Author: Wu Long
Last week, the U.S. Bureau of Labor Statistics released the latest price data. The most eye-catching one is that the core consumer price index (CPI) in August increased by 6.32% year-on-year, significantly higher than the previous value of 5.91% and market expectations of 6.1%. Affected by the continued deterioration of prices, the market's expectations for the Federal Reserve's interest rate hike this month have deepened again. According to the Fesdwath tool of CME Group, the probability of hiking 3400 basis points for the whole year is the highest. This month, the Federal Reserve's interest rate decision of 100 basis points for hiking is expected to reach 25%. With the release of CPI data this week, the three major U.S. stock indexes and various commodities fell sharply, and the US two-year Treasury bond yield hit a new high this year. Is the US economy arriving at a hard landing?
Judging from the price data, the data will enter the plateau period next. As the base period rises, it is expected to bring up pressure to the data. The key to pushing up core inflation this time is rent costs and health care.
Although energy and food support the slowdown in inflation data, the new car price index continues to rise. In addition, for the service industry that is currently short of labor, the price growth rate is relatively large. Under the influence of labor shortage, there may still be concerns about falling into a spiral of wages in the second half of the year. In addition, the monthly rate of real income in the United States in August was negative 0.1%, and Americans' wages have dropped for 17 consecutive months compared to the cost of living.
Source: Bloomberg
Is the rising prices and the decline in real incomes getting closer and closer to the possibility of a hard landing in the US economy?
Under the concerns of a hard landing in the economy, the current US employment market performance is still quite strong. The US non-farm employment increased by 315,000 in August, and the unemployment rate remained at 3.7%. Even though the United States entered a strong cycle of interest rate hikes this year, the US employment market remained in a very shortage. According to the U.S. Department of Labor, the U.S. job openings still exceeded 11.2 million in July, and almost every unemployed worker has two jobs to choose from. In the past 12 months, non-farm employment has increased by 5.8 million, the U.S. labor market has continued to recover from the post-epidemic, and has created this employment boom with the support of U.S. fiscal spending and monetary easing.
Source: US Bureau of Labor Statistics
Although the US GDP recorded negative growth for two consecutive quarters, its statistical method is mainly based on SAAR, that is, the seasonally adjusted real GDP against the previous quarter growth rate. If we judge through YOY (year on year), that is, the original real GDP against the growth rate of the same quarter last year, the US's annualized growth in the second quarter still recorded positive growth of 1.7%.
U.S. substantial GDP (YOY) Source: ycharts
However, the GDPNow model of Atlanta, which has a very forward-looking US GDPNow downgraded yesterday, adjusting its economic expectations in the third quarter, from 1.3% to 0.5%. Basically, with the release of this month's data, the Atlanta Fed lowered its economic expectations almost week by week.
Source: Atlanta Fed, USA
This model is mainly based on the GDP prediction model produced by about 30 economic indicators. Its usage method is similar to the method used by the US Bureau of Economic Analysis. Although this indicator cannot accurately predict the black swan event that has occurred in recent years, such as the new crown pneumonia or the Ukraine-Russia conflict, it provides an extremely small error value with the official US data, with an average error value of only 0.3%. Through this model, its GDPNow model also accurately predicts the negative economic growth of the United States in the second quarter. With only two weeks left in the quarter, the United States is only one step away from negative GDP growth in the third quarter.
Overall, will the US economy land softly or face-to-face?
Price rise and GDP growth downward, coupled with the Fed's faster tightening process, the US economy is heading for a more pessimistic situation. We re-examine the current domestic consumption, which accounts for a relatively high proportion of US GDP, the monthly retail sales rate in August was 0.3%, better than market expectations. Although most of the sub-items maintained growth, excluding retail data of automobiles, food and energy, the overall core retail sales rate of in August was only negative 0.3%. Rising prices remain the primary concern for American households, and more pessimistically, it has eroded the spending capacity of American consumers.
Source: BLS
Although the risk of a hard landing in the US economy is increasing overall, American people's expectations for future inflation are declining. According to the New York Fed report on Monday, U.S. households expect inflation to be 5.7% a year later, down from 6.2% forecast in July's survey. Respondents expect inflation to drop to 2.8% in three years from 3.2% expected in July. Consumers' expectations for long-term inflation have also declined. The report said respondents expected inflation to be 2% in five years, down from July's 2.3% forecast. The U.S. personal consumption expenditure price index rose 6.3% in July compared with the same period last year.
Source: NewYork Fed
Central Bank has two major missions: one is to stabilize prices and the other is to maximize employment. Strictly speaking, with the support of the current strong U.S. job market, the Federal Reserve has more confidence in raising interest rates. If U.S. inflation is driven by overheating demand, then in the foreseeable future, the Federal Reserve may regard the rising unemployment rate as a reference for the progress made in suppressing inflation. Whether it is a soft or hard landing of the economy, the Federal Reserve will eventually achieve its goal of maximizing prices and job markets.
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