Lies, Damned Lies and Inflation “Statistics”*
My daughter, who works for the Bank of England, is studying for her Master’s in Economics at the University of Edinburgh, and sent me one of her papers. It was filled with a vast array of complex mathematical equations of which I could make no sense, despite being a mathematician by training and studying Economics at Oxford…..a few years ago.
The Federal Reserve has teams of economists plus input from Reserve Banks all around the country. The Bureau of Labor Statistics, which produces the Consumer Price Index (CPI), has another battalion of experts. All this talent must, one could fairly assume, produce sophisticated and accurate models for inflation.
Imagine my surprise, therefore, to discover that one key element, housing inflation – which constitutes one-third of the CPI and 40% of “core” inflation (excluding food and energy) – is an imputed number (“assigned by inference”), not an actual one.
Read what Nobel prize-winning Economist Paul Krugman wrote recently: ”How does the bureau measure housing inflation? Not by looking at the prices at which houses are sold, which fluctuate a lot with things like interest rates. Instead, it looks at how much renters pay — and for the large number of Americans who own their own homes, it imputes what it calls Owners’ Equivalent Rent, an estimate based on rental markets of what homeowners would be paying if they were renters (or, if you like, the rent they are implicitly paying to themselves).
The trouble is that this measure relies on average rents, which to a large extent reflect leases signed many months ago. A new Fed study shows that official rent measures lag market rents by about a year. And here’s the thing: Market rental rates exploded in 2021, probably as a result of the rise in working from home, but have since leveled off and may in fact be falling.
So official inflation measures are telling us about what was happening a year ago; they overstate current inflation and, perhaps more important, grossly understate the extent to which the inflation picture has improved. If you try to measure inflation excluding those dubious housing numbers, plus other volatile elements, you get a picture of dramatic improvement, almost enough to declare the inflation surge over.”
Let’s look at inflation. There are more gauges of inflation than the UK had Prime Ministers in 2022, but let’s just look at Personal Consumption Expenditures (PCE is the value of the goods and services purchased by, or on the behalf of, “persons” who reside in the United States.). (more…)
Recession: what Recession?
The August jobs report published yesterday showed that the labour market remained red-hot in July despite expectations job growth would cool as tighter monetary conditions and company layoffs stoked fears of a recession.
Here were the key numbers from the report, compared to economist estimates compiled by Bloomberg:
Non-farm payrolls: +528,000 vs. +250,000 (more…)
Recession? Yes, no, maybe……..
When I proposed to my wife, she was taken by surprise and responded: “Yes, no, maybe.”
I was reminded of that response while listening to all the conversations in recent days about whether or not the US already in, is about to be in, or will escape a recession.
A lot of the confusion relates to the question: “how do you define recession?” and “who gets to decide if it is a recession?”
And no, it’s not by Punxsutawney Phil looking for his shadow.
What is a recession?
The most common defintion of a recession is two consecutive quarters of negative GDP growth. I used this defintion in my Are we already in a Recession? published on June 18th. This week’s preliminary Q2 GDP number was -0.9% which, following a first quarter print of -1.6%, ticked the GDP box.
If only life were that simple.
Who gets to decide if it is a recession?
Officially, it is the National Bureau of Economic Research’s Business Cycle Dating Committee (I didn’t even know there was such a thing as cycle dating) that declares a recession. In its books, recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Yet the last recession declared by the NBER — for the period from March to April 2020, when the country was hit by the first wave of the COVID-19 pandemic — met only the first half of that definition. It was the shortest recession in U.S. history. Historically, recessions have lasted for 17 months on average.
When will we know if we are in a recession?
The NBER’s Business Cycle Dating Committee takes a cautious approach to its job. It has typically taken the committee four to 21 months to declare a recession. It didn’t declare the recession that began in April 2001 until July 2003.
Are we in a recession?
Fed Chair Powell: “I don’t think it’s likely that the U.S. economy’s in a recession now.”
National Economic Council Director Brian Deese on Thursday argued that although economic growth is slowing, the economy as a whole is showing “extraordinary resilience,” and pointed to the jobs the nation has added in the past year. “We are in a transition, there’s no doubt. The economy is slowing and that is what most expected when coming off of an extremely strong and fast recovery last year. But all of the indications that we see right now are for an economy that’s showing extraordinary resilience in the face of global challenges,
President Biden: “Coming off of last year’s historic economic growth — and regaining all the private sector jobs lost during the pandemic crisis — it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation.”
“The odds are very high, perhaps over three quarters, that in the next year or two we will have a recession,” says Larry Summers, former Treasury Secretary.
So the answer is…… yes, no, maybe
And these recent articles:
Economic and mortgage commentary
Federal Reserve tries to rewrite history
Has Inflation Peaked?
Have Mortgage Rates peaked?
Are we already in a Recession?
Federal Reserve in Fantasyland: Implications for Housing Market
Time to Consider an Adjustable Rate Mortgage
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Market Reports
Essex County Mid-Year Market Summary in 5 slides
Massachusetts Mid-Year Market Summary in 5 slides
How quickly are houses selling?
Have Home Sales slowed?
June Housing Inventory: still way below 2020 levels.
