Complimentary Week in Review: Dec 12-16

With a special offer for our free subscribers

It’s been one year to the day since we expanded Sage Economics from a sporadic blog to a full-blown newsletter. This is our 90th(!!) post of 2022, which comes out to a total of roughly 86,000 words (for context, the first Harry Potter book is about 77,000 words). At this rate, our word count will match the King James Bible by 2031.  

The majority of posts were for paid subscribers, which is how you’d expect economists to operate (marginal benefit, marginal cost, that kind of thing). To celebrate our one-year anniversary, new annual (or a year of monthly) subscriptions are 30% off through Christmas. We’re also providing this Week in Review post (a primary output of the paid service) free to all subscribers today. Enjoy!

Now, on to a week that gave us another interest rate hike as well as new data regarding inflation, retail sales, and nuclear fusion.

Monday

Gas Prices

Gas prices fell again and are now down to $3.353, the lowest price per gallon since the week ending October 4, 2021. In other words, the price of gasoline is now below what it was a year ago. Before you celebrate, remember this means more traffic this holiday shopping season, all else equal. Still celebrating?  

Tuesday

Nuclear Fusion Milestone

A national lab achieved a breakthrough in nuclear fusion technology, but it seems like it’ll still be a long time (up to eternity) until we’re getting virtually unlimited clean energy from fusion. That said, file this one under good news.

NFIB Business Optimism

The NFIB Small Business Optimism Index improved in November but stayed below its 49-year average for an eleventh consecutive month. The upshot: small business owners felt slightly better last month but are still struggling with inflation, labor shortages, equipment delays, and elevated materials prices.

Consumer Price Index (CPI)

Great news! CPI, a primary measure of inflation, came in cooler than anticipated in November. Overall prices increased 0.1% for the month and are up 7.1% year over year. Sure, 7.1% year-over-year inflation is higher than in any month from 1983-2021, but it’s also the lowest in 2022. Were it not for rents being incorporated into CPI with a lag (due to reasons so technical and boring they cure insomnia better than Ambien or one of my speeches), inflation would appear even more benign.

Core inflation, which excludes food and energy prices because they’re volatile and susceptible to non-economic influences like Vladimir Putin, increased a sleep-inducing 0.2% in November and are up 6.0% year over year.

A few other odds and ends for this report: used car prices, which soared during the pandemic, continue to slide, slipping another 2.9% in November. Food prices, however, leapt 0.5% for the month after increasing 0.8% and 0.6% in September and October, respectively.

Big picture: November’s CPI data are rather encouraging. But it’s just one month of data and the Federal Reserve remains committed to killing excess inflation. The financial markets have realized that over the past three days, which is why as of 10:00 am (EST) on Friday, the S&P 500 was back below 3,900. So we’re not over the inflation-fighting hump just yet, and speaking of humps, here comes . . .

Wednesday

Fed Rate Hike

The Fed announced that they’ll raise the target range of the federal funds rate (our primer on that, if you need a refresher) by 50 basis points, which is a fancy I’ve-been-to-New-York way of saying 0.5 percentage points. In Baltimore, we just say half a point, hon.

In any case, for those keeping score, this is the seventh rate increase since the Fed started tightening in March and brings the target range of the FFR to a range of 4.25%-4.5%.

This announcement surprised precisely no one. What was surprising were some of the statements made after the meeting, with Chairman Powell, another trouble-making attorney, suggesting that rate hikes won’t end in the very near-term, which is why the S&P is now dipping towards 3,850 at 10:19 am EST.

Ok, now here’s where the fascinating game theory comes into play. Is the Federal Reserve striking the anti-inflation pose because they’re trying to convince us that inflation is headed lower so that we stop raising our prices or asking more from our bosses? Or are they serious about taking interest rates much higher after all they’ve done in 2022?

Coming into the week, I think equity markets thought that the Fed was striking the pose (think Madonna) but now realize that the Fed is serious about curbing inflation. Shucks!

FOMC Economic Projections

Along with the interest rate hike, the Fed released economic projections from their December meeting. Compared to September’s projections, the Fed expects slower GDP growth, higher inflation, higher unemployment, and higher interest rates in 2023 (but not a recession, just slower growth). They expect the federal funds rate to top out at 5.1% in 2023 before falling in 2024, which could mean a 0.25 basis point hike at the next three meetings.

Take these projections with a grain of salt; Jerome Powell also said, “No one knows where the economy will be a year or more from now.” One thing is clear—he doesn’t. Please note that his counterpart at the European Central Bank also struck a hawkish tone this week, which may have further contributed to the retrenchment in equity prices.

Mortgage Applications

Mortgage applications increased 3.2% during the week ending December 9. With average mortgage rates edging lower during the past few weeks, this isn’t a huge surprise. Nonetheless, applications are still low by historical standards.

Thursday

Jobless Claims

Initial jobless claims fell to 211,000 for the week ending December 10. This is a very low number. The labor supply remains extremely tight and employers continue to cling tightly to their staffs (figuratively, so calm down).

Continued claims for uninsurance employment crept higher once again and remain at their highest level since February. Prominent layoff announcements persist—this week’s big announcement came from Goldman Sachs—so expect initial claims to rise next year.

Retail Sales

Americans spent less in November than they did in October (-0.6% less, specifically). Retail sales are up 6.5% year over year, the smallest annual increase since December 2020.

The only categories that experienced monthly increases in spending were grocery stores and restaurants and bars, which may have something to do with the large increase in food prices observed in November (check out the CPI stuff from Tuesday for more details).

Industrial Production

Industrial production inched lower in November. Overall, this measure has been pretty much flat (except for massive craters coinciding with recessions; see the chart here) since about 2007. But there’s a lot of industrial capacity being reshored with massive manufacturing facilities being built across the nation, so maybe the index will break through the 103-105ish ceiling it has been stuck beneath for the past fifteen years.

Mortgage Rates

Average mortgage rates dipped for a fifth consecutive week, with the 30-year down to 6.31%. This represents a meaningful reversal since average rates peaked at 7.08% during the week ending November 10. Rates are still too high to bring the owner-occupied housing market out of its recession.

Friday

S&P Global Indices

These PMI measures from S&P Global fell in December, showing that the private sector is dealing with slowing demand as 2022 comes to an end. Notably, the drop in the composite index (which combines the services and manufacturing sectors) indicates the fastest decline in business activity since the early months of the pandemic.

Links of the Week

Striking findings from 2022 (Pew Research Center)

There’s just one parking for every 11 trucks on the road, which is obviously not great (Transport Dive)

A four-part series by Construction Physics on building the Empire State Building and the World Trade Center

Final Thoughts

After this week, my outlook for the economy is: The Same

It might surprise you to learn that I have moments of doubt. I’ve been predicting recession in 2023 since early 2022. But when I saw the markets rally earlier this week, I started questioning myself. Does the market know something I don’t?

Nope. I was wrong to doubt myself. Recession is coming.

Looking Ahead

Next week brings us some housing data, durable goods orders, and that weird time of year where it’s unclear if we’re really supposed to be working.