fuleky, Byron Gangnes, Rachel Inafuku, Ruben Juarez, Sumner La Croix, Colin Moore, Dylan Moore, Nori Tarui, Justin Tyndall, and Chris Wada.

Federal Reserve Chair Jerome Powell reiterated the central bank’s commitment to a 2% inflation target at the Jackson Hole Economic Symposium. Why 2%? A primary goal of all central banks is to achieve price stability, achieving the lowest inflation rate that is practical over the long term. Low and steady inflation helps reduce losses to consumer purchasing power and creates a predictable economic environment that is conducive to business activity. While there is no magic number for a long-run inflation goal, there are several reasons why a 2% target is reasonable: 1. Measures of inflation are biased upward. 2% measured inflation implies experienced inflation of about 1%. That’s an enviable goal. 2. A trend inflation target below 2% would mean low interest rates that would give the Fed precious little room to cut rates to offset or prevent a recession. 3. Two percent inflation is likely sufficiently high to avoid deflation, that is falling average prices. And abandoning the 2% target would undermine the Fed’s hard-won credibility as an inflation fighter. Read my full new article on LinkedIn.