Other
Free Property and Mortgage Fraud alert notification for homeowners
Guide to Buying and Selling in Southwest Florida
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or [email protected].
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
m 617.834.8205
www.OliverReportsMA.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReportsMA.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
__________________
Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
[email protected]
www.TheFeinsGroup.com
www.OliverReportsFL.com
————
Compass
800 Laurel Oak Drive, Suite 400, Naples, FL 34108
m: 617.834.8205
Federal Reserve tries to rewrite history
Two comments from Federal Reserve Chair Powell struck me while I was listening to his Press Conference on Wednesday:
On the “speed” of the Fed’s move to increase rates:
“When inflation changed direction, really, in October. We’ve moved quickly since then. I think people would agree. But before then, inflation was coming down month by month. And we kind of thought we had the story. Probably had the story right. But then I think in October, you started to see a range of data that said no. This is a much stronger economy and much higher inflation than we’ve been thinking.”
Moved quickly? (more…)
Will the Federal Reserve show chutzpah today?
In my How far Behind the Curve is the Federal Reserve? report last weekend I suggested that the Fed needed to increase its Fed Funds rate by a full 1.0% today to regain control of the inflation narrative and asked if it has the chutzpah to do this.
The following table shows clearly that it has been the market fighting inflation by driving up interest rate – while the fed has continued with its easy money policy.
We’ll find out in a few hours how serious this Fed is about getting inflation under control.
And read these recent articles:
How far Behind the Curve is the Federal Reserve?
How quickly are houses selling?
Have Home Sales slowed?
June Housing Inventory: still way below 2020 levels.
Swampscott House on over 1 acre with HUGE potential
Marblehead Neck Oceanfront New Listing
Why are Mortgage Rates so high?
Time to Consider an Adjustable Rate Mortgage
The Federal Reserve and Mortgage Rates
Federal Reserve: “Make me responsible…. but not yet”
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Guide to Buying and Selling in Southwest Florida
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or [email protected].
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
m 617.834.8205
www.OliverReportsMA.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReportsMA.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
__________________
Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
[email protected]
www.TheFeinsGroup.com
www.OliverReportsFL.com
————
Compass
800 Laurel Oak Drive, Suite 400, Naples, FL 34108
m: 617.834.8205
Can the Federal Reserve prevent a Recession?
The housing market is driven by the balance between supply and demand. Supply cannot be increased significantly quickly, so the only way for the booming housing market to slow is if demand drops. And the most likely causes for a drop in demand are either a major geopolitical development – such as Russia invading Ukraine and the US and its NATO partners deciding to respond militarily – or a recession.
Since World War II there has been a consistent pattern of the Federal Reserve hiking interest rates to control inflation and thereby triggering a recession. With the Fed finally acknowledging in late November that inflation was not transitory and committing to end its bond buying spree and also raise interest rates, will it be able to avoid a recession? Can this time be different?
The Boston Globe recently carried an excellent article on this subject by Jim Puzzanghera: ‘A hellishly difficult task.’ Can the Federal Reserve lower inflation without causing a recession?
“The virus is unpredictable. People’s responses to the virus are unpredictable. It’s not a garden variety business cycle by any means,” said Donald Kohn, a senior fellow at the Brookings Institution think tank who served as Fed vice chair from 2006-10. “It’s much harder to peer into the future and know how to calibrate your monetary policy.”
Bernard Baumohl, chief global economist at the Economic Outlook Group, a forecasting firm, was more blunt. “The Fed has a hellishly difficult task right now,” he said. “There is absolutely no history for the Fed to lean on to deal with this kind of inflation.”
Most economists predicted last spring that high inflation would be temporary, pointing to the supply chain problems caused by restarting the US and world economies. But some economists warned the $1.9 trillion COVID aid bill enacted last March risked fueling longer-lasting inflation by pumping too much money into the already recovering US economy.
By last June even I was writing: “Should inflation prove to be more persistent than the Fed expects, then it is likely that the Fed will have to start to increase interest rates sooner and move them up more quickly than it currently expects. And mortgage rates would follow.
The Fed’s two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.” In explaining its policy of keeping interest rates low – in part by buying large quantities of Treasuries and Mortgage-Backed Securities, the latter helping to keep mortgage rates low – the Fed refers to the still high level of unemployment.
I have to admit that I struggle to understand how low interest rates, which boost asset classes such as stock prices and real estate, are helping to boost employment. Lower interest rates benefit those who own assets which appreciate.
I would like to see the Fed start to reduce (taper) its bond buying, while encouraging Congress to focus on removing barriers to employment – by providing increased child care allowances, for example. In other words, deal directly with the problem rather than hoping that benefits will trickle down somehow.”
Some quotes (more…)
Recession: what Recession?
It is only a short 3 months ago (well I guess in political terms that’s almost a lifetime) that all the pundits were cautioning – not of course forecasting – that a recession was possible.
Since the yield on the 10-year Treasury is the most sensitive to the economic outlook, and since mortgage rates are based on the 10T yield, mortgage rates followed the drop in the yield on 10T, but only to a limited extent.
Basically, the 30-year fixed Rate Mortgage rate went from 4.5% at the beginning of the year to 4% in June and 3.5% around Labor Day, when R talk was all the rage amongst commentators.
So what has happened recently? (more…)
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