Economy Beginning to Slow

Stocks opened mixed this morning (Down +255 points; S&P 500 -.15%). It could be that the month-long rally needs to take a breather. The VIX Index—used to measure fear among traders—has fallen off to a rather benign 13. I’d say most Wall Street firms feel a little better about things. Of course, the bond market rally is really what took the pressure off. Remember, when bonds rise in price their interest yields fall. And when bond yields fall, interest rates throughout the economy fall. Over the past month Bankrate.com’s average 30-year fixed mortgage rate fell back to 7.7% from 8.1%. As you might guess, lower interest rates means less pressure on the economy.

The US economy apparently grew faster than initially reported in the third quarter. Compared with the prior quarter, growth picked up to an annualized rate of 5.2%. Keep in mind that 2% is considered healthy and normal. Digging into the components of what they call “gross domestic product,” consumer spending grew 3.6% (revised a bit lower), residential investment grew 6.2%, business investment rose 1.3% (revised higher) and government spending grew 5.5%. The obvious takeaway is that the demand side of the equation is pretty healthy. Obviously, this high rate of growth can’t continue and indeed the Federal Reserve and most economists think it will slow to about 1.5% next year. By way of response, I’ll point out two facts: nearly all such forecasts over the past two years have under-shot reality, and anyway it’s really hard to have a recession when the economy is growing.

The most important number in the report had to do with inflation. The Federal Reserve’s preferred measure of underlying inflation—called “Core PCE Deflator”—slowed to 2.3%. Now admittedly, that’s a quarter-over-quarter rate and not annual. But it is the slowest quarterly rate of inflation since December 2020, and awfully close to the Fed’s 2% target. I have no idea why the financial news media aren’t trumpeting this number. Doesn’t this give clear evidence that the Fed is winning it’s battle against inflation?

Taking it a couple of steps farther, The New York Fed’s own internal measure of inflation—called UIG—has slowed to 2.15% (annual) back in September. This index was specifically created to overcome some of the distortions of the more traditional inflation measures like the Consumer Price Index. And yesterday’s “Beige Book” report—a survey of business leaders—confirmed inflation has “largely moderated.” In fact, labor demand and consumer spending are just beginning to slow as well, a fact confirmed by other data released today by the Bureau of Economic Analysis. In other words, the Fed’s policies have largely succeeded. Bloomberg News says this “reinforce[s] forecasts [that] central bankers are done raising interest rates.”